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Mattel Earnings: Can the Company Get Its Sales Back on Track?

By Danny Vena – Apr 22, 2019 at 9:33AM

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Investors in the struggling toymaker just can't seem to catch a break.

Toys R Us filed for bankruptcy in September 2017, and the reverberations of its closing are still being felt across the toy industry. While all the major players have experienced the pain, toymaker Mattel (MAT 0.44%) has been among the hardest-hit. The company's troubles started much earlier, however, going all the way back to 2014, when Mattel lost the licensing rights for the coveted Disney Frozen and Princess lines to its biggest rival Hasbro.

Mattel will once again be making its case to investors when the company reports the financial results of its first quarter, after the market close on Thursday, April 25. Let's recap Mattel's fourth quarter and look at recent developments, to see if they provide any insight into what investors can expect when the company reports earnings.

Two girls in matching outfits laughing and playing with American Girl dolls while their mother watches from a distance

Image source: Mattel.

Better-than-expected holiday sales

For the fourth quarter, Mattel reported net sales of $1.52 billion, a decline of 5% year over year, and down 3% when excluding the headwinds posed by foreign currency exchange rates. While that might not seem like anything to write home about, it was better than analysts' consensus estimate of $1.44 billion. Gross sales plummeted 11% (9% in constant currency), with 8% attributable to the Toys R Us liquidation.

Cost discipline and reduced spending helped boost Mattel's bottom line. The company cut its operating expenses by $144 million, resulting in operating income of $107 million, compared to a loss of $251 million in the year-ago quarter. This produced earnings per share of $0.04, far better than the $0.82 loss in the prior-year quarter, or the $0.16 loss expected by analysts.

The better-than-anticipated results drove Mattel shares up 23% on the day following its fourth-quarter report.

Product-safety recall

Even on the heels of better-than-expected results, it seems that things at Mattel are going from bad to worse. In conjunction with the U.S. Consumer Product Safety Commission (CPSC), Mattel voluntarily recalled all 4.7 million units of its Fisher-Price Rock 'N Play Sleeper after reports of infant deaths while using the device. This move came in the wake of a joint warning last week by Mattel and the CPSC that infants could turn over in the sleepers and suffocate.

Mattel said consumers who have owned the product for less than six months would get a full refund, while others would be issued a voucher with a value commensurate with the amount of time they owned the product.

UBS analyst Arpine Kocharyan estimates that the recall could cost Mattel as much as $40 million to $60 million, and that doesn't account for additional lost sales or the potential for lawsuits.

The other shoe falls

Mattel wasn't ready to provide guidance at the time it reported its fourth-quarter results, but said it would announce its forecast the following week at Toy Fair, the annual trade show celebrating all things toys. In a presentation at the event, Mattel said sales would be flat in 2019, with EBITDA (earnings before interest, taxes, depreciation, and amortization) in a range of $350 million to $400 million. Investors had been expecting the company to build on its end-of-year momentum, and the disappointing guidance caused the stock to fall 18% in the wake of its announcement.

The company hasn't issued quarterly guidance, so we can turn to Wall Street to gauge its expectations, though investors don't want to fall victim to its quarter-to-quarter mindset. Analysts' consensus estimates are calling for revenue of $645 million, a decline of 13% year over year, and a loss per share of $0.56.

With all the things happening at the beleaguered toymaker, investors shouldn't hold out much hope for the quarter. We'll know more when Mattel reports earnings on Thursday, April 25.

Danny Vena owns shares of HAS, Mattel, and DIS and has the following options: long January 2021 $85 calls on DIS and long January 2020 $50 calls on HAS. The Motley Fool owns shares of and recommends HAS and DIS. The Motley Fool is short shares of HAS. The Motley Fool has a disclosure policy.

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