Mattel: But the whole world is a toy now

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Julian Close 08/11/2014

I've heard it said that the difference between men and boys is the price of their toys. If that's true, Mattel ( MAT ) is pitching toys at the low end of the market. Mattel is, of course, a toy company. Among its brands are Mattel Girls and Boys brands, Fischer-Price and American Girl. They have also recently acquired MEGA Brands, a Canadian-based manufacturer of construction building sets. Their offerings are traditional, and that's the problem; kids today, bombarded as they constantly are by digital media, don't want or need as many traditional toys.

When considering which child-centric companies are successful and which are not, it seems that the key is being able to crossover and bring in other markets as well. Disney ( DIS ), with its theme parks, pulls in entire families, and through ESPN it gets sports fans as well. The privately held LEGO Group has transformed itself into an intellectual property megalith with its highly successful video games, and now, of course, its eponymous movie.

I'm not sure which is more surprising: that Lego was able to re-imagine itself as an intellectual property powerhouse, or that Mattel was not. Buried in Mattel's bag of brands are many familiar names, the most familiar of all these being Barbie . How exactly has Mattel failed to capitalize on Barbie's status as the embodiment of all we as a culture no longer wish to aspire to? Why is Barbie not raised in celebration, as the icon America so dearly loves to hate? I can only speculate that an ironic take on Barbie is, for some reason, unthinkable to Mattel. This is, after all, the company that had Barbie saying, "Math class is tough!" just 22 years ago.

Where is the Barbie film? the Barbie series? the Barbie iPhone game? Now I wish I hadn't asked, because it turns out this does exist, but it is clearly doing something very wrong. Consider this online review from Apple's ( AAPL ) iTunes Store: "i deleted the app cuz there waz nothin to really do," post by a user named Barbie rocks! This name/review pairing perfectly illustrates how completely Mattel has failed to connect with a market that does exist . Kim Kardashian's abominable iPhone game is expected to bring in as much as $200 million this year in in-app purchases. That Barbie-Kardashian's spiritual trailblazer-will bring in none speaks to a terrifying lack of corporate imagination.

Mattel has one brand that does crossover into another market: American Girl dolls. These dolls are popular with girls, but their real market is serious, lifelong doll enthusiasts. If you think this hobby died with Queen Victoria, think again-American Girl is about the only Mattel brand forecast to grow its revenue over the next year.

In the second quarter of 2014, Mattel earned just $0.03 per share, when the Street was looking for $0.21. Sales were down a total of 9%, spread across all brands except American Girl, and gross margins narrowed by 490 basis points. This company failed to evolve when times were good, and now that the walls are closing in, its next move is likely to be panic driven. Here's some math even Barbie could manage: multiply falling sales by narrowing profit margins, then add panic and subtract imagination, and you have the formula for corporate death. In light of this, the chance of any significant near-term rise in the price of MAT stock appears remote.


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I seek to capitalize on this weakness with a bear-call credit spread. Look at the October 38/40 bear-call credit spread for at least a $0.20 credit. You will need to use limit orders to place this trade. This trade has a target return of 11.1% over 68 days, which is an annualized return of 59.6%. MAT stock has to rise 6.6% to cause a problem. Be aware that this is an aggressive trade and best undertaken by investors with diverse portfolios and high tolerance for risk.




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: MAT , DIS , AAPL

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