Mattel Earnings: Positive Set Up Waylaid by Negative Consumer Sentiment

We don’t plan any material change to our $25 fair value estimate for narrow-moat Mattel and view shares as attractive. However, we fear shares may stall in the near term as positive momentum in dolls and consumer products stemming from the Barbie movie is held back by a weakening consumer. Notably, point of sale (sales at retail) fell at a high-single-digit clip in the second quarter, and Mattel disclosed industry softness, but we believe this demand pressure is more a function of an uncertain macroeconomic picture rather than a firm specific issue with key brands like Barbie or Hot Wheels. In the second quarter, Mattel’s sales fell 12% (better than our projected 18% downtick), as sales in the infant, toddler, and preschool segment contracted 28% while challenger toys declined 39%. As a result, widespread expense deleverage took hold, leading to an adjusted operating margin of 6.9% (down 290 basis points).