Mattel Earnings: Successful Holiday Season Contingent on Continued Momentum in Barbie and Wheels

Narrow-moat Mattel’s MAT 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.

We had expected the back half of 2023 to present well, given Mattel was lapping an 11% decline in the sales in the second half of 2022, as prior-year shipments pulled forward to the first half in response to supply chain constraints. Mattel reiterated flat sales guidance for 2023, implying a roughly 16% increase in sales could be captured in the firm’s fourth quarter—in line with our outlook. Furthermore, we had already projected EPS of $1.17 for fiscal 2023—in line with the firm’s updated outlook for EPS of $1.15-$1.25. However, considering the third quarter’s outperformance, we plan to reduce our EPS forecast to around $0.30 from $0.50 and see this specific issue as the culprit sending shares down 7% after hours. We surmise most of this compression stems from higher incentive compensation in the fourth quarter, rather than a systemic increase in the enterprise’s expense structure. As such, we don’t plan to materially alter our $25 fair value estimate and view shares as attractive given the relatively conservative projections for 3% sales growth and midteen operating margins over the long run that underlie our valuation.