Mattel (MAT) Misses Q2 Earnings Estimates on Weak Sales

Mattel Inc. MAT reported weak second-quarter 2014 results with earnings and revenue missing the Zacks Consensus Estimate. Adjusted earnings of 3 cents per share missed the Zacks Consensus Estimate of 19 cents per share by 84.2% and also declined 85.7% year over year. The significant downside reflects weak sales and lower margins.
   
During the quarter, net sales declined 9.0% year over year to $1.06 billion, primarily reflecting poor performance in the domestic as well as international markets. Sales of Barbie and Fisher-Price dropped significantly during the quarter. Sales of the iconic doll have fallen in eight out of the past ten quarters. Sales also missed the Zacks Consensus Estimate of $1.17 billion by 8.8%.

Quarter Highlights

Gross sales from North America (including the U.S., Canada and American Girl) were down 8.0% year over year. In the International Region, gross sales decreased 9.0%.

The company acquired Mega Brands Inc. on Apr 30, 2014. From this quarter onwards, it has started reporting under four segments Mattel Girls & Boys Brands, Fisher-Price Brands, American Girl Brands and the newly added segment Construction and Arts & Crafts Brands. Notably, Mega Brands Inc. was a leading global brand in the construction building sets and arts & crafts category.

Worldwide gross sales at Mattel Girls & Boys Brands declined 13.0% year over year to $689.0 million. Worldwide gross sales of the Barbie brand declined 15.0% due to weak demand. Gross sales of the Other Girls Brands declined 11.0% due to a decline in sales at Monster High, partially offset by higher sales at Disney Princess and Ever After High. Gross sales of the Wheels category declined 3.0% while the Entertainment business plunged 19.0% due to lower sales of Radica and Games.

Sales at Fisher-Price Brands, which includes Fisher-Price Core, Fisher-Price Friends and Power Wheels brands, declined 17.0% year over year to $328.8 million due to weak demand.

Gross sales at American Girl Brands were up 6.0% year over year to $83.1 million.

Gross sales for Construction and Arts & Crafts Brands, which includes the Mega Bloks and RoseArt brands, were $61.6 million.

Gross margin was down 490 basis points (bps) to 46.4% due to a decline in total revenue. Decline in revenues could not offset the decline in expenses. Therefore, operating profit declined significantly year over year to $1.0 million. Operating margin declined 800 bps year over year to 1.0%.

Our Take

Mattel's top and bottom lines fell short of our expectations in the reported quarter due to weak consumer spending. It seems that consumer spending uncertainty still lingers amid sluggish economic growth in the U.S. as customers curb their non-essential purchases.

However, we remain positive about the company's acquisition of the Canadian toymaker Mega Brands. The acquisition would help Mattel to expand in two of the fastest-growing toy categories — construction building sets and arts & crafts categories.

The company presently has a Zacks Rank #2 (Buy). Investors interested in the sector can also consider Hasbro Inc. HAS, also with a Zacks Rank #2. Meanwhile, another gaming company Electronic Arts Inc. EA will report its fiscal first-quarter 2015 results on Jul 22, 2014 while Activision Blizzard, Inc. ATVI will report its earnings on Aug 5.

 

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