What to Watch When Mattel Reports Earnings

Since the demise of Toys R Us, the market hasn’t been kind to investors in the toy industry. Every company that did business with the big-box retailer felt the pain, but no business took it on the chin worse than Mattel (NASDAQ: MAT).

Once the leading toymaker, the house that Barbie built fell on hard times after a series of missteps allowed rival Hasbro to vault ahead. Things went from bad to worse after another C-suite shuffle followed.

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Investors are hoping for some good news when the company reports its third-quarter financial results after the market close on Thursday, Oct. 25. Let’s review the company’s recent results and other news to see what we can expect when Mattel reports earnings.

A slippery slope

Mattel’s second quarter was awash in red ink as the company continued to struggle with the loss of one of its biggest customers. Net sales fell to $841 million, a decline of 14% compared to the prior-year quarter, while its loss per share of $0.70 more than quadrupled year over year. Both numbers were well below analysts’ consensus estimates, which called for revenue of $855 and a loss per share of $0.09.

The bad news was broad-based, with sales in North America — the company’s biggest market — down 14% year over year and 15% in constant currency. International sales also fell short, declining 10% compared to the prior-year quarter.

The fallout from the loss of Toys R Us isn’t the only issue Mattel has been dealing with. Earlier this year, CEO Margo Georgiadis left after just one year on the job, the most recent of several failed attempts to find the right executive to affect a turnaround. The company has had to dig deep, first cutting and then eliminating its dividend, while also seeking to slash $650 million in costs by the end of 2019. Mattel announced that it would cut its global workforce by 22% and is selling off its manufacturing facility in Mexico.

The company also is investing in future opportunities. Early last month, Mattel launched its new theatrical film division in an effort to duplicate Hasbro’s box-office strategy. The company’s arch rival has had cinematic success with films like Transformers and My Little Pony.

Mattel plans to develop and produce motion pictures based on its “iconic and globally recognized franchises,” according to the company’s press release. Academy Award-nominated producer Robbie Brenner will head the newly created Mattel Films division. Brenner is best-known for Dallas Buyers Club, which was nominated at the Oscars for Best Picture. Look for more information about Mattel’s nascent film efforts.

The road ahead

Mattel stopped providing quarterly forecasts as it works to right the ship. The company updated its full-year outlook for 2018, lowering its gross margin expectations from the low 40s to high 30s due to higher-than-expected raw material and freight costs. Another wild card for Mattel is the ongoing trade dispute, which could potentially derail the company’s turnaround efforts, as many toys in the industry are manufactured in China.

Analysts’ consensus estimates are calling for revenue of $1.5 billion, a decline of 4% year over year, while earnings per share of $0.20 would more than double the $0.09 the company achieved in the year-ago quarter. Even in light of Mattel’s massive cost-cutting efforts, I think that’s a stretch. Over the longer term, Mattel may yet recover, but it appears there are many more challenges to be overcome before the company gets there.

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Danny Vena owns shares of Hasbro and Mattel and has the following options: long January 2020 $50 calls on Hasbro. The Motley Fool owns shares of and recommends Hasbro. The Motley Fool has a disclosure policy.

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