Summer movie season is upon us, and the Barbie movie looks to be one of the top blockbusters of the year.
The popular Mattel (MAT -0.60%) property seems to have all the components of box office hit: star power in the form of leads Margot Robbie as Barbie and Ryan Gosling as Ken, a $100 million budget, and one of the most-recognized toy brands with a decades-long history. Popular toys like Lego and Transformers have spawned blockbuster hits, so it makes sense for Mattel to try to do the same with Barbie.
Mattel stock has struggled for years as the company has been plagued by debt and challenges in the retail channel following the 2017 bankruptcy of Toys R Us.
Revenue is down significantly over the last decade, as is the stock price, but Barbie, which is the first movie out of its Mattel Films studio, has the potential to turn things around for the company.
Image source: Getty Images.
The cameras are rolling
Mattel launched its film division in 2018 in an attempt to tap into intellectual property like Barbie, Hot Wheels, American Girl dolls, and a wide range of Fisher-Price toys.
The move is part of CEO Ynon Kreiz's strategy of pivoting the company away from just a focus on toys to more of a comprehensive entertainment company, focusing on monetizing its brands in more ways than just toys.
The end goal is to create a flywheel effect much like Disney has done, as hit Marvel movies can spark purchases of toys and apparel as well as rides at Disney's theme parks and other content. If the Barbie movie is a success, it would bring in profits for Mattel not just at the box office but in toy sales as well, and Mattel has already launched new products in anticipation of the movie's success.
There's also much more in the works beyond just the Barbie movie. According to a recent New Yorker article, the company has 45 movies in some stage of development, leveraging intellectual property like Hot Wheels, Rock 'Em Sock 'Em Robots, He-Man, the card game UNO, and even Barney, the purple dinosaur.
What it means for Mattel
Mattel has long trailed behind rival Hasbro in the toy industry, though it has narrowed the gap in recent years. While long having similar revenue to Hasbro, Mattel hasn't had a greater market cap than Hasbro in roughly eight years.
Both companies have struggled as the pandemic boom in toys faded, and consumer spending has shifted away from stay-at-home entertainment. Mattel reported a 22% decline in revenue in its first quarter and an adjusted operating loss of $87 million, down from a loss of $10 million in the quarter a year ago.
For the full year, the company sees flat revenue at $5.4 billion, adjusted earnings per share of $1.10 to $1.20, down from $1.25 in 2022, and free cash flow of at least $400 million, compared to just $256 million in 2022.
Based on that EPS forecast, Mattel isn't cheap, trading at a forward price-to-earnings ratio of around 18, but the company was unprofitable for several years before the pandemic, so the business is already showing signs of a recovery.
Considering the challenges Mattel has faced, there seems to be significant room for improvement if the Hollywood strategy pays off, and management has said that extending its brands into new product lines would be margin accretive.
Mattel's market cap is also only $7 billion, so it wouldn't take that much to move the needle on the stock.
While the success of the Barbie movie doesn't necessarily prove that the strategy will work for other intellectual properties, it would still represent a big win for Mattel.
Keep your eye on the Barbie movie when it comes out on July 21. A big hit is likely to give a significant boost to Mattel's stock.
