Mattel Sees Weak Sales: Will Christmas Turn Out A Nightmare?

Mattel, Inc. (NASDAQ:MAT) foresees a weak holiday season as revealed in a recent regulatory filing. With Christmas just around the corner, the sales forecast hints at various challenges for the largest toy retailer in the United States.

Despite owning prominent brands like Barbie, Fisher-Price and Fijit Friends, Mattel expects 2017 sales to decline by a percentage of at least mid-to-high single digits compared to 2016.

What Worries Mattel?

Mattel is anxious about its key retail partners moving toward tighter inventory management. Moreover, Toy Box-related challenges and certain underperforming brands are likely to dent the top line in the to-be-reported quarter.

As it is, the toy industry has been tricky for companies like Hasbro (NASDAQ:HAS) , Mattel and JAKKS Pacific, Inc. (NASDAQ:JAKK) due to declining demand for traditional toys. Owing to the growing demand for a broad array of alternative modes of entertainment, including video games, MP3 players, tablets, smartphones and other electronic devices from companies like Electronic Arts, Inc. (NASDAQ:EA) , U.S. toy makers are facing a decline in sales.

Moreover, the recent Toys ‘R’ Us bankruptcy aggravated matters. Mattel has been particularly affected by the bankruptcy as it resulted in a year-over-year decline in third-quarter 2017 revenues and profits. In fact, since the company’s gross margins included the associated cost of goods sold, the net sales reversal in Toys ‘R’ Us accounted for approximately one-fifth of the year-over-year decline in total margin. The effect of the bankruptcy is expected to linger in the upcoming quarters as well.

The company reported a 620 basis points (bps) year-over-year decline in gross margins in the first nine months of 2017. This decline, owing to unfavorable product mix, higher freight and logistics expenses and lower fixed cost absorption, is expected to reflect in fourth-quarter 2017 results. A persistent decline in the top line is likely to result in gross margin deterioration due to higher inventory write-downs and discounts offered to clear inventory.

Meanwhile, Mattel suspended its dividend payments and adopted cost-cutting initiatives to counter weak sales. The company has been looking to cut costs in order to drive gross margin and operating profits.

Owing to the initiatives, Mattel’s advertising and promotion expenses contracted 9% from the year-ago level in the first nine months of 2017. However, for 2017, the company expects a slight uptick in the expenses in comparison to 2016 on a gross dollar basis. Additionally, the company expects a year-over-year rise in other operating expenses in fourth-quarter 2017.

Owing to such factors, Mattel’s operating margin, excluding severance expenses, is expected to be significantly lower in fourth-quarter 2017 from the prior-year level. In addition, gross margin and operating income could be further impacted by fourth quarter charges or expenses which includes restructuring and other non-cash write-offs. These expenses could be material or incurred in connection with the company’s recently announced cost savings program, targeting run-rate cost savings of at least $650 million.

Over the last 60 days, earnings estimates for the current quarter and year have gone down 18.9% and 93.8%, respectively. Also, year to date, shares of the company have lost 44.2% as against the industry’s gain of 43.5%.

This Zacks Rank #5 (Strong Sell) company, which generally rakes in about 40% of its annual sales during Christmas holidays, is likely to face a decline in sales and margins this season owing to the above-mentioned dampeners.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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