Company Reports

After experiencing supply chain issues and a weak holiday season in 2022, and then uneven sales in 2023, narrow-moat Mattel is finally on track for a more normal sales pattern in 2024. In the first quarter, the firm posted a less-than-1% sales decline to $810 million on growth in vehicles (up 5%) but weakness in the infant, toddler, and preschool, or ITPS, segment. Sales in this segment tumbled 10% and are now poised to generate around half the gross sales in 2024 as in 2016. While some of the recent ITPS sales decline stems from the out-licensing of lower-impact brands, further efforts to remediate issues in the segment could take some time, and we don’t expect to see meaningful evidence of improvement in ITPS until 2025.

Mattel continues to harvest gains from its turnaround, delivering above break-even operating margins starting in 2019 and reaching around 12% in 2023. Despite the expectation of little sales growth, we expect Mattel to produce operating margin expansion in 2024, thanks to its newly launched $200 million cost-saving program. Additionally, the firm's shift to a capital-light strategy has provided lower capital and operating expenditures than in the past (supporting profit growth while allowing for investment in product innovation), but profits could be hurt by tactical investments in dolls and vehicles as well as logistics and input cost inflation.

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.

Mattel continues to harvest gains from its turnaround, delivering above break-even operating margins starting in 2019 and reaching around 13% in 2022. We expect Mattel to produce only modest operating margin declines in 2023 given the recent shift in consumer sentiment before capturing further expansion ahead, helped by its $300 million cost-saving program. The shift to a capital-light strategy offers lower capital and operating expenditures than in the past (supporting profit growth while allowing for investment in product innovation), but profits could be hurt by tactical investments in dolls and vehicles capacity as well as logistics and input cost inflation.

Narrow-moat Mattel's third-quarter sales results were in line with our $1.9 billion forecast, as Barbie and Hot Wheels (together 46% of gross billings) again carried the load, with worldwide gross billings 16% and 22% higher, respectively. Fisher-Price (1% decline), American Girl (down 13%) and the challenger brands (up 1%) continue to weigh on sales performance, although we note all three had sales that improved sequentially. On the bottom line, adjusted EPS of $1.08 beat our estimate by more than $0.20, largely attributable to a 51% gross margin, which was up 270 basis points, benefiting from mix (170 basis points, helped by Barbie-related sales), price (140), and cost savings initiatives (130) partially offset by fixed costs. With some operating leverage on 9% sales growth, Mattel was able to achieve a 26% operating margin, a high-water mark.

Mattel continues to harvest gains from its turnaround, delivering above break-even operating margins starting in 2019 and reaching around 13% in 2022. We expect Mattel to produce further adjusted operating margin expansion ahead (after its rightsizing inventory at retail during the first half of 2023), benefiting from its $300 million cost-saving program. The shift to a capital-light strategy offers lower capital and operating expenditures than in the past (supporting profit growth while allowing for investment in product innovation), but profits could be hurt by tactical investments in dolls and vehicles capacity as well as logistics and input cost inflation.

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).

Mattel continues to harvest gains from its turnaround, delivering above break-even operating margins starting in 2019 and reaching around 13% in 2022. We expect Mattel to produce further adjusted operating margin expansion ahead (after its inventory at retail is rightsized in the first half of 2023), benefiting from its $300 million cost-saving program. The shift to a capital-light strategy offers lower capital and operating expenditures than in the past (supporting profit growth while allowing for investment in product innovation), but profits could be hurt by tactical investments in dolls and vehicles capacity as well as logistics and input cost inflation.

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.

Mattel continues to harvest gains from its turnaround, delivering above break-even operating margins starting in 2019 and reaching around 13% in 2022. We expect Mattel to produce further adjusted operating margin expansion ahead, helped by the execution of its $300 million cost-saving program. While movement to a capital-light strategy offers lower capital and operating expenditures than in the past (supporting profit growth while allowing for investment in product innovation), profits could be hurt by tactical investments in dolls and vehicles capacity as well as logistics and input cost inflation.

We plan to lower our $27 fair value estimate for narrow-moat Mattel by a high-single-digit rate, as weak holiday shipments are likely to persist in the front half of 2023, providing ongoing margin compression. In the fourth quarter, net sales declined 22% at Mattel, worse than the 4% downtick we had forecast, but in line with competitor commentary, with narrow-moat Hasbro predicting a 17% downtick and no-moat Spin Master foreseeing a 25% contraction in their respective sales bases for the same period. Weakness was widespread as consumers cinched wallets to combat inflation, with gross billings of dolls contracting 27%, infant, toddler, and preschool down 33%, and challenger categories lower by 26%. Vehicles were the one bright spot, up 6%. However, unlike its peer group, Mattel seemed to feel the pinch on operating margins disproportionately, at 6%, down from nearly 15% last year. This was largely attributable to an adjusted gross margin that contracted 620 basis points, to 43%, a low-water mark not seen since 2019, stemming from both discounting (350 basis points), as well as higher inflation, lower fixed cost absorption, and higher royalties.

