Retailers are off to a good quarter as warmer weather hits various parts of the world. However, toy retailers find it difficult to register higher sales during the second quarter. For them, the holiday season is the peak time for toy sales. Therefore, it is obvious that the toy industry’s slowest period is indeed the second quarter of the year.
Mattel’s (MAT, Financial) weak second quarter results are not so surprising. The numbers were posted recently and were well below the analysts’ expectations, enabling its share price to fall.
Lackluster numbers
Most of the toy retailer’s segments registered weak sales, resulting in a drop of 9% in revenue. The top line stood at $1.06 billion as against the estimate of $1.19 billion. The biggest drop came in the Barbie segment, which posted a drop of 15% in sales due to weakness in demand. However, this is not the first time. Revenue from Barbie decreased in 8 out the last 10 quarters.
Also, Hot Wheels and Fisher Price witnessed declines of 2% and 17%, respectively. Gross margin also shrunk by 490 basis points as higher costs were not offset by higher sales. Also, earnings dropped significantly to $0.03 per share from $0.21 per share, in the previous year’s quarter.
Further, the company faces stiff competition from its rival Hasbro (HAS, Financial), which is faring much better than the former. On the basis of stock price performance in the last year, Hasbro is a clear leader. Hasbro has provided a return of 15% to its investors, whereas Mattel’s share price has plunged 15.5% during the same time period. This is mainly because of Hasbro’s great financial results and growing revenue. On the other hand, demand for Mattel’s Barbie is on the downturn.
Ready to race ahead in the future
Despite all the problems and setbacks, Mattel still continues to make efforts to manage a turnaround. The biggest weapon added to the toymaker’s arsenal is the acquisition of MEGA Brands, the second-largest construction-based toy company in a $4 billion market. Instead of setting up a whole new line, which would have included huge costs and time, Mattel simply bought the second-best player in the industry. This buyout is probably the main reason why the retailer’s bottom line is weighed down. However, MEGA Brands should help the company offset all the weaknesses in the long run.
Further, Mattel is planning to expand its American Girl business, which is already doing very well and has become quite popular among customers. The segment registered an increase of 6% during the quarter and should become even better since it is being expanded to the Canadian region.
Also, the toy retailer plans to ramp up its advertising efforts as the holiday season sets in. It will also bring back its historic line of American Girl dolls, including the original dolls. This should again prove to be fruitful. Moreover, the upcoming Star Wars movie will help in boosting Hot Wheels sales.
Winding up
Overall, Mattel’s future looks better than what it is now. The company is marred down by expenses related to the acquisition and lower demand for its Barbie dolls. However, it is the same company which provides some of the most popular toys to children. Also, its current efforts should help earn more money in the long run. Further, a dividend yield of 4% makes it look attractive. Therefore, people who can wait for a long time, should invest in this company.
