Hold Mattel (MAT)
Mattel reported first-quarter EPS that fell well short of expectations last night and the stock is trading 6% lower pre-market.
Analysts were expecting EPS to fall 30.8% year-over-year, to -$0.17. The $0.32 first-quarter loss Mattel reported yesterday was nearly twice that.
Revenue also declined significantly more than expected, falling 15.4% to $735.6 million. Analysts were expecting a much smaller 6.9% drop to $809.4 million.
Management blamed the miss on leftover inventory from the holiday season. In-store sales were much weaker than expected in December, and while management said on their fourth-quarter call that they picked up in the week before Christmas, retailers were apparently still sitting on a large amount of inventory going into the new year.
Management argues that demand for key brands remains strong based on their direct-to-consumer channels, and believes sales will rebound in the second quarter, once the inventory hangover clears. However, they were also expecting orders to pick up partway through this quarter, suggesting that they may simply be overestimating retail demand. Consumers’ growing preference for shopping online is affecting almost everyone in the retail space, from mall operators to retail chains, and Mattel may be underestimating its impact on their traditional distribution model.
Management revised their full-year guidance downward based on the first-quarter results; they’re now expecting mid-single-digit revenue growth, and flat operating margins. However, further downward revisions and earnings misses could be in the cards if retail demand fails to recover.
In addition, cash flow continues to fall short of Mattel’s quarterly dividend obligation. Management hinted on the call that the board may reconsider the dividend in the coming months, as part of an evaluation of investment and growth objectives.
This new information is enough of a reason to switch MAT to sell. However, because today’s trading is likely to be knee-jerk and disorganized, we’ll wait a couple of days to react. Look for a sell alert on MAT in the coming days.