The Pain at Mattel Continues

The ripples of the Toys R Us bankruptcy are still being felt across the toy industry, and no company was likely to feel the effects more than Mattel (MAT 0.59%). The now-defunct retailer was Mattel's biggest customer, and the company was already dealing with earlier missteps that cost it the title of largest toy seller.

Going into the second quarter, investors had no illusions that things would be rosy. Better-than-expected results in the first quarter gave shareholders hope for a repeat performance -- but that just wasn't in the cards. 

Image source: Mattel.

Second quarter recap

Data source: Mattel's Second-Quarter Financial Release. Chart by author.

The cause?

Mattel reported revenue of $841 million, a decline of 14% and below analysts' consensus estimates. Its operating loss more than tripled year over year, and its net loss increased more than fourfold.

Sales in North America fell 14% year over year and 15% in constant currency, while international sales declined 10%. The drop in international sales was driven by trouble in China as well as in emerging markets.

As you may have guessed, Mattel placed the blame for its miserable performance squarely at the feet of the recently shuttered retailer. CEO Ynon Kreiz said in his prepared remarks, "We are in a turnaround and, as expected, had a challenging second quarter driven primarily by the Toys R Us liquidation."

Lower sales of Fisher-Price and Thomas & Friends contributed to the declines, down 14% year over year and 15% in constant currency. One of the worst performers was the American Girl segment, with net sales down a massive 32%.

Gross margins got hammered, falling over 10 percentage points to 30.1% -- the company just couldn't seem to get a break as it suffered from higher material costs, increased obsolescence, and an unfavorable product mix.

Not all the news was bad

Mattel highlighted a few bright spots in its otherwise abysmal results. Similar to pronouncements last quarter, the company pointed to strength in a couple of its flagship brands, most notably Barbie and Hot Wheels. Mattel reported that Barbie gross sales increased 12% year over year, while Hot Wheels burned rubber, up 21%.

Mattel is taking drastic steps to improve its financial results. The company announced that it was eliminating 22% of its global non-manufacturing workforce, a total of 2,200 positions. The company is also planning to dispose of one of its manufacturing facilities in Mexico.

Last year, Mattel embarked on a plan to find $200 million in cost savings that it would reinvest in information technology and supply chain upgrades. The company later amended its plan, looking to deliver more than $650 million in cost reductions over the coming two years. Mattel reported that it is on track to achieve its goal and is ahead of schedule with regard to SG&A expenses. CFO Joseph Euteneuer is expecting "significant sequential improvement in gross margin in the second half of the year."

A long road to recovery

If investors were hoping for a quick resolution to Mattel's plight, its second-quarter results were a stark reminder that turnarounds take time. While the company hasn't provided detailed metrics, Mattel updated its full-year outlook, lowering its gross margin expectations from the low 40s to high 30s due to higher-than-expected raw material and freight costs. 

For their part, analysts' consensus estimates for the third quarter are calling for revenue of $1.5 billion and adjusted earnings per share of $0.28. For the full year, expectations are for sales of $4.69 billion and adjusted earnings per share of $0.17.  

Investors had hopes that a faster recovery would materialize, but it's a long and winding road.