Mattel Looks Undervalued as Toys 'R' Us Weighs

Jaime Katz: We've recently made some changes to our fair values for narrow-moat toy companies Mattel and Hasbro in response to the recently announced liquidation of Toys 'R' Us. We've reduced our Hasbro fair value by $3, to $97, and our Mattel fair value to $21.50 as we made three major changes to our 2018 outlook while Toys 'R' Us liquidates.

First we took first-half sales down about 4% to 5% from where they were previously modeled for these businesses. While Toys 'R' Us represented about 8% to 9% of total sales in 2017, we believe this amount had been pruned back since the Toys 'R' Us initial bankruptcy announcement in September and had comprised a midsingle-digit level around the time of liquidation.

Second, we expect corresponding pressure to gross margin as Toys 'R' us marks down inventory to move product before shuttering doors.

Finally, we increased spending to facilitate sales, including advertising and promotional dollars, along with SG&A deleverage due to the lower sales base, further impacting overall near-term profitability.

While we still believe Mattel's shares are significantly undervalued, we believe near-term headline risk surrounding the Toys 'R' Us liquidation could continue to weigh on shares over the next several months before stability in share performance could resume.