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What Could Hurt Mattel’s Earnings in the Near Term

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Earnings continued to slide

Mattel’s (MAT) earnings continue to slide as pressure on profit margins from lower sales dented the company’s bottom-line performance. Moreover, recently, Toys “R” US filing for bankruptcy and retailer lowering their inventory further exacerbated the situation. Analysts expect Mattel to report a loss per share in 2017, driven by lower sales and subdued margins.

In the near term, the underperformance of several brands—including Barbie, Monster High, Mega, and Ever After High—are expected to hurt the company’s EPS. Plus, an adverse mix, lower licensing income, higher advertising and promotional expenses, and discounts to clear inventory could worsen Mattel’s bottom-line results.

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In comparison, rival Hasbro’s (HAS) bottom line gained from sales improvement across all brands owing to its multi-platform content strategy coupled with investments in innovation and omni-channel offerings. However, adverse mix, a tough retail environment and Toys “R” US filing bankruptcy remained a drag.

Outlook for 2018

Barring near-term challenges, analysts expect Mattel’s bottom line to return to growth in 2018, driven by cost-savings and SKU rationalization. The company’s focus on streamlining its portfolio of brands should further support its EPS growth rate. Mattel plans to save $650 million over the course of next two years by eliminating costs in manufacturing and marketing and lowering unproductive SKUs.  Also, the company’s sales are expected to stabilize in 2018, driven by innovation and expanded distribution. Meanwhile, the company’s sales in emerging markets, mainly China (FXI), are projected to benefit from its digital partnership with Alibaba (BABA), BabyTree and JD.com (JD), which in turn should cushion its bottom line growth.

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