Letter to the saver

Mattel, M&A and recovering margins give Barbie appeal

A good quarterly and rumours of extraordinary transactions have rekindled attention on the company, which, however, faces a weak market

class="dinomecognome_R21"> Vittorio Carlini

12 August 2024

6' min read

Le ultime da Radiocor

8 May, 18:42
Borsa: Milano (+2,2%) regina della settimana con rally Prysmian (+18,8%)
8 May, 18:20
Intel: accordo con Apple per produzione chip, titolo vola a +15%
8 May, 17:37
Delfin: per holding 'ricorso Basilico e' infondato, non incide su passaggio quote'

Vedi tutte

6' min read

On the one hand, quarterly revenues which, also consistent with a difficult market, dropped (or at least remained flat). On the other hand, margins which, in the wake above all of efforts to reduce costs, are rising. All this with rumours of possible M&As attracting the attention of speculation. Thus can be summarised the state of the art ofMattel.

The dynamics of accounts

The toy company, which among other things produces the famous Barbie doll, recently reported its numbers for the second quarter of 2024. These were marked by diverging trends. Turnover stood at USD 1.079 billion, down 1% compared to the same period in 2023 (on a constant currency basis, the change is zero). Profitability, on the other hand, was up. The industrial margin was 49.2%, compared to 44.9% a year earlier. Adjusted earnings per share also improved. Earnings per share (EPS), again in the second quarter, was $0.19 (it had been $0.10 as at 30/6/2023). The latter figure, moreover, beat consensus estimates (FacSet indicated $0.17). A fact that contributed to the share price rising - at least in the session following the publication of the accounts - on the stock exchange. On closer inspection, the different performance of the income statement items is confirmed on a half-yearly basis. Net sales (USD 1.89 billion) still fell by 1%. Operating income, on the other hand, was positive at 47.7 million, compared to the loss incurred in the first half of 2023. In short: in 2024 Mattel is characterised by weak revenues but manages to improve margins.

TRIMESTRI A CONFRONTO

FATTURAZIONE LORDA E PRODOTTI

LA DINAMICA DEL MARGINE INDUSTRIALE

DATI DI BILANCIO E POSIZIONE FINANZARIA

Sector trends and costs

Is this dynamic surprising? The answer is no. The global toy market has been beating around the bush in recent times. Last year, according to Circana, the sector stood at $108.7 billion, down 2% compared to $110.8 billion in 2022. Mattel itself - which in any case claims to be gaining market share - says that, in 2024, the toy industry is expected to see a modest decline (although, in 2025, there could be a recovery). In general, however - is the indication of the experts - the long wave due to the 'confinement at home' for Covid (which drove the desire for dolls and cars) is exhausted. Hence the difficulties of companies in the sector, including Mattel.

That Mattel, however - here are the reasons for the recovery in profitability - is implementing (not as of today) a programme of rationalisation and reduction of expenses. To assess the commitment on this front, one can analyse which items contributed to the 430 basis points improvement in the Gross Margin in the second quarter of 2024, compared to the same period in 2023. Well: 120 basis points belong to the 'Opg' (Optimising for profitable growth). That is to say: the multi-year cost-saving project that aims to reduce gross charges annually by 200 million by 2026. Of these savings: about 70 per cent concern the cost of sales (and thus the gross margin); the remaining 30 per cent involve selling and administrative expenses.

That said, another factor that helped improve (+40 basis points) the industrial margin was inventory management. Here, it should be emphasised, the excess 'inventory' accumulated in the wake of the euphoria over the boom in demand for toys following Covid is still weighing heavily on customer demand. About a year ago, some analysts claimed that the 'de-stocking' phase was complete. In reality, the negative environment is still there and is one of the contributing factors to the weakness of the reference market. This is one of the reasons why Mattel has set itself the goal of reducing inventories and thus aiming to improve its Net Working Capital. Beyond this, it must however be noted that support for the industrial margin also came from an exogenous variable: the drop in inflation. The deflationary trend helped by 110 basis points.

Markets and toys

So far, some considerations on the profit and loss account, reference market and cost pressures. The saver, however, also looks at the dynamics of individual products. The company, on this subject, divides the business into four large areas. In the first are dolls (where we find, of course, Barbie). To the second, on the other hand, are so-called vehicles. There are various brands in this section: from Hot Whells (with the legendary high-adrenaline tracks) to Matchbox die-cast vehicles to toys based on the Disney Pixar 'Cars' films. The third area, on the other hand, includes products for children and pre-schoolers. Finally: Action figures (toys linked to films or TV series), board games and construction toys. It was precisely this last product division that was characterised by an increase (+1%) in Gross Billing (revenues invoiced to customers without taking into account, for example, trade discounts) in the second quarter of 2024. The indicator for 'vehicles' was also positive. These achieved an increase of 2% compared to the same period in 2023. On the negative side, on the other hand, were baby and pre-school solutions (-6%) and dolls (-6%).

In particular, this latest slowdown - confirmed at the half-yearly level - appears significant. It is well known that, about a year ago, there was a lot of hype around Barbie thanks to the film of the same name directed by Greta Gerwig. The film helped to create new interest in the famous doll, so much so that sales received a strong boost. In 2023, gross sales of all dolls - supported by the iconic toy itself - grew by 15%. However, on the one hand, this was - again in 2023 - 'only' enough to compensate for the decline in the other categories (with the exception of vehicles); and, on the other hand, it has gradually lost strength over time, arriving at the current context where Barbie - together with brands such as Disney Princess and Disney Frozen - has slowed down in sales. True! The comparison with a year ago is of little significance precisely because, at that time, it was in the midst of the Maggie Margott & Co. euphoria. However, the point about the weakness of dolls remains valid.

Entertainment

Against this background, the company has not only entered into multiple partnerships to produce film-related products, but has also decided to aim to expand the model to the company's other brands. In this sense, for example, it may be recalled that - in addition to projects involving Hot Wheels - the group is collaborating with Amazon with a view to the release of a 'Maters of the Universe' film in 2026. The strategy, more generally, is to expand the business to the world of entertainment. By doing so, on the one hand, the group is able to strengthen the community dimension around the brand, consolidating the emotional bond with the brand; and, on the other hand, it is able to expand the customer base and, thus, (in theory) increase turnover.

However, the effects on the income statement have not been too linear and, in general, sales have not received the desired boost so far. Against this background of weakness, one can well understand why - last February - the activist fund Barington Capital called on Mattel - among other things - to find strategic alternatives for its Fisher-Price and American Girl brands. Not only that. In July, according to a Reuters rumour, Catterton private equity (the vehicle linked to Lvmh) made a purchase proposal to the Barbie company. The latter, indicating that it does not comment on the rumours, emphasised that its strategy remains one of stand-alone growth. Beyond the obvious reaction, the market's ears pricked up. Not least because this is not the first time Mattel has been involved in M&A speculation. On several occasions, in fact, there has been speculation about a merger with Hasbro. The option is fascinating but, inevitably, it comes up against antitrust obstacles. That being said, the possible merger - given the weakness of the toy world - cannot be filed under 'fantasy finance'. It is a catalyst - speculative - for the stock, which, after a down year, has started to recover. The do-it-yourselfer must, of course, remain cautious and wary of such situations. This is also because, although Seeking Alpha indicates that Mattel's multilliums are not expensive compared to the reference sector, situations related to possible M&A must be handled by experienced and navigated traders.