Mattel (MAT -0.60%) has orchestrated an impressive comeback over the last few years, and it's looking to keep that momentum going with Barbie hitting theaters on July 21.
It's got the makings of a hit. Barbie has been one of the most popular toy franchises for decades, which gives it a large fan base right out of the gate. Plus the movie should have a healthy draw with a star-studded cast and a reported budget of $100 million. It's a high-quality production with blockbuster potential.
Not surprisingly, Wall Street is optimistic. The stock is up about 15% in the last month as investors anticipate a successful release. However, that run-up has already added $1 billion to Mattel's market cap. Investors must wonder if Barbie's success is already baked in.
Let's dive deeper into management's strategy with this movie release, and what investors should expect from the company beyond 2023.
Management expects strong sales in the second half of the year
Mattel has gone all out to ensure that box office demand carries over to sales of Barbie merchandise.
The company has already launched a movie-themed product line, and it also stands to earn a production fee based on the movie's success. Because Mattel didn't share the production costs, the release of the movie can only help the company.
Mattel got off to a weak start to the year. Sales of Mattel's dolls fell 22% year over year in the first quarter as retailers' adjusted their inventory down from elevated levels entering the year.
Management's 2023 guidance calls for sales to be comparable with last year at $5.4 billion, which would imply growth in the next few quarters following the recent sales decline. Adjusted earnings per share are expected to be slightly down year over year, falling from $1.25 in 2022 to between $1.10 and $1.20 this year.
How much impact will the movie have on Barbie sales?
Mattel is the leader in dolls, the company's largest revenue source. Barbie generated $1.5 billion in revenue last year, according to Statista. That compares to $1.2 billion in Barbie sales in 2013. That's not much growth, but the toy industry is not a fast-growing market.
The Barbie movie will undoubtedly provide a lift to doll sales in the next few quarters, but it's unclear how much benefit from Barbie, specifically, is built into management's guidance. Even Nintendo's recent movie effort positively impacted sales of its leading video game franchise.
Nintendo's Super Mario Bros. Movie has grossed $1.3 billion worldwide since it was released earlier this year. It is helping sales of Mario video games but not to a significant degree. Nintendo reported a slight rise in activity for the classic video game title on the Nintendo Switch game system in a recent earnings report.
The Barbie movie is the first step to a bigger goal
Investors should note that Mattel stock was already undervalued before the Barbie hype ramped up this summer. A few months ago, the forward price-to-earnings (P/E) ratio was hovering around 15. It now trades at a forward P/E of 18. That is a premium to rival Hasbro but still a discount to the S&P 500's P/E of 20.
Mattel's current valuation is already pricing in the company's 2023 guidance, but there could be long-term upside based on management's strategy to better monetize its top properties.
CEO Ynon Kreiz joined Mattel in 2018 to turn a struggling business around, and he has succeeded. Prior to his tenure, the company was seeing revenue decline every year, and it was unprofitable. Those trends have reversed, and the stock has responded by doubling over the last three years.
Investors should expect more high-quality productions like Barbie over the next decade. Mattel has several franchises it's looking to bring to the big screen, including a live-action Hot Wheels film, Major Matt Mason, and Uno, just to name a few.
Hasbro delivered much better returns to investors leading up to the pandemic, largely based on its strategy to expand beyond toy sales to digital games and theatrical releases with the Transformers franchise. Mattel is following a similar course, and that playbook should pay off for shareholders.
Consider buying a small position of the stock and adding shares only as the company's performance dictates. All the signs right now indicate Mattel has the right leadership and strategy in place. The company has improving growth prospects, which could lead to significantly more upside over the next five years and beyond.
