Mattel Earnings: Toy Demand Improving, Allowing for Cost Savings to Flow Through to Profits

While we’ve started to see cracks in consumer demand across numerous categories, the rhetoric from narrow-moat Mattel remains promising, thanks to a resilient toy market set to decline at just a low-single-digit rate in 2024. Mattel's third-quarter net sales fell 4% to $1.8 billion, lapping Barbie movie sales in 2023 and reflecting the closure of poor-performing lines. Despite the sales decline, adjusted gross margin expanded 210 basis points to 53.1%, 300 basis point better than we forecast, as supply chain improvements and the cost-saving plan generated benefits faster than expected. This led Mattel to lift its full-year gross margin guidance from 48.5%-49% to 50%, a level not seen since 2014. Recall that 70% of the $200 million cost savings Mattel is targeting should benefit the gross margin. Partially offsetting the profit upside was Mattel’s downward nudge to its 2024 sales outlook, which is now flat to down slightly, from flat prior. This still implies a return to positive sales growth in the final period of the year.