What happened

A terrible first-quarter report for Mattel (NASDAQ:MAT) sent shares of the toy maker tumbling on Friday. The company missed analyst estimates by a mile, with a steep drop in sales driven by an excess of retail inventory following a weak holiday season. The stock was down 11% at 11 a.m. EDT.

So what

Mattel produced $735.6 million of revenue during the first quarter, down 15% year over year and a whopping $69 million below the average analyst estimate. The company was caught off guard by the severity of the retail inventory overhang, but it believes that it has now worked through a majority of the offending merchandise.

A Fisher Price toy.

Image source: Mattel.

Sales of Barbie products slumped 13% year over year, while Fisher-Price sales fell 9%. The construction and arts and crafts segment suffered a 38% slump in revenue. The company pointed to strong point-of-sale performance across its key brands as a sign that the situation isn't as bad as it seems, but it didn't provide further details.

Steeply lower sales led to a net loss of $113.2 million, down from a net loss of $73 million during the prior-year period. Adjusted earnings per share was a loss of $0.32, down from a loss of $0.14, and $0.15 shy of analyst expectations. Gross margin tumbled nearly 7 percentage points year over year to 37.9%, and operating costs rose as a percentage of revenue.

Now what

Mattel's weak first-quarter results are partly the result of sluggish holiday sales, which led retailers to work through existing inventory before ordering more. This was the first quarterly report under new CEO Margaret Georgiadis, a former Google executive who took the helm in January. Mattel has seen its revenue tumble for three consecutive years, and the first-quarter results make it clear that Georgiadis has a lot of work to do.

Investors may also be worried about the sustainability of Mattel's dividend. The company kept the quarterly payout flat at $0.38 per share, but the payout ratio is currently well above 100%. A dividend cut down the road could send the stock even lower as income investors bail.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.