Narrow-Moat Mattel Failed to Escape the Grinch’s Holiday Grip, Leaving Shares Undervalued

We plan to lower our $27 fair value estimate for narrow-moat Mattel by a high-single-digit rate, as weak holiday shipments are likely to persist in the front half of 2023, providing ongoing margin compression. In the fourth quarter, net sales declined 22% at Mattel, worse than the 4% downtick we had forecast, but in line with competitor commentary, with narrow-moat Hasbro predicting a 17% downtick and no-moat Spin Master foreseeing a 25% contraction in their respective sales bases for the same period. Weakness was widespread as consumers cinched wallets to combat inflation, with gross billings of dolls contracting 27%, infant, toddler, and preschool down 33%, and challenger categories lower by 26%. Vehicles were the one bright spot, up 6%. However, unlike its peer group, Mattel seemed to feel the pinch on operating margins disproportionately, at 6%, down from nearly 15% last year. This was largely attributable to an adjusted gross margin that contracted 620 basis points, to 43%, a low-water mark not seen since 2019, stemming from both discounting (350 basis points), as well as higher inflation, lower fixed cost absorption, and higher royalties.