Latest Results Up the Anxiety for Mattel Investors

Mattel (MAT -0.58%) shareholders are reeling after the company not only reported another weak quarter but cut the remainder of its dividend.

On this episode of Industry Focus: Consumer Goods, the team considers the string of challenges that have dogged Mattel up to this point as well as some of the steps management is taking in the near future to right the ship.

A full transcript follows the video.

This video was recorded on Oct. 31, 2017.

Vincent Shen: To start with Mattel, which reported earnings on Oct. 26, there's a lot to digest here in this report. Danny, what were the highlights?

Danny Vena: When we talk about Mattel, I'm going to go back a little bit into the past, Mattel was already in trouble. Mattel's flagship Barbie doll sales have been either flat or declining going all the way back to 2012. They've been through several CEOs. And they've been trying to revive the Barbie sales, revive some of the sales of their key brands. Back in February, Mattel's new CEO, Margo Georgiadis, came on and set out a plan to help the company get back on track. At the time, they planned to cut about $200 million worth of costs, and they slashed the dividend by 61%. And that was the beginning. That's how they were planning on moving forward. You may recall, a couple of years back, Mattel had lost the Disney Princess and Frozen lines in a coup to Hasbro. That was a big deal to them. That was adding insult to injury. Mattel has finally put together a plan going forward, and we'll talk about that in just a minute.

For the current quarter, Mattel's net sales fell to about $1.56 billion, which was down about 13% year over year, and that was far below the consensus estimate, which was about $1.8 billion. Unfortunately, because of the Toys R Us situation, or partly due to that, their North American gross sales fell 22% year over year. North America is their biggest market, so they took a huge hit there. Sales fell across the board in every major category. Some analysts estimated that about half of the falling sales in North America were the result of the Toys R Us bankruptcy. They had a net loss of over $600 million, per share loss of $1.75. They announced on their earnings conference call that they were going to cut $650 million in costs over the next two years vs. the $200 million that they had previously announced, and they suspended the dividend entirely. So all in all, it was really hard to find anything positive in Mattel's earnings conference call and their financial release. There just really wasn't anything good there.

Shen: Yeah, the sentiment was definitely very negative during the earnings call in the commentary from management. And it's interesting to note, you pointed out that sales for the company overall are down 13%, but for that very important North American segment, down 22%. For their brand categories within that North American segment, across the board, you're down anywhere from 20% to 34%. If you look at some of their key franchises, their key brands, for example, American Girl, Fisher Price, again, all double digit declines above 20%.

As early as the first weeks of September, Mattel had already begun cutting down on their shipments to Toys R Us as a result of the bankruptcy. Thus, some of the estimates and the comments that half of the decline that they saw in North America was driven by that latest development with a pig partner of theirs, whereas the international sales, on the other hand, were relatively flat. So a lot of the losses driven here at home. Profitability, too, I want to add, their gross margin was down 7 percentage points year over year. I think that was also a big development that was driving what you mentioned in terms of the $650 million of additional cost cuts in the next two years. Management is implementing zero-based budgeting, which we've brought up a few times in the show before. Basically, with each year, for every department, for every division, as they're setting up their budget, instead of basing it on the prior year's budget, they start from scratch, having to justify every expense, every line item. It's a common way for companies to try to cut down and make their budgets as lean and efficient as possible. With that dividend cut that you mentioned, Danny, it's expected to free up about another $200 million a year for management to spend elsewhere.