Mattel (MAT): Long-Term Prospects Bright, Risks Prevail

On Aug 12, we issued an updated research report on Mattel, Inc. (NASDAQ:MAT) , the world’s largest manufacturer of toys.

Mattel posted narrower-than-expected loss for the second quarter of 2016. Meanwhile, though revenues slipped 1% year over year at constant currency, it beat the consensus mark.

Positives

Mattel’s increased focus on improving its point of sale through introduction of more products, brand innovation and strategic initiatives like entering new categories and strengthening the Girls portfolio bode well.

Meanwhile, efforts undertaken on the digital front and its focus on better execution of marketing and promotional initiatives to bring back its flagship brands, Barbie and Fisher-Price, to their former positions have started yielding results. The company witnessed a strong uptick in Barbie sales in the recent quarter while Fisher-Price has also been doing well of late.

Moreover, the company stated that it has almost completely offset the year-to-date Disney Princess revenue gap by building core brand momentum and new partnerships. Also, Mattel’s focus on achieving cumulative cost savings, going ahead, thus enhancing margins through its current cost savings program, raise hope.

Meanwhile, despite the short-term headwinds, the company is significantly investing in foreign markets as they promise considerable long-term growth and have the potential to be significant revenue drivers.

Risks

However, Mattel’s revenues have been witnessing a year-over-year decline over the past few quarters. Though overall POS has been mostly positive owing to the company’s efforts to lower retail inventories, the improvement is not broad based. Sluggish performance of certain segments and brands has also been hurting the company’s sales.

Moreover, unfavorable foreign exchange translation remains a major headwind. In fact, Mattel expects to fall short of its 2016 gross margin expectations of nearly 50% because of forex headwinds and negative mix impact.

Meanwhile, apart from battling a broad array of alternative modes of entertainment, Mattel continues to face stiff competition from toy companies like JAKKS Pacific, Inc. (NASDAQ:JAKK) and Hasbro Inc. (NASDAQ:HAS) .

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