Here’s Why Mattel Hit a Bump in the Road

Source: Motley Fool Flickr by Ben Popkins

Last week investors in toy company Mattel (MAT -3.70%) saw its stock price plummet 8% as investors reacted poorly to the company's second-quarter earnings, where year-to-date revenue and net income dropped 7% and 85%, respectively. Of course part of this stems from acquisition costs pertaining to the Mega Brands acquisition earlier in the year. However, there are three other things that caused Mattel's most recent bumpy patch.

Decline of some traditional brands accelerated
One of the main catalysts behind Mattel's top-line tumble stemmed from an accelerating decline of its Barbie and Fisher-Price brands. While Mattel's Wheels line showed improvement over 2013, results in the most recent quarter were still in the negative range. Of course, Mattel isn't taking this lying down. According to the most recent earnings call, Mattel brought back Richard Dickson, who previously demonstrated success in revitalizing the Barbie brand. The company hopes he can duplicate this success on a broader scale as chief brands officer. Here is how each of the company's major brands have faired in the company's recent financial releases:

Year over Year Sales

 Source: Mattel SEC filings

Monster High hits a brick wall
During 2012 and 2013, Monster High contributed heavily to the year-over-year growth of Mattel's other girls segment, with the overall unit growing 57% and 25%, respectively. The other girls segment combined with the American Girl segment contributed heavily to Mattel's overall revenue growth in recent years. However, Monster High growth fell off the cliff in 2014, contributing to an 11% decline in the other girls segment.

Mattel's management blamed difficult comps relative to last year and theorizes interference from competitive activity. They also gave an indication that point of sale trends continue to point downward for Monster High's brand, meaning that things will most likely get worse before they get better.

Advertising
Realizing that Mattel needs to get smarter about advertising, company executives repeatedly emphasized the reallocation of ad spending toward the latter part of the year when consumers do their holiday shopping. Mattel executives partially blamed top-line declines on temporarily lower brand awareness as a result of this advertising shift. 

A ray of hope
I agree with fellow Fool Bob Ciura that Foolish investors should look beyond its current woes. Mattel recently acquired Mega Brands. While integration costs will temporarily impact earnings and margins, this new subsidiary will add diversity to the company. The construction and arts and crafts business represents a $10 billion market. Last year Mega Brands registered revenue of $405 million, meaning that it commands a small share of the market and has plenty of room to run.

American Girl shows continued sustainability and potential, as Mattel plans a Canadian expansion via a partnership with Indigo stores. Mattel's executives also expressed hope for Ever After High, a new line gaining momentum that will hopefully be a significant contributor to revenue in the future. Also next year we will see the release of the new Star Wars films, which will hopefully provide a positive catalyst for Mattel's licensed products.

Foolish takeaway
Mattel is having difficulties on multiple fronts with its core brands. It's important that Foolish investors focus on the long term viability of these brands and no on short term results. That being said, many of Mattel's major brands have been experiencing a multi-year decline and potential investors need to way this fact carefully when evaluating an investment in the company.