Lower ’98 Earnings Expected From Mattel
Mattel Inc., hurt last year by a drop in reorders from retailers, is expected to report today flat revenue and lower earnings for 1998, and analysts said the shortfall could lead to a restructuring and layoffs in the next few months.
In December, the world’s leading toy maker warned that its 1998 earnings would not meet analysts’ expectations. The El Segundo-based company said it expected earnings of $1.20 a share, whereas the average estimate of analysts polled by First Call Corp. was $1.78 a share. It was the company’s fourth consecutive quarterly profit warning.
Analysts expect Mattel to report today fourth-quarter earnings of 21 cents a share, a 67% decline from the 64 cents earned for the period in 1997.
“Since there’s been a revision in sales expectations, they’re looking hard at selling and administrative expenses as an area for cost cutting,” said Margaret Whitfield, analyst with Tucker, Anthony & R. L. Day Inc. “They have hinted there would be a restructuring charge, but that charge is expected to be closer to the timing of a charge related to Mattel’s planned merger with the Learning Co.”
Mattel said in December that it would buy Learning Co., which makes educational software, for $3.8 billion. Mattel has said the deal, expected to close in March or April, should add to 1999 earnings.
On Monday, Mattel shares rose $2.38 to close at $25.06 on the New York Stock Exchange.
“It may be up because Mattel is getting its bad news out of the way. It’s good that 1998 is over,” said Martin Romm, analyst with Credit Suisse First Boston.
But Mattel may have underestimated its earnings potential for 1999 when it warned in December that holiday sales would be less than expected, Sean McGowan, an analyst with Gerard Klauer Mattison, told Bloomberg News. McGowan, who’s rated the shares “hold” since November, raised his opinion to “buy” on expectations that profit and sales growth will resume.
At the time of the warning, the company also said it expected 1999 earnings of $1.50 a share and revenue growth of 7%. McGowan, who said he expects sales to rise 8%, hasn’t raised his estimate above Mattel’s $1.50 forecast.
Mattel has been hurt by cuts in orders by traditional toy retailers, particularly by Toys R Us, as more children and their parents buy toys at stores such as Wal-Mart instead.
A spokesman declined further comment Monday. A source close to Mattel told Reuters, however, that a restructuring charge could occur around the first quarter tied to a charge related to the Learning Co. transaction.
Jill Barad, Mattel chief executive, told analysts in December that Mattel was looking hard at costs.
“We currently have a cost structure in place that was originally designed to support a much higher level of sales volume next year. Over the next few months, we’ll be evaluating this structure for rationalization opportunities that will bring our overhead down to more appropriate levels,” she said. Whitfield said Mattel’s sales and administrative costs total 18% of sales. “They would like to see it closer to 14% to 15% of sales,” she said.
Analysts noted that the global economic slowdown, particularly in Latin America, has put a dent in American toy makers’ sales. Latin America alone accounts for as much as 10% of U.S. toy makers’ sales.
