Mattel: Don’t Toy With It! – Barron’s
After a rough couple of years, Mattel (MAT) has big plans to reinvent itself. But investors seem unimpressed.
The toy maker’s share price is in sharp decline today, dropping almost 8% in regent market action to $20.41 on the heels of yesterday’s investor presentation. The company unveiled a plan to slash its dividend to free up money so it can expand into China and other emerging and modernize its toys for the digital market.
CEO Margo Georgiadis wants to restore mid to high single digit sales growth and 15% margins.
But D.A Davidson analyst Linda Bolton has lost confidence in Mattel, citing deteriorating near-term business fundamentals.” She downgraded the stock from a Buy to a Neutral and cut the price target from $30 a share to $24 a share.
At her first analyst meeting as CEO, Margo Georgiadis presented a thoughtful strategic plan, with a target of getting to mid- to high-single digit sales growth and a 15%+ operating margin, but timelines were lacking, as were execution specifics. The dividend was cut by 61% to $0.60, more than our maximum expectation of 50%. We are lowering our estimates and downgrading to NEUTRAL because near-term business fundamentals have deteriorated. The list of underperforming brands was expanded to four, with Thomas & Friends and Mega Bloks added to Monster High and American Girl. MAT announced it would fall short of 2Q17 guidance issued 7 weeks ago, lowered 2017E sales growth from mid-single to low-single digits and said it would no longer update 2017 guidance or make future guidance statements. We are concerned that growth could be slowing for even the healthy brands, and MAT admitted that “Princess hole fillers” in 2016 were weak initiatives and licenses that are now declining. We are not confident MAT can make our lowered 2H17 estimates – we believe near-term earnings risk has heightened.
The lack of specifics in Georgiadis’ plans seemed to be a major concern for others as well. UBS analyst Arpiné H. Kocharyan says the presentation fell short of specifics, especially about recovery time, and left questions regarding how Mattel’s reinvestment plan will change the company’s profit profile next year.
Jefferies echoes those sentiments, complaining that the lack of clarity means “a full de-risking of estimates is unlikely.” Analyst Stephanie Wissink rates the stock at a Hold, but cut her price target to $19 a share.
It’s difficult to get constructive until the deferred risk profile is reconciled as targets still seem too aggressive.
At a recent $20.38, Mattel’s share price has fallen more than 39% over the past year, while rival Hasbro (HAS) has gained 27%.