Mattel Faces Pressure Amid Slowing Barbie Sales

With the Barbie brand starting to show its age, Mattel will have to come up with something new in order to remain competitive and combat slowing sales.

Jul 25, 2014 at 9:00AM

For years, Barbie was the blue-eyed, blonde representative of the US toy industry. As an iconic figure, although she has changed over the years, her popularity remained beyond question for a long time. Now, things seem to be changing.

The most recent earnings report from Mattel (NASDAQ:MAT) showed a steep decline in Barbie sales and with it a hefty decline in earnings as well. The news also pressured stocks of competitors such as Hasbro (NASDAQ:HAS), as commentators worry that the overall industry may be losing its shine. What can we learn from the report?

Falling appeal
Mattel released a decidedly unimpressive second-quarter earnings report which showed weakness in most product categories as well as the top and bottom lines. Net income plunged to $28.3 million from $73.3 million last year, and earnings per share of $0.08 missed the $0.18 consensus estimate by a mile. Revenue dropped by 9% to $1.06 billion for the quarter, also well below calls for revenue of $1.2 billion.

Barbie, who celebrated her 55th birthday this year, is seemingly not as popular as she used to be. The sales of the Barbie brand fell by 15%. However, Mattel's other major brands aren't performing well either, with Fisher-Price sales down by a whopping 17% and Hot Wheels posting a 2% decline. Barbie is the company's biggest sales driver, and it seems she is having trouble connecting with the Internet-savvy, smart-device-toting girls of today.

According to analysts, the company has not been making enough headway in terms of product innovation and diversifying its brands. While it completed its $423 million acquisition of MEGA Brands, a company that competes with Lego in the building-block segment, it still relies too much on its traditional brands; as a result, any weakness in these offerings puts significant pressure on its results. Since the Barbie brand declined in eight of the last 10 quarters, the company obviously needs to do something. Still, the company's management is confident it is well positioned for the rest of the year, with products related to Disney's Frozen film expected to boost sales .

Hasbro hit
Following the news, the share price of Mattel's major competitor Hasbro also took a hit, although the company is seeing stronger demand for its products. After last year's decline, the company's boys category is doing a lot better this year with strong performance from its Nerf and Marvel brands. The company has been working hard on cost-cutting initiatives after a few tough quarters with $100 million in annual savings expected by 2015. 

In any case, the company is still growing its top line. In its second-quarter report, it reported that overall revenue rose by 8.2% year-over-year, driven by a 32% sales increase in its Boys category where the Marvel and Transformers brands were the top performers for the period. The Girls division also did well, growing sales by 10% for the quarter, while Preschool lagged with a 4% drop. While both its earnings and revenue missed estimates, Hasbro's sales grew considerably, certainly in comparison with Mattel's most recent results, and such, the company may be the better choice in the industry. 

The bottom line
After decades of almost undisputed dominance in the girls' toys industry, Barbie is finally starting to show her age. The brand has been in decline for some time now, but with another 15% drop in sales, the unrealistically proportioned doll may be heading toward retirement. This is a big problem for Mattel, as it relies on the brand for much of its revenue. As such, it will have to put more work into diversifying its product offering to remain competitive in the industry. Until this happens, competitor Hasbro looks like a better bet.

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Daniel James has no position in any stocks mentioned. The Motley Fool recommends Hasbro, Mattel, and Walt Disney. The Motley Fool owns shares of Hasbro and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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