Turnaround Letter Buy-rated Mattel (MAT) reported revenues that were about 5% ahead of consensus. The adjusted per-share loss of ($0.25) was much better than the consensus estimate for a ($0.39) loss. Adjusted EBITDA profit of $42 million was similarly higher than the ($6 million) consensus loss. Mattel shares have risen by 16% since the earnings report.
The recent initiatives to reinvigorate sales of Barbie (+9% sales growth) and Hot Wheels (+5% sales growth) are working. These two products combined represent 38% of gross sales. Action Figures/Building Sets and Games grew 21% in the quarter, led by surging sales of Toy Story 4 action figures. Mattel’s efforts to participate in blockbuster movies have begun to produce tangible results. An example: the company secured the “global toy partner” rights for the 2020 release of the Top Gun sequel.
Mattel’s strength in these two “Power Brands” segments is needed, as sales in the Fisher-Price/Thomas & Friends segment (the other “Top 3 Power Brand”), fell by 7%. Also, as Mattel is guiding for full-year 2019 revenues to be about flat, many of its products continue to lag. Sales of American Girl, for example, fell 23%. However, most of these other products were not management’s initial priority – we anticipate that these will improve or be pruned when they receive more attention.
The cost-cutting initiatives are ahead of schedule. Mattel’s targeted $754 million in run-rate savings by year-end 2019 are already completed, and another $100 million in run-rate savings are now targeted by year-end. This clearly is impressive.
What we don’t know is how much of the anticipated $854 million in run-rate savings will drop to the bottom line. For example, let’s say $500 million of the run-rate savings is fully felt in 2019. Since management is guiding 2019 sales to be equal to 2018, all of the improvement in Adjusted EBITDA would come from cost savings. Management’s 2019 Adjusted EBITDA guide of $375 million (mid-point) implies a $100 million improvement over the $277 million (excluding the impact of the $80 million ToysRUs write-off) in 2018 Adjusted EBITDA. This would imply that as much as $400 million in savings has been reinvested. This reinvestment rate is probably strategically sound, but much higher than we initially expected. Over time, the company should produce higher profits from this reinvestment as well as from the falling away of any duplicative costs it creates.
From another perspective, the company commented that its Adjusted EBITDA would be $200 million higher in 2020, all-else being equal, compared to 2019. This would imply an Adjusted EBITDA in 2020 of perhaps $575 million.
Mattel’s debt/EBITDA leverage is being reduced by the higher EBITDA, as its debt remains unchanged from a year ago. Mattel remains committed to returning to investment grade.
We think Mattel’s outlook continues to brighten. New CEO Ynon Kreiz is improving on the cost-cutting program of his predecessors while boosting the chances of more profitable products and initiatives. Mattel’s total overhaul is not quite at the turn yet but it is clearly approaching it. While our $38 price target is a stretch, we leave it unchanged.
We continue to rate Mattel (MAT) shares a buy with a $38 price target.
Disclosure Note: One or more employees of the Publisher own MAT shares.