Investors have been waiting for industry-leading toymaker Mattel, Inc. (MAT -0.52%) to pull Barbie and friends out of an ongoing slump. The stock had already fallen 23% this year, after the company disappointed investors with less-than-stellar post-holiday results, and then announcing that it would cut its dividend to fuel a turnaround.
After detailing plans to get the company back on track last month, investors had hoped for signs that the carnage was over and Barbie was back on the road to recovery. When the company reported its financial results for the recently completed quarter, investors' hopes were dashed and the stock fell another 7%. What is going on?
Challenges continue
In the most recent quarter, Mattel's revenue increased to $974.5 million, up only 2% year over year or 3% in constant currency, but higher selling and operating costs combined to quadruple the company's operating loss from the prior-year quarter and nearly triple its net loss to $56 million.
Mattel CEO Margo Georgiadis tried to put a positive spin on things: "Our key power brands -- Barbie, Hot Wheels, and Fisher-Price -- continued to show strength at retail in the second quarter. In addition, we are moving quickly to activate the strategy that we outlined in June to future-proof Mattel and deliver enhanced, sustainable growth over the medium-term."
That "strength at retail" failed to translate into positive results for Mattel's core brands. Worldwide gross sales for Barbie fell 5%, while American Girl sales were off 6% from the prior-year period. Fisher-Price and Power Wheels didn't fare much better, with sales declining 3% from the prior-year quarter. Sales of Monster High and Ever After High were the big losers, plummeting 28% year over year.
Retail sales for core brands outpaced shipping to those retailers in the quarter, as Mattel worked to reduce inventory levels, though it expects retail sales and product shipping to align over time. The company also faced tough year-over-year comparisons, resulting from the renewal of its content distribution agreement in the prior-year quarter.
There was some good news
The quarter wasn't entirely a bust. Worldwide sales from the company's entertainment business climbed 58%, driven by the sales of licensed toys associated with Cars 3. However, sales of licensed products tend to produce lower margin than the company's higher-margin doll brands, such as Barbie, resulting in gross margin that fell to 41%, a 430-basis-point decrease from 45.3% in the prior year.
Sales were uneven around the world. North American sales, which account for the majority of the company's revenue, fell by 2% from the prior-year quarter, though international sales fared better, up 6% year over year.
Opportunities in China
Mattel invested in several partnerships in the quarter to further develop a key growth market in China. Emerging markets are expected to account for the majority of toy industry growth over the next few years, and the early education and training market in China is a key component of its strategy in the region.
Mattel formed a joint venture with early-development companies Fosun Group and Babytree to establish play clubs and child-focused learning centers, as well as online parenting platforms in the most populous country. This move will serve to further acquaint Chinese consumers with the Fisher-Price brand and provide opportunities for future growth.
Adding insult to injury
The company also announced that Chief Financial Officer Kevin Farr will be leaving after 25 years with the company and 17 years in his current role. The market dislikes uncertainty, and having the CFO depart while trying to mount a full-scale turnaround didn't do the company any favors and probably contributed to the stock's continuing decline.
In the wake of several years of disappointing results, Mattel laid out a plan last month to return the company to positive results. Mattel has already introduced new diversity-embracing versions of its iconic Barbie and Ken dolls and has plans to incorporate connected toys, online content, live events, and digital games into its offerings. Investors will have to wait a bit longer to see if that plan is ultimately successful.