Stagnant Earnings Resurrect Mattel Accounting Query
Amidst allegations that it has played fast and loose with its accounting, Mattel Inc. on Tuesday announced a rare occurrence: a flat quarter.
The El Segundo-based toy giant warned that “sales volume and earnings for the second quarter will be approximately the same as last year”--a significant disappointment for a firm that has religiously generated 15% to 20% profit growth.
The news sent Mattel shares slumping $3.125 to $26 on the New York Stock Exchange, a drop of nearly 11% from Monday’s record closing high.
The company didn’t explain the weak quarter, but analysts said Mattel may have been hurt in part by wary U.S. retailers’ decision to maintain ever leaner inventories of toys this summer, away from the peak Christmas selling season.
“This is an industry phenomenon, not a company-specific problem” for Mattel, said Gary Jacobson, analyst at Jefferies & Co. in New York.
In addition, European sales have been below expectations this spring, the stronger dollar isn’t helping Mattel, and toy sales tied to Walt Disney Co.’s “Hunchback of Notre Dame” may reflect the film’s middling debut, analysts say.
Yet in a brief statement, Mattel Chairman John Amerman insisted that consumer demand for the company’s toys overall remains “excellent” and that Mattel still expects an earnings rise of “at least 15%” for 1996, indicating that it plans to make up the second-quarter shortfall in the second half.
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So why the sharp drop in the stock? Mattel was stung in April by revelations that former Senior Vice President Michelle Greenwald, in a suit against the firm, alleged that questionable accounting inflated earnings growth in recent years.
In announcing a flat quarter, Mattel on Tuesday may have caused some investors to infer that the company has suddenly turned more conservative in its accounting, and thus that Greenwald’s accusations may hold water. “The market may have interpreted it that way,” conceded Harold Vogel, analyst at Cowen & Co. in New York.
Mattel wouldn’t address the accounting question, noting that a report due soon will do so: After the Greenwald accusations surfaced, Mattel asked attorney Gary Lynch, a former Securities and Exchange Commission enforcement chief with an impeccable reputation, to study its accounting practices and render an independent opinion.
Lynch is on vacation until Monday. Mattel says it doesn’t know when he will release his report, but the talk on Wall Street is that it could be ready before the company officially announces second-quarter earnings, the week of July 15.
“We think [Lynch] will vindicate Mattel,” analyst Jacobson says confidently. As for the stock, he notes that every significant sell-off in Mattel in the ‘90s has been a great time to buy.
Meanwhile, Greenwald abruptly changed attorneys in May and is now represented by Joel Kozberg. He declined to say why she dropped her original attorney, Robert Ronne. Ronne also declined comment. Kozberg confirmed that Greenwald is no longer employed by Walt Disney Co., which she had joined after leaving Mattel.
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Grand Prix Goes Public: The initial public stock offering of Grand Prix Assn. of Long Beach, which puts on the Toyota Grand Prix each spring, may be having engine trouble. The company sold 1.35 million shares on June 25 at $10 apiece, but the price has already sunk to $9.50 on Nasdaq, after initially rising as high as $11.50.
Racing stocks were hot earlier this year: Penske Motorsports, owner of two Eastern speedways and developer of the new California Speedway in Fontana, went public at $24 in March and quickly soared to $40.75. But it has faded, to $27.50 now.
Grand Prix is, so far, a one-event company with the annual Toyota race, and its revenues were all of $11.6 million in 1995. The company is using part of the proceeds from the offering to develop speedways near St. Louis and Memphis, Tenn.
Who buys such a high-risk stock? Van Kasper & Co., the lead underwriter, estimates that the deal was sold half to institutions and half to individuals. The latter group may just be interested in bragging that they have a stake in a premier, one-weekend-a-year racing event. And for the time being, with no meaningful sales or earnings likely for Grand Prix before next spring’s Long Beach race, that may be just about all its owners can say about the stock.
Revving Down?
Grand Prix Assn. of Long Beach went public last week, but if recent stock moves for two other racing stocks are any indication, investors interest is fading. Weekly closes:
Penske Motorsports: Tuesday: $27.50
Speedway Motorsports: Tuesday, $26.88
Penske trades on Nasdaq, Speedway on NYSE.
Source: Bloomberg Business News
