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Mattel Hit by Toys "R" Us Bankruptcy, Underperforming Brands

Zacks

Mattel, Inc. MAT is grappling with the impacts of Toys “R” Us bankruptcy, sluggish performance of brands and pressure on margins.

The company’s fourth-quarter 2017 results missed the Zacks Consensus Estimate on the earnings and revenues front. Both the metrics also declined significantly on a year-over-year basis.

Additionally, Mattel has a dismal surprise history with the company missing the Zacks Consensus Estimate in all of the last four quarters, with an average negative surprise of 192.68%.

In a year’s time, the company’s shares have lost 34.6% against the industry’s gain of 38.4%.


Toys ‘R’ Us Bankruptcy Continues to Hurt Revenues

The Toys ‘R’ Us’ Chapter 11 bankruptcy filing in September, 2017 has been an added concern for the already suffering toy industry players. Mattel’s gross sales decreased 9% in 2017 compared with the 2016 figure. Reversal of roughly $47 million of gross sales associated with Toys "R" Us bankruptcy filing led to the decline.

Mattel, Inc. Revenue (TTM)

Major Brands Continue to Underperform

Continual sluggish performance of key brands is another strong reason behind decline of revenues in 2017. In fact, Mattel’s all the major brands have witnessed a decline in gross sales in the year compared with 2016. While revenues at Mattel Girls & Boys Brands declined 4%, the same at Fisher-Price Brands, American Girl Brands and Construction and Arts & Crafts Brands were down 11%, 21% and 29%, respectively.

Margins Remain Under Pressure

Due to a simplified cost savings initiative that included write-downs of excess owned inventory and impairment of assets, the company’s adjusted gross margin contracted 850 basis points (bps) in 2017.

Moving ahead, costs related to marketing and promotional initiatives, and cleaning up inventories coupled with the development of digital platforms are likely to keep margins under pressure. Thus, the company pushed out its longer-term target of achieving the low end of the 15-20% operating margin range from 2018 until 2019.

To Conclude

Although the company continues to make strategic investments in its brands and focus on improving its point of sales (POS), it will take some time for all the brands to show consistent improvement. However, given the strong product line-up that includes core brands, licensed brands and lucrative product associations, Mattel remains well positioned for growth in the long term.

Zacks Rank & Stocks to Consider

Mattel carries a Zacks Rank #5 (Strong Sell).

A few better-ranked stocks in the Consumer Discretionary sector are Monarch Casino & Resort MCRI, Las Vegas Sands LVS and Wynn Resorts WYNN, all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Monarch Casino, Las Vegas Sands and Wynn Resorts’ 2018 earnings are projected to grow 26.5%, 9.5% and 39.6%, respectively.

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