Mattel’s (MAT) turnaround remains delayed, hindered by the recent bankruptcy and liquidation of Toys 'R' Us and a deceleration in The Toy Box product demand during a period of secularly slow growth. After decent growth across core brands, inventory clearance and stock-keeping unit creep of lower-productivity brands hurt performance in 2017. The company’s turnaround plan strikes us as a step change, placing heightened focus on core brand productivity and better manufacturing alignment, which should begin to bolster profits in the second half of 2018. Furthermore, we think natural gross margin leverage should occur in the second half as inventory obsolescence charges fail to repeat (a significant contributor to the nearly 900-basis-point decline in 2017), with Mattel lapping the Toys 'R' Us initial bankruptcy announcement and improved inventory management underway.
Core brand focus, the capture of new licenses, and a faster supply chain--bringing in-demand products to market quickly--could help restore Mattel’s sales growth, while supply-chain initiatives that realign the manufacturing footprint should improve profitability. Additionally, Mattel’s digital plan, which has focused on strategic relationships with Google, Alibaba, YouTube, Nickelodeon and others, should increase brand visibility, potentially stemming losses to other digital toy manufacturers and peers.
Jaime M. Katz, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.