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Why Did Mattel, Inc. Shares Lose 17% in March

By Daniel B. Kline – Updated Apr 13, 2018 at 8:24AM

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The company lost a major distribution partner.

When a company loses a major distribution outlet, it's reasonable to assume that its sales will fall. That's a major fear for Mattel (MAT -4.55%) as the closure of Toys R Us presents a major problem for the company.

What happened

Heading into the 2017 holiday season, Toys R Us declared chapter 11 bankruptcy. At the time, the company expected it would be able to refinance its debt and eventually emerge from bankruptcy as a smaller, but more financially sound company.

That did not happen. The toy retailer was unable to work out a financing plan with its creditors and was forced to close all of its U.S. stores. For Mattel, that's a major blow because Toys R Us was a key distribution partner.

An image from a Hot Wheels car game

Hot Wheels is a key brand for Mattel. Image source: Mattel.

So what

Mattel was already struggling, and losing a chain that was responsible for roughly 15% of its U.S. toy sales won't help. In 2017, the toy maker saw net sales drop by 11%, and it lost $167.1 million on an adjusted basis. Despite that, when the chain reported its full-year results on Feb. 1, CEO Margo Georgiadis expressed strong optimism.

"We have taken aggressive action to enter 2018 with a clean slate so that we can reset our economic model and rapidly improve profitability," she said, continuing:

We are optimistic about stabilizing revenue in 2018 anchored by our key power brands, entertainment partnerships, and exciting new launches. We continue to gain momentum toward the medium-term goals we shared at our June Investor Day.

The death of Toys R Us throws a wrench in those works. Investors were clearly upset at the news. After shares closed February at $15.90, they fell to $13.15 to close March, a 17% drop, according to data provided by S&P Global Market Intelligence.

Now what

Consumers won't stop buying toys just because Toys R Us went out of business. What remains to be seen is exactly where consumers will go to buy the items they once purchased at Toys R Us.

That's a big unknown for Mattel. The company has lost a key way to display its products to consumers. It's unlikely a similar replacement will emerge, so the company is going to have to find new ways to bring attention to its variety of toy lines.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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