Mattel Earnings: Normalized Sales and Profit Patterns Should Return by Late 2023, Aiding Cash Flow

Weak performance was set to surface in narrow-moat Mattel’s first quarter, given a weak holiday season that had left retailers with bloated inventory to work through. As a result, Mattel’s first-quarter sales contracted 22%, to $815 million, with category gross billings down 23% in dolls; 27% in infant, toddler and preschool, or ITPS; and 39% in challenger. The wheels segment was the sole grower, with gross billings up 1%. Not surprisingly, this sales downtick pressured cost metrics. The adjusted gross margin collapsed 660 basis points to 40%, primarily due to close out and obsolescence expenses. Even worse was the more than 1,000-basis-point deleverage in selling and administrative costs born from lower absorption, despite the firm continuing to manifest savings from its cost-savings plan. While the overall sales and profit performance was abysmal, it was largely expected prior to the print, and we don’t see any reason to materially alter our $24.50 fair value estimate (which includes long-term sales growth of 3%). We view shares as attractive.