Will Dismal Sales & Margins Hurt Mattel's (MAT) Q2 Earnings?

Mattel, Inc.MAT is scheduled to report second-quarter 2018 financial numbers on Jul 25, after market close.

Like most other U.S. traditional toymakers, Mattel is facing a dearth of consumer demand for quite some time now. A look at Mattel's price trend reveals that the stock has had an unimpressive run on the bourses in the past year. Shares of the company have lost 21.9% against the industry 's rally of 27.3% in the same time frame. This reflects investors' pessimism on the stock, given uncertain sales environment.

Dismal sales environment, high costs and the Toys 'R' Us liquidation are likely to have hurt Mattel's top and bottom lines in the to-be-reported quarter. Let us gauge each of these factors in detail.

Bleak Top-Line Picture

The Zacks Consensus Estimate for second-quarter sales is pegged at $869.8 million, suggesting a decline of 10.8% from the year-ago quarter. Even in the first quarter, total sales declined 3.7% year over year. Owing to the Toys 'R' US liquidation, Mattel recorded sales slump across every brand in the last reported quarter and we expect this downward trend to continue.

Moreover, sluggish performance of a few key brands has been hurting Mattel's performance. In this context, at the Mattel Girls & Boys Brands, performance of the Other Girls brand has been a matter of concern for quite some time. Despite relying heavily on a growing pipeline of tech-enabled products that capitalize on new play patterns and allow it to extend beyond traditional toys for younger age groups, the company is unable to revive sales. Also, lack of innovative schemes for brand awareness and innovation has been hurting its revenues and POS momentum. Though overall POS has been mostly positive owing to the company's efforts to lower retail inventories, the improvement is not broad based. We need to wait for more consistent progress of all its brands.

International Sales Likely to Be a Relief

We expect Mattel's sales to be robust in the international front. This is because since the Toys 'R' Us liquidation is solely hurting sales in the United States, toy companies are exploring growth opportunities abroad. In fact, international markets have greater potential based on the pace of economic growth that they currently enjoy. Particularly, given the fact that emerging markets are expected to be the leading driver of future industry growth, Mattel aims to accelerate its presence therein. Subsequently, per the consensus estimate, sales growth is projected to be 8.4% year over year for the second quarter. Even in the first quarter, international sales were up 5% from the year-ago quarter.

Margins Likely to Hurt Earnings

The company's bottom line is expected to be hurt owing to a rise in operating expenses. Costs related to marketing and promotional initiatives, and those incurred for cleaning up inventories, coupled with the development of digital platforms are likely to keep margins under pressure, going ahead. 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.

Owing to the Toys 'R' Us liquidation, the company's gross margins are likely to decline in the second quarter. In the first quarter, adjusted gross margin contracted to 21% year over year. A persistent decline in the top line is likely to result in gross margin contraction due to higher inventory write-downs and discounts offered to clear inventory.

Subsequently, the consensus estimate for the second quarter is pegged at a loss of 31 cents, compared with a loss of 14 cents recorded in the year-ago quarter.

Our Quantitative Model Does Not Predict a Beat

Our proven model does not show that Mattel is likely to beat earnings estimates in the quarter to be reported. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Mattel has an Earnings ESP of -7.12% and a Zacks Rank #3.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into earnings announcement, especially when the company is seeing negative estimate revisions.

Mattel, Inc. Price and EPS Surprise

Mattel, Inc. Price and EPS Surprise | Mattel, Inc. Quote

Stocks Poised to Beat Earnings Estimates

Here are some stocks from the Consumer Discretionary sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat in the to-be-reported quarter:

Netflix NFLX has an Earnings ESP of +0.21% and a Zacks Rank #3. The company is scheduled to report quarterly numbers on Jul 16. You can see the complete list of today's Zacks #1 Rank stocks here.

Pool Corp POOL carries a Zacks Rank #2 and has an Earnings ESP of +1.29%. The company is slated to report quarterly numbers on Jul 19.

Royal Caribbean RCL has an Earnings ESP of +9.10% and holds a Zacks Rank #3. The company is expected to announce quarterly numbers on Aug 7.

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

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

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