The ongoing market turmoil has upset the growth strategy set by Mattel, Inc. (NASDAQ: MAT), with focus on transitioning into an IP-driven company. Currently, the maker of legendary brands like Barbie and Hot Wheels is banking on its brand power and the upcoming holiday season to stay on the growth path.
Mattel’s free-falling stock got a relief last month after slipping to a twenty-year low, coinciding with the management’s decision to reject a merger offer from California-based MGA Entertainment. The COVID-related disruption does not bode well for the company, which has been looking to new and emerging markets to expand the business.
Analysts are divided in their recommendations for the stock, which carries a consensus rating of moderate buy with a not-so-impressive price target, thanks to the virus-induced slowdown. While long-term investors might still find the stock attractive, Mattel’s weak balance sheet can act as a dampener. At the end of the March quarter, the company had total debts of $2.8 billion, which will be a constraint to secure additional credit. At the current levels, the company’s cash flow is not sufficient to service the debt.
The company, which has been entertaining kids for the past 75 years, recently reaffirmed its resolve to engage with children by launching an online platform called Mattel Playroom. According to research firm NPD Group, Mattel continues to be a market leader.
The company faces competition from the likes of Funko, LEGO, and MGA Entertainment in an industry where there are limited entry barriers for new players. In short, it is imperative for the toymaker to assess the market dynamics accurately and make informed decisions with regard to the product portfolio.
Competition has been intensifying due to the rapid shift in demand from traditional toys to the technologically advanced ones and shorter life-cycles for individual products. Consequently, Mattel also faces competition from providers of children’s products other than toys, such as video games.
Last year, Walmart (WMT) and Target Corp. (TGT) together accounted for one-third of the company’s sales. Such a level of customer concentration demands constant engagement, though it facilitates efficient product distribution and cost-efficiency.
The business is highly seasonal as most customers tend to make purchases during the holiday season, which falls in the third and fourth quarters of the company’s fiscal year. This leads to an imbalance in inventory that often makes it difficult to fulfill orders from retailers in a timely manner.
Mattel aims to shift to the high-growth mode on the back of the improvement in its capital structure, achieved through a structural simplification program focused on run-rate savings and streamlining of operations. The ongoing brand transformation for the American Girl and Thomas & Friends brands complements those efforts.
Having restored manufacturing and distribution activities to a large extent after the shutdown, the management is optimistic about fulfilling orders promptly in the second half of the year. It claims to be on track to transform the company into an IP-driven toymaker, leveraging the positive cash flow, thereby creating long-term shareholder value.
Investor sentiment took a beating after the company reported a wider loss for the March-quarter, hurt by a double-digit fall in net sales. The results also fell short of expectations. The only bright spot was a marked improvement in gross margin, reflecting the ongoing cost-reduction drive and the capital-light program launched for optimizing capacity. Such measures assume importance considering the steady increase in commodity prices and logistics costs.
“In the midst of the disruption, we are encouraged by the continued improvement of our gross margin. This speaks to the progress we are making in optimizing our cost structure and restoring profitability. While we expected higher retail inventories entering the year to have a negative impact on our revenues, the majority of the decline was COVID-19 related.”Ynon Kreiz, CEO of Mattel
When the virus attack crippled financial markets a few months ago, Mattel’s shares slipped to the lowest level in more than two decades, once again falling below the $10-mark. Though they have pared a part of the loss since then, the performance continues to be volatile. The stock, which closed the last trading session at $10.13, underperformed the consumer discretionary index of the S&P 500 in the past five years.
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