Since arriving at Mattel, Inc. (NASDAQ:MAT) a year ago, Chief Executive Margo Georgiadis has begun “editing” the toymaker’s product line-up, scrapping flashy high-cost items such as the Aristotle line of baby monitors and the Hologram Barbie that incorporated technology with little thought of whether it was a good fit for the toy.
The jury is out whether the strategy being championed by Mattel’s third CEO in as many years will work, which is why investors should take a pass on MAT stock.
For one thing, key MAT brands such as Fisher-Price, American Girl and Thomas continue to underperform. MEGA BLOKS, Monster High and Ever After High are also struggling. It isn’t clear when these brands will see better times.
Earlier this year, MAT brought back veteran Fisher-Price executive Chuck Scothon to run the business. Though Scothon is well-respected, he’s got a daunting challenge ahead of him. Fourth quarter sales at Fisher-Price fell 12 percent to $533.8 million amidst soft demand for infant and preschool products including Thomas & Friends.
The business has been mismanaged for years and has suffered a brain drain, which has detailed the Thomas brand. MAT is adding new content for Thomas, adding new female characters and stories that take place outside the mythical island of Sodor.
Speaking to Wall Street analysts during the recent company’s earnings conference call, Georgiadis argued that MAT is dedicated to “re-energizing” American Girl as a “premium experiential brand.”
Of course, she didn’t provide specifics.
Georgiadis noted MAT was “accelerating aggressive plans to refresh this franchise in 2018 with both investment and talent enhancements to revitalize this brands premium appeal and improve the offline and online experience.” She promised more details to come.
Sales of American Girl Brands plunged 23% in the fourth quarter to $217.3 million. Revenue from Mattel’s Construction and Arts & Crafts Brands, which includes MEGA BLOKS, fell 25% to $93.5 million.
Wall Street analysts don’t see better times ahead for MAT. They are expecting the toymaker to continue to lose money through 2018, as revenue losses continue for a fifth straight year. Rival Hasbro, Inc. (NASDAQ:HAS), which has challenges of its own, is profitable.
Georgiadis, a former Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL)executive, has taken steps in the right direction, suspending its dividend, proposing to slash $650 million in annual costs and shedding underperforming brands.
The only reason to buy MAT stock, which is down 13% this year, is as a bet that HAS will take it over. Rumors about a Mattel-Hasbro merger, which have been around for years, surfaced again last year.
The problem with takeover rumors is oftentimes they don’t come true or at least take a long time to come to fruition.
For now, MAT’s risks far outweigh its rewards. HAS is a much better “play” in the toy industry. The average 52-week price target for HAS is $104.57, a premium of nearly 25%, better than the 15% upside expected for MAT. The difference between the two stocks is hardly child’s play.
As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.
