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Toy maker Mattel (NASDAQ: MAT) has had a very tough time these past few years. Its core Barbie and American Girl dolls are out of favor with consumers, as the reality sets in that children simply don’t play with dolls like their parents and grandparents did.
As a result, Mattel’s sales have fallen in recent years, and the stock is down more than 30% from its five-year high. But the stock has picked up some positive momentum. Shares are up 29% in the past three months. Mattel’s restructuring plan is working to cut costs, and the company recently announced a new lineup of Barbie dolls that could reignite sales.
Mattel’s management was far too slow to respond to what was a very clear change in consumer preferences. People simply don’t buy dolls like Barbie for their kids nearly to the extent they used to. Instead, children are playing games and being entertained increasingly by smartphones and tablets.
The Barbie Makeover
Mattel operates not just Barbie, but also American Girl. This structural change has brought the company to its knees, since dolls still make up a big portion of Mattel’s sales. Last year, total worldwide Barbie sales fell 10%, while American Girl sales fell 7%.
Making matters worse was that consumers simply didn’t like Barbie dolls for social reasons. Barbie’s unrealistically thin shape and uniform design received increasing criticism from consumers. The unflinching body type was an example of management’s rigid view of the consumer.
But going forward, Mattel has announced curvy, petite and tall versions of Barbie. This comes just a few months after the company announced its Fashionistas line, which feature a broader assortment of Barbie dolls with a greater number of skin tones, eye colors and facial structures.
These changes are more drastic than investors may realize. It’s the first time in more than 50 years that Mattel is changing Barbie’s body type. But desperate times call for desperate measures, and it’s at least a good sign that Mattel management is finally responding to clear changes in consumer attitudes in a meaningful way.
More recently, rumors have circulated in the financial media about a potential merger between Mattel and fellow toy industry titan Hasbro (NASDAQ: HAS). Bloomberg has reported that Mattel and Hasbro have held talks about a potential merger.
These reports may hold significant merit. When growth in a consumer-oriented industry slows, consolidation inevitably follows. Investors have seen this come to pass in the alcohol and tobacco industries over the past year. It would not be a surprise to see Mattel and Hasbro come together.
In fact, it would make a lot of strategic sense. A merger would give both companies the ability to join forces in the fight against digital entertainment, which has grabbed consumers’ attention away from the companies’ toys and board games. And Mattel and Hasbro have to fight against each other now when they bid for lucrative consumer merchandise contracts with movie studios.
Plus, the combined company would theoretically be able to squeeze out considerable cost savings, since the companies are nearly identical.
Investor Hopes Could Materialize
Mattel’s situation certainly looks bleak judging by its recent financial performance, but there may be hope for what the future holds. Mattel is making progress in cutting costs, refocusing itself and bringing its Barbie line into the 21st century.
Mattel probably isn’t an outright buy on this news. Investors should wait for confirmation that the Barbie makeover can help restore sales growth. But investors who have held on this long have reason to be optimistic.
As a result, it seems like there are enough potential catalysts for investors to continue holding the stock. Mattel shares could continue to rise as its turnaround progresses. In the meantime, at least shareholders are paid a solid 4.8% dividend to wait.
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