The fourth quarter earnings report from toy maker Mattel (MAT 16.77, +1.45, +9.5%) was nothing special. Net sales declined 12.2% to $1.61 billion and the company reported an adjusted operating loss of $164.8 million, or $0.72 per share, which was well shy of analysts' average expectation.
Shares of MAT, however, are doing something special in the wake of the fourth quarter report and in the face of a down market. They are rallying, yet that wasn't the case at the open when the stock dropped 5.7% to 14.44.
It is difficult to pinpoint the reason for the abrupt turnaround. Several factors could be at work:
- Short-covering activity given the stock's resilience to initial selling efforts
- Speculation that Mattel's disappointing results make it a ripe takeover candidate (prior press reports have suggested Hasbro (HAS 93.91, -1.83, -1.9%) might be an interested acquirer); and
- A burgeoning belief that 2017 will be as bad as it gets for Mattel
Time will tell if the latter rings true, yet Mattel said on its conference call that it expects to improve profit trends in 2018 and that it does not expect costs that impacted the fourth quarter to recur at the same levels in 2018 -- if at all.
Mattel is coming off a year in which it reported a 10% decline in adjusted net sales, an 850 basis points contraction in its adjusted gross profit margin of 38.3%, and an adjusted operating loss of $167.1 million, or $1.08 per share, so it is fair to say it has a low bar to hurdle in 2018.
The company's struggles have been a byproduct of weak demand for its products, heightened industry competition, changing consumer preferences, and the Toys 'R Us bankruptcy.
For the fourth quarter, which encompasses the key holiday selling period, worldwide gross sales were up 1.1% for Mattel Girls and Boy Brands, helped by a 9% increase for the Barbie brand, down 12% for Fisher-Price Brands, down 23% for American Girl Brands, and down 25% for Construction and Arts and Crafts Brands.
There is a lot of runway, then, for improvement. That's not just the case for the company, but its stock as well.
Notwithstanding today's gain, MAT is down 35% over the last 52 weeks and down approximately 65% from the high it hit in 2013, demonstrating that it has been anything but fun and games for shareholders.