Large-cap Mattel (MAT) stock has been a laggard for the past few years, with share earnings at the toy maker falling off markedly since hitting a peak of $2.58 back in 2013. (Earnings this past year amounted to just $0.92 a share.) The company has been hurt by waning sales of its core Barbie brand, struggles against rivals Hasbro (HAS) and privately held Lego, and a failure to keep up with changing consumer preferences. It’s also been lagging on the technology front, making it more vulnerable to the scores of smartphone and tablet games that kids have come to enjoy in recent years. And there’s been a high level of turnover in the management ranks, including in the corner office. Still, Mattel has just named a new chief executive, Margaret Georgiadis (she takes the helm on February 8th), an Alphabet (GOOG) veteran with years of tech experience. And, while the holiday shopping season was a disappointment (fourth-quarter results missed Wall Street’s expectations), there are faint signs of a turnaround emerging, including long-awaited pick-ups in sales of Barbie and Fisher-Price offerings and cost savings from newly implemented streamlining/rightsizing initiatives. So, is now a good time for investors to build positions in this high-yielding recreation issue? Or are the company’s recovery prospects already being discounted by the market? In this brief article, we will attempt to address these questions by taking a closer look at Mattel’s business and performing an easy-to-follow SWOT analysis of the company, evaluating its Strengths, Weaknesses, Opportunities, and Threats.
The Business
Mattel, Inc., founded in 1945 and headquartered in El Segundo, California, is a leader in the design, manufacture, and marketing of toys and family products, with a top line nearing $6 billion annually, about 30,000 employees worldwide, and sales distribution in more than 150 nations. The company maintains four major brand categories: Mattel Girls & Boys (including Barbie, the most popular fashion doll ever produced, Hot Wheels, and Monster High); Fisher-Price (Fisher-Price, Little People, and Thomas & Friends); American Girl (Truly Me, BeForever, and Bitty Baby); and Construction and Arts & Crafts (MEGA BLOKS, RoseArt, and Board Dudes). Plus, it has an array of entertainment-inspired toy lines, many of which are tied into popular TV shows and motion pictures.
Strengths
Strong Market Position: Mattel, along with principal rival Hasbro, leads the roughly $85 billion toy industry. And, despite pressures on the business, the company maintains several of the sector’s top-10 brands, most notably Barbie (the best-selling doll of all time), which has risen to iconic status in American homes since launching in 1959. And we expect these labels to enjoy something of a sales renaissance over the next few years, as new, more-diverse products are added to the lines, a greater emphasis is placed on innovation, and advertising efforts are stepped up, particularly online. Efforts to expand Mattel’s retail presence, such as with more mini-shops inside Toys “R” Us locations and a new partnership with the Kohl’s (KSS) department-store chain, should also be a positive. (Luxury American Girl dolls, typically sold at high price points with accompanying books, have gotten a big boost from the company’s alliances with these traditional brick-and-mortar retailers.) Brand extensions overseas hold great promise, as well, notwithstanding headwinds from a strong U.S. dollar and a softening of economic conditions in select markets.
Attractive Dividend Yield: In spite of the bottom-line malaise, the company has been able to generate sufficient cash to cover its generous dividend, which currently stands at $1.52 a share on an annualized basis. This equates to a yield of more than 5.5%, pretty compelling even in a rising interest rate environment. Additionally, the dividend payout looks fairly safe to us, given the likelihood of a healthy earnings bump over the next several periods. Wall Street’s consensus view is for share net to come in at about $1.50 in 2017 and $1.70 next year. And these estimates may even prove to be conservative if the newfound Barbie momentum persists and distribution widens further at Toys “R” Us and Kohl’s. Plus, a drop in interest obligations should be good news for free cash flow, with debt levels projected to decline over time.
Weaknesses
Barbie: While this core brand has been perking up, which is encouraging, there’s no doubt that it’s lost some of its luster over the past several years. Aside from heightened digital competition, the loss of market share is likely due to quality issues and an unintentional narrowing of the customer base. The company seems to recognize these problems, and plans to continue rolling out new dolls with a greater array of body types (e.g., petite, curvy, and tall) and ethnic backgrounds. We also look for quality enhancements to be phased in as the product line is turned over.
