Mattel (MAT, Financial) reported Q3 2015 results yesterday and missed expectations. Revenue of $1.79 billion missed analyst estimates of $1.89 billion. Net income came in at $223.8 million and an EPS of 71 cents per share, compared to analyst expectations of 79 cents per share. Today, Oppenheimer released an optimistic note on the company and shares rallied 6% to close at $23.89 per share. Mattel is one of the world’s largest toy makers and sells popular brands such as Barbie, Hot Wheels, Monster High, American Girl, Thomas & Friends, Fisher-Price and Mega Brands.
Non-GAAP results below
The company operates four divisions. The table below shows revenue percentage by division for the nine months ended Sept. 30.
| Mattel Girls and Boys Brands (Includes Barbie and Monster High) | 56.7% |
| Fisher Price Brands | 29.9% |
| American Girl Brands | 7.3% |
| Construction and Arts Brands | 5.4% |
| Other | 0.7% |
Highlights from Q3’15 financial results
- Worldwide net sales were down 4% in constant currency.
- Gross sales for Barbie were down 4% in constant currency. Year-to-date sales for Barbie were up slightly globally with strong sales in the U.S. offset by a decline internationally.
- Monster High and Disney Princess experienced softness. Disney Princess includes Frozen. Mattel will lose the rights to Disney Princess in 2016, which will be a headwind next year.
- The company expects to offset the Disney Princess loss with partnerships with Time Warner where they will focus on growing DC’s Super Hero Girl franchise (Wonder Woman, Supergirl, Batgirl, etc).
- Their Mega Brands will launch Teenage Mutant Ninja Turtle toys in conjunction with the 2016 film.
- MAT declared Q4’15 dividend of 38 cents per share, which is flat with last year. Currently, the dividend rate is 6.74%.
Bull argument
Barron’s recently published an article titled “Mattel Could Rise 35% in a Year” and also posted a video here. They cite that Mattel has fallen largely because of its woes with Barbie. Barbie accounted for approximately 26% of Mattel’s fiscal 2014’s revenue. The company has been giving Barbie an image makeover to make her more consistent with today's values. This holiday season, Mattel will introduce “Hello Barbie”, a Wifi enabled doll that will be able to interact with users. “Hello Barbie” is connected to the cloud and pre-programmed with 8,000 lines of dialogue. The doll will be able to record responses for future reference i.e. remember a person’s name and what their favorite color is. Mattel has made a concerted effort to distance this Barbie from dolls of the past that many critics thought objectified women. For instance, Mattel has incorporated “Hello Barbie” with educational material such as exposing girls to Newton’s laws of gravity. You can see a hands-on demo of the doll below. The video actually cracks me up, as the reporter struggles to make conversation with Barbie and looks relieved when the interview is over.
Barron’s also points out that Mattel's stock has lost about 50% of its value since the start of 2014 and is currently sporting an attractive dividend yield of about 6.7%. Some investors believe that Mattel is a Warren Buffett (Trades, Portfolio) type stock with durable competitive advantages. You can see the presentation here. The major talking points of the presentation are:
- Mattel has shown consistent earning power
When we look at the company's earnings trend over the last 10 years, it looks pretty lumpy and it averages out to about $615 million over that time span. Last fiscal year's earnings were $499 million.
- The company has a satisfactory ROE. Over the last 10 years, the company's ROE averaged 23.8%
- The company has a good management team. For me, it’s too early to tell. The previous CEO Bryan Stockton was fired and Christopher Sinclair was named CEO in April. It remains to be seen what results he can achieve. I do believe he has instilled a sense of urgency as the company is bringing products to market faster as shown by "Hello Barbie" and their upcoming Viewmaster toy
- The company is easy to understand
Bear argument
For short term risks, it’s reasonable to assume that boys will want Star Wars toys this Christmas season and Mattel has limited exposure. Their Hot Wheels division will have Star Wars cars, but Hasbro will be the main beneficiary. Bearish investors will point out that Barbie sales have fallen for over three years. There is also a risk that “Hello Barbie” will underperform as some people have privacy concerns. Losing the rights to the Disney Princess line will definitely be a hard void to fill. It's noteworthy that they will still partner with Disney on other properties. Long term, a more concerning trend is that tablets and smartphones have captured a greater share of children’s attention and are eating into toy sales. Finally, if Mattel can’t boost sales, the dividend may need to be cut.
Final thoughts
I’m in the camp that believes Mattel can turn things around. When looking at Lego and Hasbro, they are both performing well, which implies that Mattel’s problems are fixable. Mattel’s partnerships with companies like Walmart, Toys ’R Us, etc. are still intact. Their distribution channel and supply chain are competitive strengths, as getting shelf space for new toy companies is extremely difficult. Their leadership position gives them opportunities to partner with Disney, DC comics, and other media companies. Currently, Mattel gets less than half of their revenue from abroad, so there is still plenty of runway if you believe that the world’s middle class will continue to grow. The toy business is very hits driven as demonstrated by their Monster High brand. The line was introduced in 2010 and quickly ramped up. In the last year, Monster High sales have slowed. I believe Mattel will gain traction at some point with another line. However, there will be ebbs and flows. I’m optimistic about Thomas & Friends and also believe that there is an opportunity for the Mega brand to give Legos some competition. Currently, Legos pretty much has a monopoly on building blocks. In closing, Mattel is not a perfect or cheap stock, as it trades at a PE close to 20 with known headwinds in the coming year. However, I like its prospects for the long term. Per GuruFocus, a number of well known investors hold shares in Mattel like Sarah Ketterer, Tom Gayner, Joel Greenblatt, and Jim Simons. Feedback from others is welcome.
Disclosure: I'm short puts in Mattel.
