While the revenue picture appeared grim at Mattel (MAT), the earnings picture looks much better, asserts George Putnam, editor of The Turnaround Letter.
North American revenues grew by 4%, but the sharp 18% fall-off in International revenues pulled overall sales in the latest quarter well into negative territory.
International sales were about 38% of total sales. All of the principal geographies, including Europe, Latin America and Emerging Markets (primarily China), were meaningfully weak.
More broadly, the Toys R Us liquidation continues to cycle through Mattel’s results, pulling overall sales down by 3% compared to a year ago. The year-over-year effect will be the greatest in the upcoming 4Q. We don’t think all those sales will vanish, as some will appear through different channels.
Another factor that got little attention but that we believe is important was the reduced number of products that Mattel is now selling compared to a year ago. Mattel had a proliferation of low-margin brand extensions that boosted sales but did little for profits.
As these are discontinued, their absence reduces revenues but will likely have a positive effect on profits as complexity and hidden costs are removed.
The company appears to be gaining market share and its brands continue to hold appeal in consumers’ eyes. This is critical for the turnaround to be viable.
Mattel’s EBITDA improved over the prior year by $34 million, or 18%, as the company’s cost-cutting efforts take hold. Perhaps just as important, its EBITDA margin increased to 16.1% from 12.7%, indicating that Mattel is becoming more profitable even as sales decline.
In the next phase of its turnaround, Mattel is working to generate more revenues by expanding its well-recognized brand portfolio into new products, including film and television, digital gaming, live events, music and consumer products. Mattel added new talent to develop these products.
Another component of the next phase is to improve Mattel’s cost structure and manufacturing flexibility. This involves outsourcing much of its currently in-house productive capability. Not only should this release capital currently tied up in factories but also help provide speed and flexibility, ultimately producing more profit.
While the Mattel story holds risks, the turnaround is working and the company has time to make further and major improvements. We continue to rate MAT shares a buy up to 38.
