Concerned About Consumer Demand Softening, Mattel Pulls 2023 Guidance; Shares Attractive

We don’t plan any material change to our $27 fair value estimate for narrow-moat Mattel after the company laid out expectations for weaker fourth-quarter profitability and eliminated its 2023 outlook. Third-quarter sales of $1.75 billion were in line with our preprint forecast, while an adjusted operating margin of 22.7% was ahead of our 21% outlook. This was largely attributable to an improved gross margin, which ticked up 50 basis points, to 48.3%, helped primarily by pricing and cost savings initiatives. However, the full-year outlook was lowered on both the top and bottom lines, as foreign exchange is set to provide a more significant headwind to sales than previously anticipated (3%-4% impact, versus 2%-3% prior), gross margin is hurt by inventory management costs, and advertising ratchets higher to support holiday sales. As such, the fourth quarter is set up for low-single-digit as-reported sales declines, around 150 basis points of gross margin pressure, and a roughly 250-basis-point contraction in operating margin.