We issued an updated research report on Mattel, Inc.MAT on Nov 9, 2015.
Mattel's third quarter 2015 earnings per share of 71 cents missed the Zacks Consensus Estimate by 10.1% and declined 27.6% year over year. The downside reflects soft sales and the negative impact of currency exchange rates. Besides missing the consensus mark, revenues declined year over year due to currency headwinds and a decline in sales at Mattel Girls & Boys Brands and American Girl. In fact, lack of innovative schemes for brand awareness and brand innovation have been dampening revenues and POS momentum of the company.
Sluggish performance of the Barbie Brand has been a matter of concern for long. This flagship brand has been posting soft sales since the beginning of 2013. Stiff competition from other fashion dolls is dampening the demand for this iconic brand. Meanwhile, Mattel's Monster High brand once again experienced a challenging quarter.
We would like to remind investors that except for the first quarter of 2015, Mattel's revenues have missed the Zacks Consensus Estimate since the beginning of 2014. Though overall POS has been positive so far in 2015 (down in third quarter 2015), owing to the company's efforts to lower its retail inventories, the improvement is not broad based. Meanwhile, despite the cost saving initiatives, adjusted gross margin has declined so far in 2015 owing to costs related to marketing and promotional initiatives and for clearing inventories including digital efforts.
Also, given the company's considerable international presence, foreign exchange translation has been hurting revenues and profits of the company over the past few quarters and is expected to continue to do so for the rest of 2015. Meanwhile, the company has also been losing ground to electronic toys and tablets. The iconic brands of the company have to battle a broad array of alternative modes of entertainment including video games, MP3 players, tablets, smartphones and other electronic devices. In fact, other toy makers like Hasbro Inc. HAS and JAKKS Pacific, Inc. JAKK have also been bearing the brunt of the change in kids' preference.
However, Mattel is also taking steps to turn around the business. Mattel is focusing on improving its POS. This involves introduction of more products, brand innovation and strategic initiatives like entering new categories and strengthening of the Girls portfolio. It is working on bringing better science and analytics to its advertising and trade spending programs to generate higher returns from its spending. The company believes that e-retail is a priority and therefore the company has considerably increased initiatives to drive momentum in this area.
In order to battle an array of alternative modes of entertainment and bring back the erstwhile position of its two flagship brands, Barbie and Fisher-Price, the company is working on the digital front and focusing on better execution of marketing and promotional initiatives. The digital gaming space is dominated by players like Activision Blizzard, Inc. ATVI , which is expanding aggressively in the mobile gaming business. Recently, the company announced the buyout of Candy Crush maker King Digital Entertainment plc for $5.9 billion.
With 3D printing becoming an important part of the toy industry, the company has announced exclusive partnerships with Autodesk, the world leader in 3D design software and Quirky - one of the unique invention companies in the world. Also, the company has a solid strategy for the holiday season.
Meanwhile, Mattel is aggressively developing plans to offset the Disney Princess revenue gap by building core brand momentum and developing new partnerships. Per a deal signed in Sep 2014, Mattel lost the rights to manufacture dolls based on Disney Princess stories and characters to Hasbro, beginning 2016, worldwide, except Japan.
With the holiday season representing more than 50% of the retail sales in a year and products lined up of 2016, the company believes that it will be able to recover a significant portion of the Disney Princess revenue gap as it gears up for 2016 and 2017.
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