Hold Mattel (MAT)
Mattel’s stock fell 17% yesterday after the toy company reported fourth-quarter and full-year earnings that fell short of every analyst estimate.
Fourth-quarter EPS of $0.52 missed the analyst consensus of $0.71 by a mile. Revenue fell 8% year over year and missed the analyst consensus by 7%.
Especially distressing to analysts, Mattel’s progress in improving margins has been set back. Gross margins fell by 3.2%, mostly because of steep discounts offered to retailers during the holiday season. As a result, management has pushed back their timeline for reaching a 15% to 20% operating margin to 2019 (vs. 2018 previously).
However, management attributed most of the miss to an industry-wide slowdown late in the quarter in the run-up to Christmas, which has been corroborated by Toys R Us and other retailers. Faced with slow sales in the first few weeks of December, Mattel offered retailers significant discounts to pass on to consumers, which kept retail sales numbers up, but hit Mattel’s margins and revenues. Sales rebounded significantly during Christmas week, but the discounting had already taken its toll on Mattel’s margins.
Given the transient nature of the fourth-quarter troubles, Mattel’s management remains optimistic about 2017. Their top brands, including Barbie, remain well positioned with consumers, and they have a strong entertainment lineup planned for this year.
After the stock’s initial, dramatic, reaction, Wall Street also seems to be becoming more optimistic about Mattel’s future. MAT gapped down from Wednesday’s closing price of 31.56 to open at 27.27 yesterday, then drifted lower intra-day to close just a hair below 26. But the stock opened unchanged this morning and was trending slightly upward in the first hours of trading, suggesting that bargain hunters may already be stepping in to provide support.
Mattel was already rated Hold in our portfolio, and we still have a small profit, so I don’t think any additional action is necessary at this time. However, if the stock fails to find support in the coming days or if the industry slowdown persists, we’ll reconsider. For now, MAT remains on Hold. (Although as always, if you have a loss in your own portfolio, use a loss limit appropriate to your own risk tolerance.)