Action dramas typically dominate the summer movie season and are represented this year by Indiana Jones and the Dial of Destiny and the newest entry in the Mission Impossible franchise. But there's one hotly anticipated film coming soon to a theater near you, and it's pink. Yes, it's the Barbie movie, fittingly called Barbie, and it's everywhere.
That could be great news for Warner Bros. Discovery (NASDAQ: WBD), which is producing the film, but it could be even better news for Mattel (MAT -0.60%), owner of the Barbie brand. Let's see what this highly anticipated film release could mean for the toymaker's stock.
Making Barbie great again
The Mattel name is intertwined with Barbie, which the company began to market in the 1950s. It also owns other iconic toy brands like Fisher-Price and Hot Wheels. These have been a mainstay of American childhoods, but it's been a struggle to shepherd them into the 21st century.
There have been various problems over the years, most recently supply chain issues and a retail slump that's affecting many consumer goods companies. Mattel's revenue has only increased 20% over the past five years, and it was down 22% year over year in 2023's first quarter. The quarter was almost uniformly depressing, with gross margin down 6.3 percentage points to 40%; an operating loss of $115 million (compared to $80 million in operating gains last year); and a net loss of $106 million, a reversal from $21 million in net income last year.
Enter the Barbie movie.
Actually, first, enter Ynon Kreiz, who took over as Mattel CEO in 2018. He crafted a new strategy to lead the company after many years of declining sales and increasing irrelevance, diving straight into the pandemic era and effecting a real turnaround in both sales and profits.
MAT net income (annual) data by YCharts.
That's why he inspires confidence at the company despite the new problems.
Kreiz came from a background in media, and that industry -- including film entertainment -- is a cornerstone of his new strategy. Mattel was previously known for making toys, but it's full-on into creating entertainment from its beloved brands and characters, sort of a Walt Disney move in reverse.
Toys are still its main game, and it has partnerships with companies like Disney to create licensed products. But "outside of the toy aisle," as the company says, it's making a tremendous effort with its brands, including the Hot Wheels: Ultimate Challenge show on Comcast's NBC, the Barbie Dreamhouse Challenge home makeover competition series on Warner Bros. Discovery's HGTV, and the launch of its own publishing house. But the Barbie movie is its biggest splash yet.
Pink is the new black
The movie earns more for Mattel than just the fee it gets for the filmmaking rights. Part of the benefit is the more than 100 licensing agreements it has with other companies to use the Barbie label. These stretch way beyond toys and include partnerships for collections at Gap and Ulta Beauty, and even extend as far as Microsoft Barbie Xboxes.
Chief operating officer Richard Dickson said 2023 is going to be a "legacy-making year," and he stressed that the new digital, gaming, and media ventures were revenue-generating and brand-monetizing opportunities. Kreiz said they were "margin-accretive opportunities" as well.
Not your mother's Barbie doll
Barbie sales were down year over year in the first quarter, but that was due to overall lower doll sales. Barbie remains the No. 1 doll in the world, and it captured market share in the quarter.
Management continues to update the doll with new looks, figures, and jobs, and it released the first-ever Barbie with Down syndrome in April. But the movie is rated PG-13 and meant to appeal to adults, not kids who play with dolls.
If the movie succeeds as expected, all players involved will benefit, with Mattel at the top. That should generate some short-term positive movement for the stock, but it's not clear that it will last.
As rosy pink as management tried to make the picture look, you couldn't really convince investors that everything's going to be OK at Mattel. Notice in the chart above that sales today are still below where they were 10 years ago.
Mattel is expecting sales to improve in year-over-year comparisons for the second half of 2023, and once the economy takes off, it might get the chance to realize Kreiz's vision. But it will need more than one hit movie to make that happen.
Mattel stock is cheap, trading at 1.4 times trailing-12-month sales. Risk-tolerant investors may want to take a small position on the theory that the price will jump this summer and then go on to improve. But most investors are better off investing in a Barbie dreamhouse right now.
