It could have been a complete coincidence that toymaker Mattel (MAT 0.75%) decided to announce the closure of a Canadian factory just three days before it releases a quarterly earnings report. Or perhaps it was strategic, getting the bad news out of the way so the company wouldn't have to dwell on it during Thursday's earnings report conference call.
Given industrywide headwinds, though, somehow it feels like the company is preparing to put the best possible spin on what's apt to be seen as bad news.
For investors' sake, I hope I'm wrong.
Still playing defense, despite the open net
The most recent look at the consensus -- as measured by Thomson Reuters -- has Mattel reporting a profit of $0.01 per share on sales of just under $1.5 billion for the three-month stretch ending in December. The so-called whisper number says the organization could feasibly post a profit of $0.04 per share for the quarter in question. Underscoring that prospect is the fact that Mattel has topped earnings estimates in each of its past four quarters.
Image source: Getty Images.
If there was ever a time over the course of the past year to expect disappointment, however, this may be it.
Yes, Monday's news that the toy company is shuttering its Mega Bloks factory in Montreal is a subtle hint that costs have remained high relative to revenue, though it's not just the factory in Montreal being closed. The company is also in the process of combining two facilities in Mexico into just one. All these moves are ultimately aimed at cutting costs in an economic environment that has proven empowering for consumers. For the record, spending by U.S. consumers reached record levels (sequentially as well as year over year) in every quarter of 2019.
The real red flag for Mattel and its shareholders, however, is being waved by a key third-party partner and one of the toy market's top monitors. That's retailer Target (TGT 3.35%), and market research outfit The NPD Group, both of which have already dished out data that doesn't bode well for the business.
Mattel is facing industrywide challenges
It was supposed to be a banner year-end for Target's toy department. The retailer managed to scoop up more than its fair share of shoppers once the last of the old Toys R Us stores closed in 2018, and Target was even more ready for 2019's holiday shopping season thanks to partnerships with Walt Disney and a reborn Toys R Us company.
Yet as it turned out, despite an enormous and creative effort, the best the company could do is match 2018's holiday toy sales tally. James Zahn, senior editor of the trade publication The Toy Book, commented on the result, "Target did a great job with their merchandising, with their assortment and I think the initial boom that they had coming out of 2018, which was fantastic." But he added: "A lot of people thought they were going to repeat again and were pretty saddened when they didn't."
The NPD Group says the rest of the industry's key brands and retailers didn't fare any better; in fact, they seem to have done worse. NPD reported in late January that U.S. toy sales fell in the fourth quarter after rising during the third quarter, topping off a year in which total toy revenue fell 4%.
While Mattel may end up repeating history and topping estimates, bear in mind that those fourth-quarter estimates are both lower on a year-over-year basis. During the final quarter of 2018, Mattel generated $1.52 billion in sales and turned it into per-share earnings of $0.04. Even a beat would be a dubious victory.
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No time to play
Maybe Mattel's decision to publicize the closure of its Montreal factory was made without respect to Thursday's earnings release. It's certainly possible Mattel wants to keep Thursday's focus on results and plans. Perhaps it didn't want to inform those 580 workers of their likely job losses in a mere aside during the upcoming earnings call.
If a disappointing quarterly report was looming, though, one way to round off its sharp edges would be to point out that the company is already taking clear measures to reduce expenses, pointing back to news from just three days prior as evidence. Investors may want to make sure they're committed to Mattel for the long haul, if they intend to still own shares after Thursday's close.
On that note, Hasbro (HAS +0.76%) will have released its fourth-quarter numbers by the time you're reading this. The rival toymaker scheduled its report and conference call for on Tuesday morning. The two companies are increasingly differentiating themselves, but they're still far more alike than different, and in the same boat in more ways than not. That earnings release might be a good one for Mattel shareholders to examine in preparation for Thursday's results.
