It's all fun and games until you stop selling fun and games. Shares of Mattel (NASDAQ:MAT) tumbled 11.8% last week, heading sharply lower after the company posted uninspiring quarterly results. MKM Partners also downgraded the stock following the report.
Net sales slipped 8% -- or 6% on a constant-currency basis -- to $1.83 billion during the toy giant's fourth quarter. There was strength in Mattel's Hot Wheels and American Girl lines, but the rest of its categories were weak. Even Barbie sales, which had started to rebound earlier in the year, slipped during the telltale holiday-encompassing quarter.
The news gets worse as we work our way down to the bottom line, as adjusted earnings of $0.52 a share declined from the $0.65 of a year earlier. It's easy to see why the makers of traditional playthings are struggling in this era of electronic toys and digital downloads, yet Mattel's weakness took analysts by surprise. Wall Street pros were forecasting an adjusted profit of $0.71 a share on $1.96 billion in revenue. Put another way, analysts were holding out for a slight year-over-year improvement in earnings on flattish net sales. Mattel fell woefully short of both targets, and that's something Mr. Market rarely forgives.
"Our results were negatively impacted by a number of industrywide challenges, including a significant U.S. toy category slowdown in the holiday period, and increased forex headwinds," CEO Christopher Sinclair is quoted as saying in the earnings release, a nugget that also sent rival Hasbro (NASDAQ:HAS) lower on the news.
Learning to play a new game
MKM Partners analyst Eric Handler wasn't impressed. He lowered his rating on the stock from "buy" to "neutral," lowering his price target from $36 to $27. The stock would close out the week just south of his new price goal.
Handler thinks the turnaround story at Mattel is losing steam. The holiday-embracing quarter was a disaster, something that should be making Hasbro investors nervous as they head into next week's quarterly report.
Handler's concerned about the rough retail environment, weak toy reorders, and the need to ramp up promotional activity to move product. He doesn't see things recovering anytime soon. Handler thinks foreign currency headwinds, increasing input costs, and Mattel's unfavorable product mix will continue to weigh on its turnaround prospects at least through this year.
Weakness at Mattel is already bleeding into Hasbro. Monness, Crespi, Hardt, & Co. downgraded Hasbro from "buy" to "neutral" shortly after Mattel announced its financial results.
Shares of Mattel and Hasbro inched higher in 2016 on the bullish thesis that the industry's prospects would improve. Mattel has just rattled off its third consecutive year of declining net sales. Hasbro is faring a bit better, but the market is going to lump both companies together until one of them decisively turns things around. The game is real now.