What happened
Shares of Mattel (MAT -0.43%) fell 19.4% in February, according to data from S&P Global Market Intelligence, on concerns that factory disruptions resulting from the coronavirus may weigh on earnings in the coming quarters.
The coronavirus has sickened more than 80,000 people in China, has temporarily shut down factories, and has resulted in quarantines that prevent workers from leaving their homes and towns. Companies worldwide have felt the impact, and toymakers are particularly concerned.
Image source: Getty Images.
So what
About 70% of all toys are made in China, according to IBISWorld research. In its 2018 annual report, Mattel doesn't specify how heavily it relies on China but does mention that it produces toys in six countries. That factor could mitigate risk. Still, Isaac Larian, CEO of privately held toymaker MGA Entertainment, told Yahoo! Finance that for the 2020 holiday season, the damage to toymakers has already been done. The February-through-April period is when much of the production for the holidays takes place in Chinese factories.
Now what
At the moment, Mattel expects that production delays in the first quarter may affect the quarter's earnings. The good news is that the first quarter is generally a small one in terms of sales for Mattel. But things may become complicated if the outbreak in China deepens. Mattel on its fourth-quarter earnings call predicted 2020 full-year gross sales to grow 1% to 2.5% -- but the company said that doesn't include the potential impact from the coronavirus outbreak. Mattel also said the impact will depend on the duration of the outbreak.
Before the coronavirus situation, toy companies seemed on their way to recovery. Mattel and others had suffered after Toys R Us, a big seller of their products, went bankrupt and closed all of its stores in 2018. The NPD Group, in a fall report, predicted that total U.S. toy industry dollar sales would gain in 2020. Now, without knowing how long the coronavirus outbreak will last, it's impossible to determine how deeply the situation will affect Mattel's supply chain and therefore earnings. While the shares may see more losses if the outbreak persists, weakness may be a decent entry point for long-term investors in consumer discretionary stocks.
