Big news hit the toy industry earlier this month when word spread that Mattel, Inc. (MAT) and Hasbro, Inc. (HAS) held talks about a possible merger. Mattel stock holders clearly celebrated the idea, bidding shares up 6% in just a couple of days after the news.
The two large U.S. toymakers never reached a merger, but both seem open to further discussions on creating a larger company to take on brands like Lego and hold more leverage to retailers.
While Mattel is the struggling brand of the two, with declining sales for several of its flagship brands, MAT might be better off ignoring merger discussions with Hasbro.
Here are three reasons why Mattel stock investors should see better returns in 2016 and 2017 — with Mattel going it alone.
Barbie Gets a Makeover
Mattel had revenue of $5.7 billion in fiscal year 2015. Of that total, $906 million came from the iconic Barbie brand that has been a staple of this toy company for 55 years.
After years of declining sales and shelf space, Barbie is seeing a comeback. The fourth quarter marked a seldom-seen increase in sales of the Barbie brand, with sales up 8% to $327.6 million. Barbie enjoyed double-digit growth in North America.
Barbie is undergoing a makeover that may boost sales dramatically in 2016. Mattel has launched multiple varieties of the Barbie doll for the upcoming spring slate. This includes seven different skin tones, 22 eye colors and 24 hairstyles. More importantly, Mattel is signaling change and appealing to a wider audience by offering Barbies in multiple sizes of original, curvy, tall and petite.
Mattel’s Media Deals Are Picking Up Steam
Mattel has a strong portfolio of brands. In today’s digital age, brands mean licensing power, especially in the media sector. Mattel is quickly signing deals to bring its characters to the small screen with a number of media deals.
The biggest media deal could be for a Mattel toy brand that hasn’t even hit shelves yet. Mattel is launching the DC Super Hero Girls line of toys in March. The line features teenager versions of characters like Supergirl, Batgirl, Wonder Woman, Harley Quinn and Poison Ivy. Target Corporation (TGT) has signed on as the exclusive launch partner. A f44-minute special will air on Boomerang Channel in the spring, with other media content expected down the road.
Mattel also signed a deal with DHX Media Ltd (USA) (DHXM), a top Canadian kids’ content producer. The companies will co-develop and jointly fund episodes of series based on Mattel properties like Bob the Builder, Fireman Sam, Little People and Polly Pocket.
Back in October, MAT announced it was working on bringing back two old media properties. The company will re-introduce the shows Barney & Friends and Angelina Ballerina in 2017, and each series will get 52 episodes to start. Barney & Friends aired from 1992 with 2009, creating nearly 250 episodes along the way.
Amazon.com, Inc.’s (AMZN) Amazon Studios reached a deal to create four live action specials based on the American Girl brand. The e-commerce leader also has the option to produce multiple seasons of a related television series. Perhaps the new movies can help boost sales of the American Girl brand, which is rapidly declining; sales fell 14% in the fourth quarter and 7% in FY2015.
Acquisitions Can Power Mattel Stock, Too
In 2016, Mattel has already acquired two technology brands that could expand its products and intellectual property into new categories. Mattel acquired baby monitoring company Sproutling and the assets of bankrupt kids’ tablet maker Fuhu.
Sproutling created a baby monitor that looks like an ankle bracelet, which tracks items like heartbeat, body temperature, noise level and baby’s motion. All of these items are then delivered back to a smartphone or monitor keeping parents less worried while their babies sleep. Sproutling has been called the “Fitbit Inc (FIT) for your baby” and “Nest for your nursery.”
Sproutling will now develop products under Mattel’s brand. This is a good shift for MAT, as the baby market is growing and smart interactive content is going to be key going forward. Mattel noted the strength for its Fisher-Price brand in the baby segment on the fourth quarter earnings call. Look for this category to grow.
Mattel Stock Is a Strong Buy Right Now
Shares of Mattel were down more than 10% in 2015, though MAT shares have made that up and then some already in 2016.
While analysts see Mattel’s revenue falling 3.5% to $5.5 billion this fiscal year, things look much better for FY2017, with Wall Street expecting growth of 6.7% to $5.9 billion.
Mattel is making all the right moves to boost its revenue and improve margins. The first half of 2016 will be a true test, as the company is up against comparable sales from Walt Disney Co’s (DIS) Disney Princess, which Mattel lost the licensing rights to.
However, with growth coming from Barbie, media deals, and the integration of new technology acquisitions, Mattel stock should still have a good 2016. If it can continue its roadmap, FY2017 should see a return to growth — and good times for shareholders.
As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.
