Should Mattel Be Avoided This Year?

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Feb 25, 2015

Shares of Mattel (MAT, Financial), manufacturer of toy products worldwide, have plunged 25% in the last year. The company is undergoing a tough phase, and its results are affected by a large number of problems. Thus, its recently reported fourth quarter results were worrisome. The numbers were below the Street’s expectations, resulting in a further decline in its share price. Let’s take a closer look at it.

Mattel’s woes

Revenue for the quarter declined 6% to $1.99 billion, as compared to the previous year. This was lower than the analysts’ estimate of $8.16 billion. Sales were affected factors such as lower demand for Barbie and Fisher Price products. In fact, Barbie sales have been on a decline since 2013, as children lose interest in the traditional toys. Demand for traditional toys is becoming weak as demand for electronic devices have increased in the last few years.

Therefore, sales in North America slipped 2%, over last year. International sales too were weak, decreasing 5% during the period. The Mattel Girls and Boys segment also plunged 9% in the quarter.

Barbie sales were down 12%, mainly due to increased competition from Disney’s Frozen dolls. This also affected demand for American Girl branded dolls, which was down 4%. The overall Entertainment business declined 21%, over the previous year. Revenue from Fisher Price plunged 11% due to sluggish demand in the fourth quarter.

Although almost all the segments were down, there were some bright spots. Wheels category and the Construction Arts & Crafts segment were up 2% and 5.3%, respectively.

The margins of the company also shrank during the period. Gross margins contracted 410 basis points to 50.4%, over last year. Also, earnings dropped 51.4% to $0.52 per share, whereas the analysts’ estimate was at $0.96 per share. Lower top line resulted in a lower bottom line.

The road ahead

The toy maker acquired MEGA Brands in April last year. MEGA Brands specializes in construction, arts & crafts category. This acquisition helped the company to diversify its product portfolio from the same old traditional toys. In fact, this was the only category which registered a growth of 5% in the last quarter. Thus, this buyout should help the company grow.

Also, Mattel plans to revitalize its brands and change the marketing approach it uses. These efforts should be beneficial for the retailer. Further, it will be introducing new products which will attract more customers.

One of the key problems of the company is stiff competition from a number of other industry players as well as a vast number of new products such as tablets, video games and smartphones which are gaining popularity. This has resulted in weaker sales of the company. Moreover, lower consumer spending in the U.S. has been one of the key reasons for the decline in sales.

In addition, the toy maker lost its contract related to making dolls of the Walt Disney characters in September last year. This loss of contract will be a major setback for the company and will result in a further decrease in sales.

Summary

Mattel is indeed in a troublesome condition. Lower product demand, loss of contract and intense competition has affected the retailer’s results. The company needs to work on its new product development in order to win back lost customers. Also, technological advancements and higher promotions might help the company from drowning. Investors should definitely stay away from this company at this time.