The year 2018 turned out to be a tough one for Toys – Games - Hobbies industry and Mattel, Inc. is no exception. In a year, the company’s shares have decreased 43%, wider than the industry’s 27.7% decline. Most of the traditional toymakers have been bearing the brunt of soft consumer demand and consequent sales crunch. The U.S. toy industry dealt a heavy blow when the country’s largest independent toy seller Toys "R" Us filed for bankruptcy.
Leading U.S. toymakers like Hasbro, Inc., Mattel and JAKKS Pacific, Inc. were much affected by the setback as a considerable portion of their revenues were generated from sales to Toys "R" Us.
Let’s delve deeper and find out whether Mattel can turn around in 2019.
Robust barbie sales across all regions impressed investors. In third-quarter 2018, barbie sales were up 17% in constant currency, marking the fourth straight quarter of growth. In North America and International segments, barbie sales increased 22% and 11%, respectively, on a constant-currency basis.
Since the U.S. toy market is somewhat saturated, toy companies are exploring growth opportunities abroad. International markets offer greater potential based on the pace of economic growth that they currently enjoy. Mattel has been seriously focusing on accelerating its presence in Europe, Latin American and countries in Asia. Particularly, to succeed in China, which is currently positing a tough operating environment, Mattel adopted a solution-based and digital-first method to localize products. Moving ahead, the company also aims to expand more quickly and efficiently across other top markets in Asia, such as India and Indonesia.
Through its current cost-saving program, Mattel remains focused on achieving cumulative cost savings, thus, enhancing margins. Basically, the company is simplifying organization structure, and optimizing processes and supply chain to generate savings across operations. Mattel continues to make progress in its $650-million Structural Simplification cost-saving initiatives and prioritized investments. Subsequently, the company expects to achieve 40% of $650 million in 2018.
Further, given a strong product lineup — including core brands, licensed brands and lucrative product associations — Mattel remains well positioned for growth. Owing to its popularity among young boys and girls, the company’s premier brand like Hot Wheels has been the category leader in multiple product segments for several years.
Lack of innovative schemes for brand awareness and brand innovation has been hurting the company’s revenues and POS momentum. Though overall POS has been mostly positive, owing to the company’s efforts to lower retail inventories, the improvement is not broad based. We need to wait for more consistent progress at all of its brands. Meanwhile, Toys ‘R’ Us liquidation and slowdown in China operation significantly affected Mattel’s sales in third-quarter 2018.
Traditional toys are failing to compete with a broad array of alternative modes of entertainment — including video games, MP3 players, tablets, smartphones and other electronic devices. As a result, the industry has been facing lower demand over the past few quarters. Another factor affecting demand is age compression. Kids are moving on to higher-age toys much faster than before.
Mattel currently carries a Zacks Rank #3 (Hold).
Stock to Consider
A better-ranked stock in the same space is Take-Two Interactive Software, Inc., which currently carries a Zacks Rank #2 (Buy). It reported better-than-expected earnings in the trailing four quarters, the average being 19%.