MAT - Mattel Inc.

[mcmaaaaath]

Mattel hitting a new low today. Apparently a guy from BlueMountain came out as short at one of the Sohn conferences. He made a few arguments:

 

-Mattels brands are declining and usually brands continue to decline

-Brand has transitioned from 3-10 year olds to just 3-6 year olds, not "evolved with the times"

-Monster High sales are down 25% YoY and are seeing much lower Google search activity

-The company cannot rebound from the loss of the Disney license. "Large gap in revenue and no immediate fix"

 

Estimates I've seen are that Disney Princess sales for Mattel are in the $400-500m range, implying $200-250m of gross profits at the corporate rate of 50% (although its very possible that these sales have lower than average gross margins since they must pay Disney their royalties).

 

Street estimates are for ~$600m in EBIT this year and ~$700m in EBIT in 2016. Pretty surprising that they expect such an increase given the loss of the Disney Princess business...

 

 

 

 

 

 

(Bloomberg) --

David Zorub, a money manager for the $22 billion BlueMountain Capital Management, said he’s betting against shares of toymaker Mattel Inc.

 

Zorub said he believes the company will meaningfully disappoint sales expectations because its legacy brands are losing relevance and it will soon lose a “phenomenon” -- a license to market dolls and toys from the hit Walt Disney Co. movie “Frozen,” he said at the Sohn Canada conference presented by Capitalize for Kids in Toronto on Tuesday.

 

Mattel, which closed Tuesday’s trading at $21.03 in New York after a 32 percent drop this year, could decline to $10 to $14 a share, according to Zorub. Shares of competitor Hasbro Inc., which takes over the “Frozen” license in 2016, have been going in the opposite direction, up 32 percent this year.

 

There’s no immediate fix for a potential revenue gap at Mattel, Zorub said in his presentation, as the company’s partnerships offer significantly less movie content in the visible future.

 

To fill the void left by Disney Princess, Mattel is counting on a resurgence of its Barbie brand, which he said hasn’t successfully evolved with the times. Those bullish on the stock believe the company’s new management will be able to compensate for losing its Disney license by capitalizing on its lineup of iconic brands.

 

“Clearly we disagree with this view,” Zorub said

[DanielGMask]

Certainly not a popular name! I've been adding since I think this is going to be a company my kids are going to buy for their kids, but it's getting harder to estimate future cash flow and net earnings. Barbie and Fisher Price produce close to 3B in sales with a gross margin of 50% and there are many other iconic brands (Hot Wheels, Monster High) and concepts (American Girl) the company is being successful with, so I don't consider the current problems to be a permanent issue. That being said, this is going to take longer than I originally thought.

[CorpRaider]

Still tracking.  Apologies, Just want to post this here to reference:

 

http://www.wsj.com/articles/mattel-names-google-executive-margaret-georgiadis-as-ceo-1484661479

 

http://www.wsj.com/articles/mattel-shares-tumble-after-reporting-weak-holiday-sales-1485381895

 

Getting slammed on earnings/crappy holiday season. Also failed to note that they hired a new CEO from GOOG....kind of scary to me that they could plow a bunch of capital into moonshot/tech initiatives.  I really would prefer focus on what they do well, license their IP for low margin higher risk electronic stuff and profitability.  Need to check out shareholder composition as I would demand an owner of the company in the boardroom to at least give me a hope they could mitigate these risks.

[VAL9000]

This thing is a train wreck.  4th CEO in 4 years.

 

I believe there is value here, but there's also lots of room to destroy value over the next couple of years, as has been the recent trend at Mattel.

 

What I see as opportunities:

- COGS are 60% higher than their closest competitor (~39% vs ~62%).  This is toy manufacturing we're talking about.  How are COGS > 60%?  Oh right they own their own factories.  What is this, 2001?

- Distribution.  Not as valuable given migration to internet shopping, but it's still valuable.  Toys R Us is going away but not really.

- Brands.  Again, not as valuable given how children are spending more time on electronics, but there is still value.  Plus these brands are untapped (think Paw Patrol vs. Barbie, Cars vs. Hot Wheels).

 

I'm sitting on the sidelines right now.  I'm guessing the next earnings call will prompt another leg down in price.  A big part of my decision to establish a position will be based on what the new CEO says.  He's got a multimedia background, so if he's intent on unlocking the value of the brands through multimedia development I think it's probably the right play.  But only if they can execute well on the previously announced cost cutting initiative.

 

[Cigarbutt]

This thing is a train wreck.  4th CEO in 4 years.

 

I believe there is value here, but there's also lots of room to destroy value over the next couple of years, as has been the recent trend at Mattel.

 

What I see as opportunities:

- COGS are 60% higher than their closest competitor (~39% vs ~62%).  This is toy manufacturing we're talking about.  How are COGS > 60%?  Oh right they own their own factories.  What is this, 2001?

- Distribution.  Not as valuable given migration to internet shopping, but it's still valuable.  Toys R Us is going away but not really.

- Brands.  Again, not as valuable given how children are spending more time on electronics, but there is still value.  Plus these brands are untapped (think Paw Patrol vs. Barbie, Cars vs. Hot Wheels).

 

I'm sitting on the sidelines right now.  I'm guessing the next earnings call will prompt another leg down in price.  A big part of my decision to establish a position will be based on what the new CEO says.  He's got a multimedia background, so if he's intent on unlocking the value of the brands through multimedia development I think it's probably the right play.  But only if they can execute well on the previously announced cost cutting initiative.

 

FWIW, here's my opinion.

Is Mattel a typical contrarian pick?

 

The positives:

-powerful and valuable brands

-distribution infrastructure

 

Just like Lego did a while ago after losing its direction, it is likely that Mattel could relatively get its mojo back in terms of profitable innovation and licensing deals.

 

The negatives:

-there is a secular transition to technology

-residual free cash flow power from traditional brands going to technlogy vs competitors (little barriers to entry and different industry dynamics) is unlikely (IMO) to result in a sustainable moat

-growth assumptions rely on the growth in traditional toys markets in emerging economies (may not happen or may be +/- skipped).

 

According to various surveys, most kids aged 2-12 now "own" tablets and smart phones. The toy story is becoming different.

 

Industries change and Mattel may be consolidated into more agile players.

 

So, IMO, relative downward trend expected. Path may be altered punctually by a premium offered by a competitor along the way.