On Nov 13, 2014, Zacks Investment Research downgraded Mattel, Inc. (NASDAQ:MAT) to a Zacks Rank #5 (Strong Sell). Estimates have been declining ever since the company announced weak third quarter 2014 results on Oct 16, which turned out to be the second consecutive quarter of earnings miss and the fourth consecutive quarter of revenue miss.
Why the Downgrade?
Mattel reported weak third-quarter 2014 results with earnings and revenues missing the Zacks Consensus Estimate for the fourth time in a row. Adjusted earnings of 98 cents per share declined 15.5% year over year due to weak sales and lower margins.
During the quarter, net sales of $2.02 billion declined 8% year over year, primarily reflecting poor performance in the domestic as well as international markets. Sales of Barbie and Fisher-Price dropped significantly during the quarter. The sluggish performance of the Fisher-Price and Barbie Brands has been a matter of concern for long. Both these flagship brands have been posting soft sales since the beginning of 2013.
We believe increasing inclination of kids toward electronically driven devices has lowered the demand for traditional products. Mattel has to battle a broad array of alternative modes of entertainment including video games, MP3 players, tablets, smartphones and other electronic devices. Also, Mattel's focus on toys such as building blocks has not helped much as children are gradually shifting to electronic games and tablets. This toy maker thus faces stiff competition from manufacturers of such products.
Moreover, weak consumer spending amid sluggish economic growth in the U.S. adds to the woes. Customers are reducing their non-essential purchases, which is weighing on the company’s sales.
Mattel is losing market share to mass merchants. The loss of rights to make dolls for The Walt Disney Company (DIS) based on its toy characters to another toy maker Hasbro, Inc. (NASDAQ:HAS) compounds the company’s woes. Currently, Mattel holds the rights to develop dolls based on characters from the animated movie, Frozen and Disney Princess.
However, the new deal will grant Hasbro rights to manufacture these dolls. The partnership with Disney had been a savior for Mattel so far. Strong sales of the Frozen line of products helped the company to somewhat mitigate the weak performance of Barbie dolls in the recent quarters.
Meanwhile, Hasbro is reportedly considering the acquisition of DreamWorks Animation SKG Inc. (NASDAQ:DWA). The combination of these two companies would help both to diversify beyond their core businesses and create a consolidated kids’ entertainment company, thereby boosting Hasbro’s revenues considerably.
Currently, Mattel has partnerships with DreamWorks on several of its product lines. However, if the Hasbro deal takes place, Mattel would not reportedly renew the deals, thereby losing a substantial chunk of its revenues, especially at a time when the toy maker is battling intense competition.