Mattel Faces the Reinvention Challenge

Toy company unveils plan to deliver enhanced and sustainable growth

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Jun 15, 2017
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After gaining a new CEO in January, Mattel Inc. (MAT, Financial) revealed its strategic growth plan at an investor day on June 14.

In a presentation, management outlined a five-pillar strategy to enhance long-term growth and profitability.

Among its initiatives, the toymaker is focusing on building its Power Brands into connected 360-degree play systems and experiences, which means incorporating both physical and digital components into its toys. These brands include American Girl, Barbie, Fisher-Price, Hot Wheels and Thomas & Friends.

Mattel also seeks to accelerate growth in emerging markets through digital-first solutions, strengthen its innovation pipeline, reshape its operations and reignite its company culture and team.

CEO Margo Georgiadis said the company’s vision is to “inspire the wonder of childhood.”

“As we shift our business aggressively in a new strategic direction and transform how we operate, I believe we have the assets to achieve this vision and shape the future of the toy industry," Georgiadis said. "The strength of the underlying Mattel franchise supported by important trends such as a growing global toy market and an increasingly digital, mobile-first world provides an opportunity for Mattel to create significant long-term value for our investors."

The company said it will also be re-evaluating its dividend in order to allocate more resources to reinvestment, strengthen its balance sheet and provide additional financial flexibility. In its earnings report, Mattel declared a second-quarter dividend of 38 cents per share. The trailing dividend yield and forward dividend yield are both 6.7%. Over the past five years, the company has grown its dividend at a rate of 9.5% per annum.

The California-based company released its first-quarter 2017 results on April 20, posting lower worldwide sales compared to first-quarter 2016.

The graph below illustrates the trend in Mattel’s revenue over time. Since December 2013, the company has been witnessing significant declines in this metric.

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With a market cap of $7.6 billion, Mattel shares were trading around $22.15 on Thursday with a price-earnings (P/E) ratio of 28.04, a price-book (P/B) ratio of 3.4 and a price-sales (P/S) ratio of 1.4.

The Peter Lynch chart below suggests the stock is trading above its fair value.

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Among the gurus invested in Mattel, the T Rowe Price Equity Income Fund (Trades, Portfolio) holds the largest position with 1.9% of outstanding shares. John Rogers (Trades, Portfolio), Jana Partners (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Jim Simons (Trades, Portfolio), John Hussman (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) also own the stock.

Disclosure: I do not own any stocks mentioned in this article.