A Hot Wheels play set

Image source: Mattel.

What happened

Shares of toymaker Mattel (NASDAQ:MAT) slumped on Thursday after the company badly missed analyst estimates for its fourth-quarter results. A significant slowdown in the U.S. toy market during the holidays caught the company by surprise, leading to a steep decline in revenue. At 11 a.m. EST, the stock was down about 14.5%.

So what

Mattel reported fourth-quarter revenue of $1.83 billion, down 8% year over year and a whopping $130 million below analyst expectations. Currency exchange rates had a negative impact, with sales dropping by 6% on a constant currency basis. Fisher-Price sales dropped 3%, Hot Wheels sales rose 13%, and Barbie sales sank 2%.

Mattel faced the challenge last year of replacing revenue from Disney princess dolls, the license for which it lost to rival Hasbro. Excluding the princess revenue, fourth-quarter sales were flat as reported and up mid-single digits on a constant currency basis. Mattel's core business performed better than the headline numbers suggest, but the company was unable to fully compensate for the loss of the princess license.

Non-GAAP EPS came in at $0.52, down from $0.65 in the prior-year period and $0.19 below the average analyst estimate. Gross margin slumped 3.2 percentage points year over year due to elevated promotional activity driven by the slowdown in sales. Operating cost cuts helped partially offset the decline in gross profit, but it wasn't enough to prevent a steep decline in earnings.

Now what

Mattel CEO Christopher Sinclair, soon to be replaced by Margaret Georgiadis, emphasized that the core business was performing well:

Even against this difficult backdrop, our core brands continued to show solid growth, and our performance in key emerging markets like China was equally strong. And, importantly, we offset a substantial revenue gap from the loss of the Disney Princess license. Looking forward, we remain broadly optimistic about Mattel's performance in 2017 and beyond. Our core brands are strong and growing, we have a solid lineup of entertainment properties in the pipeline, and we are forging valuable relationships with key retail partners throughout the world.

Mattel declared a $0.38-per-share quarterly dividend, flat compared to recent payments. With Mattel producing just $1.06 in non-GAAP EPS in 2016, the payout ratio continues to be well over 100%. The company will need to grow earnings substantially in 2017 and beyond in order to keep its dividend intact.