After Mattel's ‘Hard Choices,’ Investors See Improvements Coming

(Bloomberg) -- Mattel Inc., desperate to break out of a deep funk, resorted to drastic measures last year, from killing entire lines of toys to aggressively clearing inventory and writing down assets.

The result was a fourth quarter that was even worse than what analysts expected: It posted a surprise loss, revenue plummeted 12 percent and gross margin collapsed.

But with the shares surging as much as 10 percent on Friday, it's clear investors believe the company's narrative that the skies are finally clearing.

“A lot of what we saw in the numbers was not poor performance; it was taking the necessary steps to set up the company for growth going forward,” said Gerrick Johnson, an analyst for BMO Capital Markets. “I was really encouraged.”

Mattel rose as high as $16.90 on Friday, after falling 40 percent over the past 12 months.

Since arriving from Google a year ago, Chief Executive Officer Margo Georgiadis has revamped management, including a new head of finance, and altered the merchandise lineup by exiting smaller brands and axing some products that were still in development. While the idea is to refocus the company on its biggest properties, it still hasn't revived the toymaker's broader performance.

But Barbie may be an early indicator that the strategy is paying off. The company's biggest brand posted a 9 percent gain in sales last quarter. The improvements at Barbie still haven't been reflected in some areas, however, with other girls properties plunging 35 percent.

‘Brand Momentum'

“We have real quality brand momentum leading us into 2018,” Georgiadis said in an interview. “In 2017, we really had to clear the decks.”

Mattel pulled back on Christmas-season shipments to its retail partners, even though it hampered revenue, to reduce bloated inventories at chains. At the end of the fourth quarter, retail inventories of its biggest brands were down more than 20 percent.

“There had been a prior strategy, which I inherited, and it clearly wasn't positioning us the way it needed to at retail,” Georgiadis said. “We had pursued a more promotional strategy.”

Reducing Discounts

In the retail industry, promotions refer to discounts -- which have contributed to a lessened cachet and lower margins for some companies. Mattel, citing the recent performance of Barbie and Fisher-Price, now predicts the changes will result in revenue picking up and more full-price sales.

Their success will ultimately depend on how good its products are this year and whether it can show retailers that it can once again produce top-performing toys, according to Johnson.

“Just because you clear stuff out, doesn't mean you're going to ship more,” he said. “At least they have a chance of shipping new product.”

The company is also starting planned cost cuts of $650 million over the next two years. A larger chunk of this is now expected to happen in 2018.

Toys 'R' Us

Still, the September bankruptcy of Toys “R” Us Inc. has made Georgiadis's job harder. The world's biggest toy retailer was also Mattel's second-largest customer, after Walmart Inc., and its troubles were a big reason why Mattel's revenue in North America sank 17 percent last quarter.

Mattel's biggest rival, Hasbro Inc., also was hurt by the bankruptcy of Toys “R” Us. But it's weathered the challenges more effectively, helped by the revival of its Transformers and My Little Pony brands. In fact, Hasbro overtook Mattel in the past year as the No. 1 toymaker in terms of sales.

There was speculation that Hasbro would ultimately acquire Mattel, but an offer hasn't materialized.

Mattel's latest quarterly results, released after the close of markets on Thursday, showed revenue declined to $1.61 billion, short of analysts' average estimate of $1.69 billion. The company also posted a loss of 72 cents a share excluding some items. Analysts had estimated profit of 16 cents.

“We've made the hard choices,” Georgiadis said, “to get this business on track.”

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Jonathan Roeder, Lisa Wolfson

©2018 Bloomberg L.P.