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The 3 Biggest Factors That Could Impact Mattel's Earnings

By Danny Vena - Oct 27, 2019 at 3:00PM

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The trade war is just one big issue for the toy maker.

It's been a tough few years for Mattel ( MAT 0.88% ), and as the company's recovery drags on, the trade war between the U.S. and China provides yet another obstacle. Tariffs on some categories of toys were levied earlier this year, with more scheduled for mid-December, which could have a big impact on the consumer goods stock.

Mattel is scheduled to release the results of its third quarter after the market close on Tuesday, Oct. 29, and the impact of the trade war is just one of three issues that could play a major role.

Barbie's National Geographic Playset.

Barbie's National Geographic Playset. Image source: Mattel.

1. Will tariffs hit the bottom line?

According to the Toy Association, 85% of all toys in the U.S. are imported from China, resulting in sales of more the $27 billion annually. The tariffs couldn't come at a worse time for an industry already in turmoil. Kids are increasingly abandoning traditional toys and games for electronic devices, and the fall of Toys R Us eliminated a key shopping destination for toys. 

Here's where Mattel could have an advantage: Fewer than two thirds of the company's products that are sold in the U.S. are manufactured in China, according to Linda Bolton Weiser, senior research analyst at D.A. Davidson. Mattel has additional factories in Canada, Indonesia, Malaysia, Mexico, and Thailand. This puts it in a better position to avoid tariffs.

Even better, the lion's share of Barbie and Hot Wheels toys aren't imported from China, and these are Mattel's most popular brands. Barbie accounted for 21% of the company's revenue in 2018, and Hot Wheels made up more than 16%. 

On the company's Q2 conference call, CEO Ynon Kreiz sought to downplay the impact of tariffs, saying, "There are several levers that we can pull to offset the potential impact such as price increases, find different alternative suppliers, work with our product development and procurement teams to optimize our product mix and sourcing options, and transition to a different manufacturing structure that gives us the flexibility and mobility to leverage our resources."

2. News regarding the "whistleblower letter"

In early August, Mattel revealed in a regulatory filing with the Securities and Exchange Commission (SEC) that it "was made aware of an anonymous whistleblower letter." The company didn't provide any additional details about the allegations or information in the letter, though it did say it would delay a planned bond sale to give it time to investigate the matter.

The company hasn't made any additional disclosures about the letter, but it's sure to come up either in Mattel's earnings report or the subsequent conference call to discuss the results.

3. Progress on cost-cutting

Mattel has been in the midst of a turnaround several years in the making, and significant progress toward its stated goals could help boost the beleaguered stock. The company has said it's conducting an extensive review of its 13 factories, multiple distribution centers, and its global third-party manufacturing network -- which likely takes into account the recent pressures related to the trade war.

Management also announced plans to reorganize and cut costs by $650 million in 2019. In the second-quarter conference call, Kreiz said the company had achieved a run rate of $754 million, and expects to achieve additional cost reductions of $100 million by the end of the year, though it doesn't expect to realize the full benefit of the amount above $650 million until 2020.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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