Will Soft Sales & High Costs Hurt Mattel's (MAT) Q4 Earnings?

Mattel, Inc. (NASDAQ:MAT) is scheduled to report fourth-quarter 2017 numbers on Feb 1, after market close.

Last quarter, the company’s earnings missed the Zacks Consensus Estimate by 83.93%. In fact, Mattel saw earnings misses in each of the trailing four quarters, the average negative surprise being 68.48%.

Further, shares of the company have lost 43% in the past year, against the industry’s gain of 51.3%.

Mattel, Inc. Price

Mattel, Inc. Price | Mattel, Inc. Quote

Sales to Decline Further

The consensus estimate for revenues in the to-be-reported quarter is pegged at $1.76 billion, reflecting a 4.2% year-over-year decline.

The projected sales decline is primarily due to a challenging sales environment owing to growing demand for a broad array of alternative modes of entertainment, including video games, MP3 players, tablets, smartphones and other electronic devices from companies like Electronic Arts, Inc. (NASDAQ:EA) .

Moreover, the recent Toys ‘R’ Us bankruptcy aggravated matters. Mattel has been particularly affected by the bankruptcy as it resulted in a year-over-year decline in third-quarter 2017 revenues and profits. This is expected to reflect in fourth-quarter revenues as well.

Also, per a recent regulatory filing, the company expects 2017 sales to decline by a percentage of at least mid-to-high single digits compared to 2016. For the to-be-reported quarter, the company expects particularly weak sales as a few of its major brands have been underperforming for quite some time now. Also, the company’s key retail partners are moving toward tighter inventory management.

Weak Margins to Hurt Bottom Line

The consensus estimate for fourth-quarter earnings is pegged at 20 cents, suggesting 61.5% year-over-year decline. Also, the company witnessed a 51.2% downward revision in earnings estimates over the past 60 days, reflecting analysts’ pessimism surrounding the stock.

This bottom line is expected to be hurt primarily by a rise in operating expenses. We note that, even though Mattel suspended its dividend payments and adopted cost-cutting initiatives, it is expected to see a slight uptick in 2017 expenses in comparison to 2016 on a gross dollar basis. For fourth-quarter 2017, the company expects year-over-year rise in operating expenses, leading to a drop in operating margin.

Additionally, owing to the Toys ‘R’ Us bankruptcy, the company’s gross margins are likely to decline in the fourth quarter. For the first nine months of 2017, net sales reversal in Toys ‘R’ Us accounted for approximately one-fifth of the year-over-year decline in total margin.

The company reported a 620 basis points (bps) year-over-year decline in gross margin during the said time. This decline, led by unfavorable product mix, higher freight and logistics expenses and lower fixed cost absorption, is expected to be reflected in fourth-quarter 2017 results. A persistent decline in the top line is likely to result in gross margin deterioration due to higher inventory write-downs and discounts offered to clear inventory.

Finally, the company stated that its gross margin and operating income might get affected by fourth-quarter charges or expenses which include restructuring and other non-cash write-offs. These expenses could be material or incurred in connection with the company’s recent cost-savings program, targeting run-rate cost savings of at least $650 million.

Our Quantitative Model Predicts a Miss

Mattel does not have the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Zacks ESP: Mattel has an Earnings ESP of -38.78%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: The company has a Zacks Rank #5 (Strong Sell).

As it is, we caution against stocks with a Zacks Rank #4 (Sell) or 5 going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Mattel, Inc. Price and EPS Surprise

Mattel, Inc. Price and EPS Surprise | Mattel, Inc. Quote

Stocks to Consider

Here are two stocks from the Consumer Discretionary sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Marriott International (NASDAQ:MAR) and Penn National Gaming, Inc. (NASDAQ:PENN) have an Earnings ESP of +0.32 and +8.71, respectively. Both the companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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