Merchandising Deals: As we’ll discuss more below, Mattel appears to have fallen behind competitor Hasbro on the important licensing front, most prominently when it lost the rights to manufacture and market goods based on characters from the blockbuster animated Disney (DIS - Free Disney Stock Report) film Frozen. This is a notable development, since licensing arrangements with TV and movie studios allow recreation and consumer products companies to leverage established children’s brands by marketing everything from clothing and dolls to home décor and games. The revenue streams tend to be “sticky,” too, often lasting for years. And, toy companies need not launch new items with massive advertising buys, because there’s typically huge built-in demand.
Tech Offerings: The company has been slow to embrace e-commerce, introduce “connected” products, and grow its brands with a complementary online presence, such as with entertaining YouTube videos. That should change now that Mattel’s leader is from Silicon Valley. Going forward, we expect the company to do a far better job engaging young consumers via digital platforms, an endeavor that should help drive sales across its portfolio. Indeed, we see online sales becoming a much greater piece of the top-line pie in the coming periods.
Management in Flux: Mattel is now on its third CEO since the start of 2015, when Bryan Stockton was let go after he failed to reverse the company’s sliding fortunes. Mr. Stockton was succeeded by Christopher Sinclair, a former executive at PepsiCo (PEP), who brought a needed measure of stability to the business during his two-year tenure. Incoming CEO Margaret Georgiadis has plenty of work to do, though, to build on strengthening sales trends and get Mattel back on a sustainable growth track. And it will probably take a while for Ms. Georgiadis to implement new strategies and map out her broader tech-oriented vision for the company. Thus, shareholders will likely have to continue to exercise patience here.
Opportunities
Cost Cutting: Mattel has seen its margins erode since 2013, squeezed by pricing softness, operating inefficiencies, and an unfortunate sales deleveraging. But the top line should rebound in the quarters ahead, removing some of the pressure. And profits ought to benefit from cuts to corporate overhead (the company has been criticized for having too much bureaucratic red tape), a streamlining of the manufacturing base, and a far more disciplined approach to advertising. Mattel has already had some success driving out costs, with its just-completed “Funding Our Future” program resulting in nearly $300 million in savings.
Licensing: Though a weakness at present, licensing, in terms of acquiring the toy rights to characters from hit TV shows and films, will likely be more of a priority for Mattel’s new chief executive. The company still has ongoing multiyear deals that it can capitalize on, too. These include one with Warner Bros., a unit of Time Warner (TWX), which grants it the rights to develop toys based on DC Comics’ superheroes, like Batman, Superman, Wonder Woman, and The Flash.
Emerging Markets: While macroeconomic conditions abroad are uneven, at best, we see Mattel making nice strides in large emerging countries, most notably China and Russia. This will be critical to the company’s long-term success, especially as the Asia/Pacific region accounts for about one-quarter of the global toy market. Plus, these international territories are still poised to grow at a faster clip than the comparatively mature U.S. and euro zone markets.
Threats
Digital Gaming: With the proliferation of smartphones and tablet PCs, digital games are growing in popularity and increasingly competing for parents’ entertainment dollars. This has been a cause for concern of investors in this industry, and partially explains, we think, why MAT shares have fallen out of favor over the past few years. Nonetheless, fears that digital gaming will overtake traditional toys seem overblown. In fact, after some initial share losses last decade, the toy market, estimated at three times the size of the digital gaming space, appears to have stabilized. Thus, decent annual growth in the area of 5% appears probable through the 2020-2022 horizon.
Hasbro: While once the sector heavyweight, Mattel has lost considerable ground to Hasbro lately, with the latter competitor scoring a series of big licensing wins, including the rights to sell products inspired by Disney’s StarWars, Frozen, and “Princess” franchises. These lucrative arrangements have helped Hasbro make deep inroads into the doll category that had long been dominated by Mattel. What’s more, they have enabled Hasbro to shake its reputation as predominantly a boys’ toy outfit (Nerf and Transformers are among its largest brands). And the partnership with Disney, one of the world’s premier media conglomerates, could well bear more licensing fruit for Hasbro going forward, which would be a lost market opportunity for Mattel.
Conclusion
In sum, we think that Mattel’s strengths and opportunities are roughly even with its weaknesses and threats as the new CEO takes the helm. That said, key sales trends have started to stabilize over the past year, the toy market is in the midst of a solid expansion phase, and many of the company’s current weaknesses can also be seen as attractive opportunities. What’s more, the above-average dividend yield is definitely appealing, and may provide investors with enough of an incentive to hold these shares until further signs of a turnaround in the business emerge. At the very least, we think this stock is worth monitoring for those interested in gaining exposure to the toy segment of the recreation industry.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
