Facebook
Twitter
To say that the past year has been challenging for Mattel (NASDAQ: MAT) would be an understatement. Shares of the toy giant are down 23% just since the start of 2015.
Mattel’s revenue is declining, due to poor sales of its flagship Barbie brand. Its core product group is dolls, which collectively represent 40% of the company’s total revenue.
Investors appear relieved that Mattel’s results weren’t even worse after the company posted quarterly earnings after market close on Thursday. Mattel shares rose 5% in early trading Friday and finished the session up 6%.
But investors would be wise not to buy the stock without considering the risks.
Clearing a Very Low Hurdle
Mattel’s adjusted earnings came in at $0.71 per share, down from $0.98 per share in the same quarter last year. That represents a 27% year-over-year decline. Sales fell 11%, with much of the damage coming from currency fluctuations. Still, even after excluding foreign exchange effects, Mattel’s constant-currency revenue still fell 3% last quarter.
Even these results could not meet analyst expectations, which called for $0.80 per share of adjusted profit.
The company’s revenue is still declining, and since Mattel is spending more on advertising and marketing of its new products, earnings are collapsing and the company is burning through cash.
For example, Mattel’s advertising and promotional expenses were 11.9% of sales last quarter, up from 10.8% of sales in the same quarter last year. But it doesn’t appear that the company is getting much bang for its buck. It’s spending heavily to market its new line of Barbie dolls, but Barbie sales fell another 4% last quarter on a constant-currency basis.
Furthermore, in the first half of the year, Mattel generated negative free cash flow of $354 million. Its current dividend cost the company $257 million over the first half of the year. If Mattel does not return to generating positive free cash flow soon, the dividend could be cut.
Mattel’s dividend currently yields in excess of 6%, which is far higher than the stock market average. But sometimes, an abnormally high yield such as Mattel’s is a sign that investors are pricing in the possibility that the company could cut its dividend.
Barbie Blues
Investors should not be too quick to rush out and buy Mattel shares. This looks to be much more of a relief rally and ensuing short squeeze than a true turnaround story.
Mattel’s sales and profits are still in a significant decline. The stock appears fairly cheap at 15 times forward earnings estimates, but it’s worth noting that analysts expect earnings to decline to $1.32 per share this year before recovering significantly to $1.49 per share in fiscal 2016 – which may simply not happen.
At its core, Mattel’s problem continues to be a high reliance on dolls, which are not as popular with this generation of young children as they were with previous generations. Children are rapidly embracing new forms of entertainment, mostly on mobile devices. Unless Mattel figures out a way to generate new revenue streams, the turnaround may not materialize.
This is making ordinary people rich
Ordinary people across America are getting insanely rich. Take Gladys Holm. She never earned more than $15,000 a year as a secretary. But by making one simple move, she was able to leave an $18 million fortune to a children’s hospital when she died. There’s many more just like her. Find out how they did it right here.