Mattel continues to harvest gains from its turnaround, delivering above break-even operating margins starting in 2019 and reaching around 14% in 2021. We expect Mattel to produce further adjusted operating margin expansion ahead, helped by the execution of its $250 million cost-saving program. While movement to a capital-light strategy offers lower capital and operating expenditures than in the past (supporting profit growth while allowing for investment in product innovation), profits could be hurt by tactical investments in dolls and vehicles capacity as well as logistics and input cost inflation.

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.

Mattel continues to harvest gains from its turnaround, delivering above break-even operating margins starting in 2019 and reaching around 14% in 2021. We expect Mattel to produce further adjusted operating margin expansion ahead, helped by the execution of its $250 million cost-saving program. While the shift to a capital-light strategy should offer lower capital and operating expenditures than in the past (supporting profit growth while allowing for investment in product innovation), near-term expenses could be inflated by the tactical investment in dolls and vehicles capacity as well as input cost increases.

We don’t plan any material change to our $27.50 fair value estimate for narrow-moat Mattel after incorporating better-than-expected second-quarter 2022 results and moderating our second-half 2022 sales forecast. Mattel put up terrific top-line marks in its second quarter, growing net sales by 20%, as all categories rose more than 20%, with the exception of dolls (which increased 2%, on top of 50% growth last year). Nevertheless, rising sales and price increases weren’t enough to fully absorb higher input and supply chain costs and royalty expenses, leading Mattel to surface an adjusted gross margin decline of 260 basis points, to 44.9%. Despite gross margin headwinds, a more than 600-basis-point improvement in selling, administrative, and advertising costs proved Mattel had further operating margin gains to print, resulting in 9.8% adjusted operating margin in the second quarter, the best second-quarter figure since 2012. We expect some of these expenses (particularly advertising) to tick back up over the back half of the year as product launches accelerate.

Mattel continues to harvest gains from its turnaround, delivering above break-even operating margins starting in 2019 and reaching around 14% in 2021. We expect Mattel to produce further adjusted operating margin expansion ahead, helped by the execution of its $250 million cost-saving program. While the company's shift to a capital-light strategy should offer lower capital and operating expenditures than in the past (supporting profit growth while allowing for investment in product innovation), near term expenses could be inflated by the tactical investment in dolls and vehicles capacity as well as input cost increases.

Narrow-moat Mattel put up its first positive first quarter EPS mark since 2013, as shipments accelerated and cost absorption ensued. Gross sales rose 19%, to $1 billion, handily outperforming the single-digit metric we forecast, as all categories delivered robust growth (with dolls up 4%, vehicles 31%, infant toddler and preschool 12%, and action figures and other up 41%). The adjusted gross margin contracted only 40 basis points (to 46.6%), significantly better than the 300-basis-point downdraft we foresaw, despite 550 basis points of input inflation, as favorable foreign exchange, pricing, and cost savings helped defend profits. All in, an 8.7% adjusted operating margin is a high-water mark for the first quarter at Mattel, sending shares up 3% post print. With shares popping and additional 11% in the trading day prior to the report (due to speculation around private equity interest in the name), we view shares as fairly valued.

Mattel continues to harvest gains from its turnaround, delivering above break-even operating margins starting in 2019 and reaching around 14% in 2021. We expect Mattel to produce further adjusted operating margin expansion ahead, helped by the execution of its $250 million cost-saving program. While the company's shift to a capital-light strategy should offer lower capital and operating expenditures than in the past (supporting profit growth while allowing for investment in product innovation), near term expenses could be inflated by the tactical investment in dolls and vehicles capacity.

With results as quantitative evidence, it appears narrow-moat Mattel’s turnaround has been largely completed. The company’s fourth-quarter sales growth of 10% (to $1.8 billion) and adjusted operating margin of 15% indicate products are enticing consumers, particularly in dolls and action figures, building sets, and games, where the category billings increased 13% and 25% as reported, respectively. Full-year 2021 put up a whopping 19% sales growth, a 14% adjusted operating margin (up 440 basis points over last year) and only 80 basis points of gross margin pressure, despite logistics, inflation, and other cost headwinds. We plan to increase our $25 fair value estimate by a high-single-digit percentage, and view shares as fairly valued after a 10% pop post print.

Mattel continues to harvest gains from its turnaround, delivering above break-even operating margins starting in 2019 and set to reach 13% in 2021. We expect Mattel to produce further adjusted operating margin expansion ahead, helped by the execution of its $250 million cost-saving program. Furthermore, the company's shift to a capital-light strategy should offer structurally lower capital and operating expenditures than in the past, supporting profit growth while allowing for investment in product innovation.