Mattel’s (MAT) latest quarterly earnings report sent the stock flying high. Though Mattel has had its struggles of late, the toy maker beat the street’s fourth quarter expectations by a considerable margin.
All in all, Mattel’s holiday sales are down six percent. However, revenue topped the $1.5 billion mark, beating analysts’ expectations of $1.44 billion. Some argue the closure of Toys R Us might spell bad news for Mattel and other toy makers as we transition to an era dominated by high-tech electronic gadgets.
Is there still a place for traditional toys in the home? Can Mattel continue to beat the street? Let’s take a look whether Mattel should have a place in your portfolio.
Mattel’s latest numbers show strength in two particular brands: Hot Wheels and Barbie. Unfortunately, Mattel’s American Girl, Thomas & Friends and Fisher-Price lines all suffered double digit declining sales this past quarter. However, the company’s gross margin improved in the fourth quarter of 2018, the first-ever fourth quarter increase for this storied toy maker. Cost-cutting efforts hiked margins from about 30 percent in the third quarter to more than 46 percent this quarter. The company reduced its operating expenses by nearly 20 percent, saving almost $150 million. Adjusted operating income came in at $113 million, an incredible rise from the same quarter a year ago. Adjusted earnings per share spiked into the positive at 4 cents compared to -82 cents in the same quarter the year prior.
It is clear Mattel is making progress. Investors are challenged with figuring out if Mattel can continue to win back lost market share. There is also a question as to how popular the company’s traditional toys will be as we segue to a tech-centric society. There is a light at the end of the tunnel as evidenced by the fact that Mattel enjoyed two consecutive quarters of profitability last year. Mattel’s fourth quarter performance in 2018 was a company-best since 2009.
Some question whether Mattel can pull off a successful turnaround bid after Toys R Us closed its stores. The bottom line is Mattel’s aggregate sales are falling. The company’s fourth quarter net sales decreased by 5 percent on a year-over-year basis. Gross sales were down about 10 percent. Analysts attribute about 8 percent of this decrease to the Toys R Us bankruptcy.
There is a long road ahead for Mattel. The company certainly has some short-term momentum with its better-than-expected fourth quarter performance, yet these could be mere battle victories while the overarching war is lost.
Market analysts credit Mattel’s recent rise to its somewhat unexpectedly impressive sales numbers compared to those of top-competitor Hasbro. Mattel’s sales throughout Europe are on the upswing. Effective cost-cutting measures have also played a role in renewed investor confidence. The company’s cost savings totaled a whopping $521 million in 2018. That is some serious trimming. However, plenty of investors still question what, exactly, Mattel executives can do from this point forward to maintain the positive momentum.
If you purchased Mattel stock, your best move right now is to either hold or sell. Mattel is not transitioning to the digital toy market. Today’s kids are not that interested in the conventional toys they make. Modern day entertainment is centered on the screen with console games, computer games, the internet, movies or TV. Mattel is operating in a space that will likely continue to shrink as the masses gradually transition to smaller family units (meaning fewer children) and more screen-time.
So, don’t be fooled by Mattel’s latest numbers. There are only so many cost-cutting measures a company can take. The bulk of the Mattel’s business is in the North American market, where sales dropped by more than 5 percent on a year-over-year basis. Mattel’s international sales are down 7 percent to boot. Though Mattel’s Barbie sales are certainly a highlight, there is no reason to expect Barbie or any other antiquated Mattel toy to rescue this company.
It will be interesting to see if Mattel can reach the street’s estimates of nearly $700 million in revenue for the first quarter of 2019. Analysts are also anticipating a loss per share of just under 40 cents, representing about a 40 percent hike from the first quarter of 2018.
Regards,
Ethan Warrick
Editor
Wealth Authority
