Where Will Mattel Stock Be in 1 Year?

Mattel (MAT -0.60%) posted its second-quarter report on July 26. The toymaker's net sales fell 12% year over year to $1.09 billion but exceeded analysts' estimates by $82 million. Its adjusted earnings per share (EPS) dropped 44% to $0.10 but also beat the consensus forecast by $0.13. Those headline numbers cleared Wall Street's low bar, but the bulls and bears shrugged and Mattel's stock barely budged after its earnings release.

Over the past 12 months, Mattel's stock has declined 11% as the S&P 500 has advanced 13%. The Barbie movie, which was co-produced by Mattel and distributed by Warner Bros. Discovery, recently set new box office records, but it hasn't meaningfully boosted the toy maker's sales nor generated significant interest in its stock yet.

Let's see if investors will change their minds about Mattel over the next 12 months.

Image source: Getty Images.

What happened to Mattel over the past five years?

Mattel sells dolls, products for infants and toddlers, toy vehicles, action figures, building sets, and games. It generates most of its revenue from its Barbie, Hot Wheels, Monster High, Fisher-Price, and licensed Walt Disney products.

Up until 2019, Mattel's revenue had declined for five consecutive years as its soft sales of Fisher-Price, Thomas & Friends, and American Girl products offset its stronger sales of Barbie and Hot Wheels toys. The loss of its Disney Princess license to Hasbro in 2016 and the bankruptcy of Toys R' Us in 2017 exacerbated that slowdown.

Yet its sales growth stabilized over the following three years, and it won Disney back with a fresh licensing agreement in 2022. 

Data source: Mattel. YOY = Year over year.

Mattel achieved that stabilization by launching a two-phase turnaround plan in 2018. The first phase stabilized its near-term sales and profits by restructuring its business, growing its "power brands" (Barbie, Hot Wheels, Fisher-Price, Thomas & Friends, and American Girl), and expanding its portfolio.

The second phase was aimed at capturing the "full value" of its intellectual property (IP) by licensing its franchises while expanding its own first-party e-commerce platform to reduce its dependence on third-party retailers. It also launched Mattel Films that year to explore the development of new movies.

That turnaround plan -- along with new licensing deals with Disney, Nintendo, Warner Bros., Comcast's Universal, and WWE -- drove Mattel's accelerating sales growth through 2021. The pandemic also amplified its growth as consumers purchased more toys for their kids. Unfortunately, that growth spurt set it up for an abrupt slowdown in 2022 as the pandemic tailwinds dissipated, inflation curbed consumer spending, and it paused its shipments to Russia.

Mattel expects that pressure to persist with flat constant-currency sales results in 2023, while analysts expect its reported sales to rise 1%. By comparison, Hasbro's reported sales are expected to dip 2% this year.

During the conference call, CEO Ynon Kreiz said Barbie's strong box office performance demonstrated that Mattel could "capture the full value" of its brands through new media franchises. CFO Anthony DiSilvestro also said the company saw "improving trends" in Barbie's sales in July in response to the movie's release and marketing campaigns, but he didn't provide an exact outlook regarding the hit movie's impact on the brand's full-year sales.

Its near-term margins are peaking

Mattel's turnaround plans significantly boosted its gross and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins from 2018 to 2021. But both margins declined significantly in 2022 as its inventory levels rose, inflation drove up its production costs, and it paid out higher royalties for its licensed products.

Data source: Mattel.

Mattel expects its adjusted gross margin to rise back to roughly 47% this year as it implements more price hikes and cost-cutting measures, but that's still well below its pandemic-era highs of 2020 and 2021. It also expects adjusted EBITDA to decline 2% to 7% for the full year and adjusted earnings per share (EPS) to drop 4% to 12%.

Analysts expect Mattel's adjusted EPS to decline 6% this year. Hasbro, which seems to face less near-term pressure on its margins even as it encounters similar headwinds, expects its adjusted EPS to grow 0% to 2% this year.

Where will Mattel's stock be in a year?

Mattel is in better shape than it was five years ago, and the Barbie movie might generate a lot of fresh interest in its top power brand. Its stock looks reasonably valued at 18 times forward earnings, but it hasn't paid any dividends since 2017. Hasbro, which trades at 14 times forward earnings, still pays an attractive forward yield of 4.5%.

Mattel's valuation should limit its downside potential, but I don't think it can outperform the market over the next 12 months. Its sales of Barbie products might keep rising, but that growth could easily be offset by its weaker product lines. Unless it can consistently grow revenue, margins, and profits again, Mattel's stock will continue to tread water.