TIME RUNNING OUT FOR MATTEL?

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Back in June I wrote an article about Mattel and their troublesome outlook. Yesterday a new article from Forbes increased my worry for the future of the company. In the last article, Mattel was in a new cost-cutting phase with hopes to secure a brighter future. Unfortunately, the future is more bleak than originally thought thanks to a new update about the company.

Mattel is struggling with its $3 billion debt and is facing a new probe as to whether it violated federal securities laws.

Mattel has lost roughly two-thirds of its overall value over the past three years and faces an uphill climb as it tries to turn itself around with rapidly declining sales, operating losses, high-profile executive departures, and losing $531 million on sales of $4.5 billion last year.

If hedge funds, who are by far the biggest investors, pull out amid the propagation of recession fears, Mattel’s stock could go to zero, says The Edge.

Not only is the company suffering from financial issues, but from unstable leadership issues as well. Former CEO Margaret Georgiadis stepped down only 13 months in the job, and new CEO Ynon Kreiz took over in April 2018. He has been widely criticized for his $18.7 million pay packet.

To top it all off, a 10% tariff goes into effect December 15 on toys. China supplies two third of toys for Mattel. The 10% additional tax could hurt Mattel’s margins if the company is unable to pass on these cost to consumers. This cost if it goes into effect, will have damaging consequences for an already tight Mattel.

Securities Fraud Issue

Part of Kreiz’s plan to bring the company out of its troubles was to try and sell to MGA Entertainment. However, that was rejected by MGA in June. A whistleblower halted its planned bond sale in August, igniting a collapse in the share price while at the same time sparking a securities fraud probe which may have serious consequences for the board.

On August 8, 2019, Mattel informed the US Securities and Exchange Commission (SEC) that they are investigating an anonymous whistleblower letter received on August 6, thereby terminating its debt issuance intended to refinance its notes ($250m debt due October 2020 and $350m due August 2021).

Shares dropped -15.8% the following day compared to the S&P MidCap 400 Index’s own drop of -1.1%. Block & Leviton LLP, a securities litigation firm, is said to be investigating whether Mattel and its officers or directors violated federal securities laws.

Mattel has had its fair share of major controversies and has been saved from failure on two separate occasions. Its founders Elliot and Ruth Handler were given 41-year suspended sentences and were forced out of the firm in 1974 after they pleaded no contest to a claim their CFO deliberately issued false and misleading financial reports.

The company almost landed itself in bankruptcy in 1983 after dipping its toes into the video games field (which ultimately failed), but was saved after John W. Amerman revitalized the company through an emphasis on core brands.

Time for the Numbers Crunch…

The structural simplification program detailed on the company’s website is aimed at reducing costs, thereby making Mattel a profitable company from FY20E onward after making losses for the last two years (adjusted net loss of $510m in FY17 and $422m in FY18). In addition, the net debt continues to rise from $1.5bn in FY16, $2bn in FY17, and $2.2bn in FY18 to the current $3bn (Q2FY19). The Edge believes the low levels of profitability until FY20E is unlikely to reduce the debt levels, and any downturn in the environment will be disastrous for the toy maker.

Is their Hope for Mattel?

There is still hope for Mattel though. In my opinion it doesn’t look very good and they are hedging their bets on things that have minimal chances of succeeding. Mattel is hoping that the Margot Robbie Barbie film will bring back the appeal of the character and toys to children and spark a sales boon.

Frozen 2 is a huge license for the company and should see major dollars at the box office. Will it translate into toy purchases? I am sure it will, but will it be enough to actually help the bottom line? That is yet to be determined.

There seems to be an effort by Mattel to right the ship, but with little management experience, a super high debt load, lack of initiatives in growing the business, and frankly, a toy market that just doesn’t command the time and attention of kids as it once did, it could be good night for a company that has been a staple of the toy aisle for decades.

Masters of the Universe SDCC 2019 Exclusive

Frankly, my real worry is the effect that this will have on the Masters of the Universe brand. This once was and should rightly be now, one of their biggest franchises. Loads of missteps have turned the once famous franchise into an afterthought for most.

A new movie is in the works by Sony, but even that company has started and stopped production several times. Even now, Sony is looking at releasing the film on Netflix instead of directly to theaters. This isn’t necessarily a bad thing though. Streaming platforms are taking off and are slated to be the future of entertainment. The troubling issue is the lack of decisiveness on what to do with the film. I am sure that Mattel’s troubles might also be playing into these decisions as well.

Hopefully, whatever happens to Mattel, Masters of the Universe will either be sold to a company that will take care of it and nurture it, or Mattel makes it out of this rut and brings it back to the forefront of their business.

In any case, Mattel’s future is certainly up in the air right now, and if the right things fall into place (which many have already started falling), then Mattel might not be around in the near future.

About Mattel:

Mattel, the largest toy company in the world, was founded in 1945. It produces a huge range of dolls, toys, games, and video games for boys and girls of all ages. In addition to the company’s very-well-known lines like Barbie and Hot Wheels, Mattel also provides merchandise under license to some of the world’s most famous properties. Many of the firm’s products have become a part of our culture and one would be hard pressed to find any adult in this country who has not owned, played with, or at least touched one of Mattel’s myriad of toys.

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