18 Months ago, my son was born. As any other passionate parent, I end up buying an insane amount of toys. Why not, it’s fun to watch your child’s first reaction with every new toy, even though they prefer the packaging over the actual toy. But when it comes to toys starting from a few months of age, Mattel is one of the market leaders with their Fisher Price brand. As a curious person, I decided to investigate Mattel a bit further, and see if it’s a worthwhile stock to buy.
The simple answer is that Mattel is a dying company and I see nothing but downside ahead. The stock remains quite popular amongst retail investors, even though I think that retail investors should not hold any exposure to this company.
First of all, the previous CEO, Ms. Georgiadis was replaced by new CEO Ynon Kreiz in April 2018. This came at the same time as the Toys”R”Us liquidation, which led Ynon to immediately lay off 2,200 jobs as revenues declined by more than 10%. A further contributor to the revenue decline were the methods employed by the previous CEO: Ms. Georgiadis persuaded retailers to take on more inventory on longer credit terms, and this inventory had to be sold off before further revenue could be created. It is a positive sign that Mattel finally has a capable CEO, after years of high executive turnover.
Between 2010 and 2014, a bit more than $1.7 billion has been spent on buybacks. The problem is: Mattel used debt to buy back stock. They didn’t generate enough cash to buy back stock, so they used leverage to do so. On top of that, they had to suspend their dividends late 2017. If you can’t generate enough cash, or expect to do so in the near future, just don’t buy back stocks. It doesn’t show a lot of confidence to investors. Consequently, Moody’s and S&P Global Ratings downgraded Mattel’s credit to junk.
Although the company might struggle with aspects such as a declining market, lack of innovation, trade tariffs for importing toys and such, the most basic fundamental should at least be right,..
A toy company for young children should at least know and care about their target market. If you do not have any empathy for new parents and their children, it will not work out in the long term.
This lack of empathy is shown in their handling of Fisher Price’s Rock ‘n Play Sleeper. The story is best explained here by the New York Times. The sleeper has led to 32 infant deaths and hundreds more life- threatening situations and serious injuries. This has been going on for years, and Fisher Price has always been aware of it, but the sleeper was just making too much money for them.
If you look at it with some common sense, the first death should worry the company. It might be their fault, or it might not be. If it happens a second time, there should be some more investigation. How about the third, fourth or fifth death? Do we really need to wait for 32 infant deaths and a mandatory recall to take some action? On top of that, they blamed customers for not following the safety guidelines, even though the NYT investigation has proven that the deaths happened when using the sleeper as advertised by Fisher Price.
I might have some bias as a parent myself, but I am sure most of you feel the same way. Though I am investing to make money, I refuse to invest in a company that handles such a sensitive situation this way. Honestly, how can you be so obsessed with easy profits that you knowingly let infants die in your product. They knew the exact product, the deaths were known for years, and they kept it going. What do you tell a parent when their baby died in your product and you knew the risk was there? Once again, that is enough for me to completely abandon a company.
Those who remain in a long position might disagree and have their own argumentation as to why the future of Mattel is brighter than I think it is. Their primary reason is a shift towards media entertainment.
Mattel holds the licenses for Disney’s Toy Story and Cars franchises. But this is just a game of piggybacking on other franchises, it does not give them any big power. The licenses for larger franchises from Disney such as Star Wars, Marvel and Princess have been given to Hasbro. On top of that, Hasbro (their main competitor), successfully managed to capitalize off their own toy characters like the Transformers.
Meanwhile, two of Fisher Price’s most successful brands (Barbie & American Girl) have been taken over by the Frozen franchise. If Mattel wants to take over new franchises, Disney will probably require a 20-25% royalty, even though Mattel only spent 7% on royalties last quarter. It’s up to Mattel to determine whether they want to benefit their top line in exchange for bottom line pain, which are their cost cutting efforts.
Mattel has the opportunity to develop their own shows based on their own toys (doubtful) or develop an entire new show for which they can develop a new series of toys. In the end, movies do give a story to the plastic toys. This could help them survive a bit in the long-term. Mattel just has to be cautious that they don’t stray away from who they are.
In my opinion, based on Mattel management decisions, execution of strategies, and their product range, I do not think that they are capable of turning the company around. I actually think that their current revenue-generating brands will significantly decline in the forthcoming years. The stock price is likely to decline further to less than $3.50 a share within 5 years, a 65% decline from where it’s trading at the end of May.