Despite all the talk of a recession, U.S. retail sales posted some nice gains in September. However, the good news didn’t shares of Mattel (NYSE:MAT), which reported its quarterly numbers earlier Friday. The stock was recently off 2.6% to $27.06.
Yet the quarterly report was far from problematic. Revenue increased by 9% and both the top and bottom lines were in line with Wall Street expectations.
Might this be an opportunity for investors to get a good value? Here’s a look at the pros and cons:
Pros
Strong brand portfolio. Mattel has such iconic franchises like Barbie and Hot Wheels, which have shown strength for decades.
But the company’s strengths go well beyond great design. After all, Mattel has a massive distribution footprint, which extends across 150 countries, and the company is getting lots of traction from the growth in emerging markets.
Partnerships. Mattel has agreements with Time Warner’s (NYSE:TWX) Warner Brothers, DreamWorks (NYSE:DWA), World Wrestling Entertainment (NYSE:WWE), Viacom’s (NYSE:VIA) Nickelodeon and HIT Entertainment.
But perhaps the most important relationship is with Disney (NYSE:DIS). Mattel has certainly benefited from product tie-ins for hit movies like Cars 2.
Digital technology. This is definitely a big growth opportunity. To this end, Mattel has been aggressive with its Facebook page and other social media. The company also has a variety of top Apple (Nasdaq:AAPL
) iPhone apps.
Interestingly enough, Mattel has joined Angry Birds – the world’s #1 smartphone app – to create a children’s board game, called Angry Birds: Knock On Wood. It looks like it will be a red-hot product for the Christmas season.
Cons
Costs. Like many other companies, Mattel is facing raw materials inflation and higher wages in China. These pressures were certainly an issue for the company’s latest quarter.
But Mattel also must deal with the higher costs for content as well as distribution. Consider that three customers – Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and Toys “R” Us – account for roughly 41% of sales.
Competition. The environment is fierce. Mattel must contend with rivals like Hasbro (NYSE:HAS), Lego, Jakks Pacific (Nasdaq:JAKK) and Bandai. There is even potential competition from online operators, especially in the gaming sector.
Tastes. Let’s face it, kids can be fickle. While Mattel has a good track record of anticipating the major trends, the company has been far from perfect. And, as movie tie-ins become more important, so do the risks of a flop.
Verdict
Mattel is positioned nicely for the upcoming Christmas season. The company has a strong lineup of brands and should get a boost from foreign markets.
And Mattel has a strong balance sheet, while also announcing a new authorization for up to $500 million in share repurchases. What’s more, Mattel pays a hefty dividend of 3.3%.
In light of all these factors, the pros outweigh the cons on the stock.
Tom Taulli is the author of “All About Short Selling” and “All About Commodities.” You can also find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
