Imagine celebrating your 58th birthday and those in attendance gushing over your eternal youth: “You don’t look a day over 21,” they concur.
It happened last month, and those gushing weren’t flunky sycophants attempting to curry favor. Barbie, Mattel Inc.’s (NASDAQ: MAT) most iconic toy, turned 58 last month, having debuted in March 1959. Can anyone argue Barbie has aged less than splendidly?
But looks take you only so far. People quickly tire of the attractive husk backed by nothing other than libertine habits. Production matters in the end.
The Barbie line maintains both youth and production. The dolls and accessories generated $971.8 million in sales — 16% of Mattel’s gross sales — in 2016. This was a 7% increase over the $905.9 million in gross sales in the prior year.
Barbie matters to Mattel, to be sure. But she’s merely a queen, she’s not a dictator. Mattel is more than Barbie. Mattel also manufactures and sells toys for the more fidgety sex and for young children.
For the boys, Mattel offers Hot Wheels and Matchbox vehicles and adult-figured dolls based on World Wrestling Entertainment (NYSE: WWE) characters. For younger children (of both sexes) Mattel offers the popular Fisher-Price toys.
Fun Toys Are a Serious Business
Keeping the kids occupied is big business. Mattel sold $5.5 billion worth of toys, accessories, games, and entertainment last year. That’s a lot of playthings, but it’s not as many playthings as were sold in the recent past. Sales have trended lower.
In 2015, Mattel sold $5.7 billion of playthings; in 2014, it sold $6 billion worth. Earnings have trended in the same direction: Last year, Mattel produced EPS of $0.92. Two years earlier, EPS was $1.45. If we look at the year before that, 2013, we find EPS was $2.58.
Mattel’s share price has trended in the same direction as sales and EPS — down. In 2013, Mattel shares were changing hands at around $45 each. Today, you can buy a share of Mattel stock for under $26.
Mattel first set investors on their heels when it lost a key licensing pact with Disney (NYSE: DIS) in 2014. The contract gave Hasbro the right to sell Disney princess toys from films such as “Frozen,” “The Little Mermaid,” and “Aladdin.”
A surging U.S. dollar further dampened both reported financial results and investor enthusiasm. U.S. dollar appreciation against most currencies shaved 7% off European sales, 10% off Latin American sales, and 2% off Asia-Pacific sales.
What About the Mattel Dividend?
Of course, the Mattel dividend is the most pressing concern for income investors. Is the $1.52-per-share annual dividend that generates the 6% yield sustainable?
I think it is. Yes, current earnings fail to cover the Mattel dividend, but free cash flow does. Mattel generated $2.45 per share in free cash flow last year. What’s more, management was downright sanguine about the dividend at the January meeting with analysts.
When asked about the Mattel’s ability to sustain the Mattel dividend, Christopher Sinclair, company board chairman, replied, “I think we feel at this point reasonably comfortable. We’re okay there and we always reevaluate. At this point, I think we’re quite comfortable [with the current payment].”
Perhaps the sanguinity is backed by legitimate confidence in the future. A new CEO with a strong marketing background was appointed in February. The R&D team continues to evolve Barbie. The latest evolution introduced three new body types and a new line of accessories.
New licensing partnerships should also invigorate sales and investor enthusiasm. Key licensing agreements have been confirmed with DC Comics, Jurassic World (which Mattel recently won from Hasbro), and Minecraft.
A new strategic partnership with Alibaba (NASDAQ: BABA) to sell Mattel toys in China could be the growth game-changer, though. The partnership gives Mattel closer access to Alibaba’s 440 million active buyers. The multi-billion-dollar toy category in China is highly fragmented. Mattel and Alibaba will begin product development immediately, with initial sales planned for mid-2017.
As growth resurfaces, investor enthusiasm for Mattel will also resurface. I expect detractors to convert to supporters sooner than later. Given the brand power behind Barbie, Hotwheels, and Fisher-Price, management really has no reason not to turn around operations and investor fortunes sooner rather than later.