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Mattel (NASDAQ:MAT) Misses Q4 Sales Targets


Full Report / February 07, 2024

Toy manufacturing and entertainment company (NASDAQ:MAT) missed analysts' expectations in Q4 FY2023, with revenue up 15.6% year on year to $1.62 billion. It made a GAAP profit of $0.42 per share, improving from its profit of $0.05 per share in the same quarter last year.

Mattel (MAT) Q4 FY2023 Highlights:

  • Revenue: $1.62 billion vs analyst estimates of $1.64 billion (1.1% miss)
  • EPS: $0.42 vs analyst estimates of $0.29 (43.8% beat)
  • Gross Margin (GAAP): 48.8%, up from 43.1% in the same quarter last year
  • Market Capitalization: $6.54 billion

Known for the creation of iconic toys such as Barbie and Hotwheels, Mattel (NASDAQ:MAT) is a global children's entertainment company specializing in the design and production of consumer products.

Mattel's story began in 1945 as a garage startup. Founded by Harold "Matt" Matson and Elliot Handler to craft picture frames, they later pivoted to dollhouse furniture. The founders' belief in the crucial role of play in a child's development spurred Mattel's shift toward toy manufacturing. This move led to the creation of Barbie, a toy that rapidly gained popularity.

Today, Mattel's portfolio encompasses a variety of toy lines and digital games that encourage imaginative play. Some of its products are also dedicated to educational purposes.

Mattel’s revenue is derived from sales of its toy and game portfolio, film and television content based on its brands (Barbie Movie), and licensing deals. It sells its products through direct-to-consumer sales channels and a retail presence. Mattel's potential lies in its ability to create characters and stories that resonate with children across various cultures.

Leisure Facilities and Products

Fitness companies may be riding the wellness trend, for example, while those selling boats and toys may have to lean into innovation to stand out. Either way, all leisure companies must compete against the 800-pound gorilla of social media and streaming entertainment, which offer instant gratification and have been taking share of consumers’ free time for over a decade.

Competitors in the toy and entertainment industry include Hasbro (NASDAQ:HAS), Funko (NASDAQ:FNKO), and Jakks Pacific (NASDAQ:JAKK).

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one may grow for years. Mattel's annualized revenue growth rate of 3.6% over the last 5 years was weak for a consumer discretionary business. Mattel Total RevenueWithin consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends. That's why we also follow short-term performance. Mattel's recent history shines a dimmer light on the company, as its revenue was flat over the last 2 years.

This quarter, Mattel's revenue grew 15.6% year on year to $1.62 billion, falling short of Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 2.7% over the next 12 months, a deceleration from this quarter.

Operating Margin

Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Mattel was profitable over the last two years but held back by its large expense base. It's demonstrated mediocre profitability for a consumer discretionary business, producing an average operating margin of 9.7%. Mattel Operating Margin (GAAP)

In Q4, Mattel generated an operating profit margin of 8.6%, up 2.6 percentage points year on year. This increase indicates the company was more efficient with its expenses over the last quarter, spending less money in areas like corporate overhead and advertising.

Over the next 12 months, Wall Street expects Mattel to become more profitable. Analysts are expecting the company’s LTM operating margin of 11.3% to rise to 12.7%.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions. Mattel EPS (GAAP)

Over the last 5 years, Mattel's EPS grew 2,140%, translating into an astounding 86.2% compounded annual growth rate. This performance is materially higher than its 3.6% annualized revenue growth over the same period. There are a few reasons for this, and understanding why can shed light on its fundamentals.

Mattel's operating margin has expanded 1.5 percentage points over the last 5 years, leading to higher profitability and earnings. Taxes and interest expenses can also affect EPS growth, but they don't tell us as much about a company's fundamentals.

In Q4, Mattel reported EPS at $0.42, up from $0.05 in the same quarter a year ago. This print beat analysts' estimates by 43.8%. Over the next 12 months, Wall Street expects Mattel to grow its earnings. Analysts are projecting its LTM EPS of $0.61 to climb by 117% to $1.32.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

Mattel's five-year average return on invested capital was 16.3%, slightly better than the broader sector. Just as you’d like your investment dollars to generate returns, Mattel's invested capital has produced decent profits.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, Mattel's ROIC has averaged a 6.7 percentage point increase each year. This is a good sign, and if Mattel's returns keep rising, there's a chance it could evolve into an investable business.

Key Takeaways from Mattel's Q4 Results

We were impressed by how significantly Mattel blew past analysts' EPS expectations this quarter. Its free cash flow for the full year also beat expectations, enabling it to repurchase $203 million of shares in 2023. The Board also authorized another $1 billion of share repurchases. 

On the other hand, its revenue missed Wall Street's estimates this quarter as its international sales were underwhelming (3% year-on-year growth). The North America segment, however, grew its revenue by 32% year-on-year thanks to strong demand for its Barbie dolls, Disney-branded dolls (specifically Disney Princesses and Frozen characters), and Hot Wheels products.

Overall, this was a mixed quarter for Mattel. The stock is up 1.2% after reporting and currently trades at $19.05 per share.

Is Now The Time?

When considering an investment in Mattel, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

Mattel isn't a bad business, but it probably wouldn't be one of our picks. Its revenue growth has been uninspiring over the last five years. And while its projected EPS growth for the next year implies the company's fundamentals will improve, unfortunately, its cash burn raises the question of whether it can sustainably maintain growth.

Mattel's price-to-earnings ratio based on the next 12 months is 14.3x. We can find things to like about Mattel and there's no doubt it's a bit of a market darling, at least for some investors. But it seems there's a lot of optimism already priced in and we wonder if there are better opportunities elsewhere right now.

Wall Street analysts covering the company had a one-year price target of $22.38 per share right before these results (compared to the current share price of $19.05).

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