EUR 850.00 For Business Accounts Only

Morningstar | Green Shoots Sprout as Mattel’s Turnaround Persists Thanks to Its Focus on Restoring Brand Equity

Mattel's turnaround remains delayed, hindered by the recent bankruptcy and liquidation of Toys 'R' Us and a deceleration in Toy Box product demand during a period of secularly slow growth. After stringing together decent growth under prior CEO Chris Sinclair across core brands, inventory clearance and stock-keeping unit creep of lower-productivity brands hurt performance in 2017. However, the firm's turnaround plan strikes us as a step change, placing heightened focus on core brand productivity and manufacturing realignment that should begin to bolster profits in the second half of 2018 as efforts start to bear fruit. Furthermore, natural gross margin leverage should begin to occur in the final quarter of 2018 as the firm laps inventory obsolescence charges that should occur at a significantly lower pace (a main contributor to Mattel's nearly 900-basis-point slide in 2017), as Mattel laps the TRU initial bankruptcy announcement and improved inventory management gets under way. Ahead, core brand focus, the capture of new licenses, and a faster supply chain (bringing demanded products to market quickly) could help restore Mattel's sales growth, while supply-chain initiatives (realigning the manufacturing footprint) should improve profitability. Additionally, Mattel's digital plan, which has focused on strategic relationships with Google, Alibaba, YouTube, Nickelodeon and others, should increase brand visibility, potentially stemming losses to other digital toy manufacturers and peers.That said, despite recent challenges, Mattel still holds a top position in toy marketing thanks to its highly recognized brands, which we believe has allowed it to recapture key license relationships and win new ones (Jurassic World), boosting top-line promise. Mattel has historically had some of the most popular toys in the industry, which could lead to better point-of-sale results once inventory and brands are rightsized, stabilizing recent brand equity volatility. The firm's market share, along with its scale, supports it's narrow moat rating, which remains constrained by low barriers to entry forcing continuous innovation as peers converge on the traditionally high-ROIC business.