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Stock Strategist

Mattel's Turnaround Set to Begin

Self-inflicted issues should persist for a few more quarters as a new CEO takes control.

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Although  Mattel (MAT) had been a good steward of capital in the past, recent sales declines indicate that the firm's merchandise was poorly aligned with consumer demand, putting its previous capital-allocation policy and brand equity at risk. Further, a turnover in leadership, underperforming inventory management, volatile currency movements, and lower forecast cash flows could pressure returns on invested capital at least in the near term; we forecast ROICs to fall to 15% in 2015 from more than 30% in 2013. Despite what we perceive to be a temporary destruction in value, Mattel's brand equity has not been permanently impaired, in our opinion, but the road to redemption could take some time.

New CEO Christopher Sinclair's background is impressive; he has led companies across the information technology, venture capital, and packaged goods industries. We expected Mattel to seek out a leader with experience across retail, digital (an area in which the firm has seriously lagged), and supply chain, making Sinclair a good fit with his breadth of knowledge and experience.

Jaime M. Katz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.