Mattel Earnings: Solid Exit From the Holiday Season Positions Firm for Profit Growth

Narrow-moat Mattel parted ways from the 2023 holiday season in a solid position, with reasonably clean retail inventories to start the new year. Furthermore, with sales up 16% in the fourth quarter, expense absorption was significantly improved, leading to an adjusted operating margin that expanded 350 basis points to 9.1% and adjusted EPS of $1.23 (two pennies short of our pre-results estimate). Gross margin surged 570 basis points to 48.8%, benefiting mostly from deflation and cost savings, but a higher selling and administrative margin partially offset these gains as compensation rose with improving performance. All brands showed positive sales growth in the period as Mattel lapped weak prior-year results, with dolls up 29% (thanks to the Barbie movie); vehicles higher by 18%; infant, toddler, and preschool increasing 9%; and challenger categories up 3%. However, with shipments back to historical patterns, we don’t expect inconsistent growth will persist in 2024. In fact, we foresee minimal growth over the full year, given Mattel has called for flat year-over-year sales and EPS of $1.35-$1.45. As this is largely in line with our prior forecast (low-single-digit sales growth, $1.41 in EPS), we don’t plan any material change to our $24 fair value estimate, and view shares as attractive, trading at a more than 20% discount.