Mattel 3rd-Quarter Estimate Bad News for Investors, CEO
Onetime toy king Mattel Inc. warned Wall Street on Monday that it expects sharply lower-than-expected earnings for its third quarter--a performance that Chief Executive Jill E. Barad can ill afford, analysts said, following Mattel’s tough time last Christmas and the toy industry’s general malaise.
Mattel blamed its bad news on a series of problems at recently acquired computer software maker Learning Co. The warning sent Mattel’s shares tumbling 30% and renewed speculation about Barad’s removal.
One Wall Street watcher suggested that the ouster of Mattel’s first woman leader is all but inevitable, as the company shows little sign of emerging from a protracted slump. Based on the response from stockholders, another analyst handicapped Barad’s survivability at 30%.
But an institutional investor, with 3.77 million Mattel shares, said he would not join what he called a “sea of condemnation” against Barad, the marketing whiz who more than a decade ago returned the sagging Barbie division to international popularity.
But the harsh Wall Street reaction to Monday’s news could prove to be more than Barad can withstand, said Erik Gustafson, a senior portfolio manager at Stein Roe & Farnham Inc. in Chicago.
“This certainly occurred on the present management team’s watch--the Learning Co. was their acquisition, and quite frankly, they will bear the responsibility for it,” Gustafson said. “There are certainly issues that all owners of Mattel, both individual and institutional, have with the present management team. The question is, can they deliver? And the answer so far has been no.”
In its announcement, El Segundo-based Mattel forecasts as much as a 55% third-quarter earnings shortfall compared with what analysts polled by First Call Corp. had anticipated. It expects to earn between 30 cents and 40 cents per share, with a 2% to 4% decline in revenue compared with last year’s third quarter. But the company, which will report its official results Oct. 21, gave Wall Street scant details on its problems. Mattel’s stock fell $5 to $11.88, a nearly 30% drop and a new 52-week low.
The Learning Co.’s woes include an after-tax loss of between $50 million and $100 million and a 2% to 4% revenue decline. Mattel had forecast a $50-million after-tax profit at Learning Co., a software giant it bought last May for $3.6 billion.
The maker of Barbie and Hot Wheels said Learning Co. took hits on several fronts, including a decision to bail out of a planned licensing agreement, higher-than-expected product returns, a write-off of bad debts and weak international sales.
In a news release, Barad said sales gains for Barbie, Fisher-Price and Hot Wheels are testimony to the strength of Mattel’s domestic business at a time when Hasbro Inc. was predicted to have the upper hand with two hot brands: Star Wars and Pokemon. Barad said Mattel could not keep up with demand for its products, shaving revenues by more than $100 million, which Mattel expects to recoup by shipping the products early in the fourth quarter.
Wall Street experts, however, questioned whether Mattel has even a chance of achieving its earnings targets for the year.
Jill Krutick, an analyst with Salomon Smith Barney, revised her fourth-quarter estimates for the company down by half, to 30 cents per share from 61 cents and her yearly estimates to 76 cents, down from $1.35; and 2000 estimates to $1 from $1.70.
“The sales look great on the retailers’ books, but not on the manufacturers’ books, because they aren’t restocking,” she said.
What happened with Learning Co., which owns titles such as “Reader Rabbit” and “Carmen Sandiego,” is a lesson in what happens when a basically good idea isn’t scrutinized, some Wall Street watchers said.
“It’s a function of overpaying for an acquisition and bad due diligence,” said Hayley Kissel, a Merrill Lynch leisure industry analyst. “They should have had a better sense of what the accounting was like at the Learning Co.”
Mattel’s purchase of Learning Co. and Pleasant Co., maker of the popular American Girl dolls, made sense as Barad tried to reposition Mattel, Kissel said.
Meanwhile, Barad’s beloved Barbie line suffered, falling 14% in 1998 sales to just under $2 billion, after generating double-digit revenue growth for several years.
Profits at Mattel last holiday season fell by 67% to $63.8 million, excluding a one-time charge, while sales fell 4.3% to $1.54 billion.
In March, Mattel announced cost-cutting and reorganization as well as the departure of two senior executives. The company followed in April with plans to cut 3,000 jobs and close some plants, as it reported a $17.9-million loss in the first quarter, its first loss since 1997.
Mattel’s second quarter this year seemed to foretell a turnaround, with profits up 81% before a restructuring charge.
Mattel’s troubles came at a time when the toy industry in general was contracting, with 1998 sales off $41 million to $15.2 billion, according to one trade group.
Indeed, in spite of owning rights to the sizzling Pokemon and Star Wars, Hasbro shares fell $1.75 to $20.31. The company hit its 52-week high in May at $37. Salomon analyst Krutick downgraded Hasbro based on what she sees as a limited upside for Star Wars toys and rising competition in the Pokemon arena.
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Mattel’s Plunge
The toy maker’s shares plummeted $5 to $11.88 on the New York Stock Exchange on Monday after the company’s earnings warning.
Quarterly closes and latest:
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Monday: $11.88
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Source: Bridge Information Systems
