Mattel Stock Isn’t a Lot of Fun Right Now

Mattel, Inc. (Nasdaq: MAT) stock tumbled more than 4 percent on Tuesday as investors continue to digest the company’s recent guidance cut and subsequent credit downgrades from three major credit agencies. The credit downgrades dig Mattel’s hole a little bit deeper as it looks to implement an aggressive turnaround plan in coming years.

In an 8-K filing, Mattel says it anticipates its fourth-quarter operating income margin to be down year-over-year and its full-year gross sales to decline by mid-to-high single digits. The new guidance incorporates a slow start to the crucial holiday shopping season as Mattel deals with a difficult U.S. retail environment and the recent bankruptcy of key partner Toys “R” Us.

Things went from bad to worse for Mattel investors this week when Fitch, Moody’s and S&P Global Ratings all downgraded Mattel’s credit. In its downgrade note, Fitch said Mattel has been “challenged by the phenomenon of children – in particular, girls – outgrowing traditional toys at a younger age, with greater interest in consumer electronics, beauty, sports and social media.”

Fitch currently has a BB rating on long-term Mattel debt. Moody’s has a Ba3 rating and S&P has a BB- rating for MAT stock. All three ratings are considered to be non-investment grade, or “junk” ratings.

According to Jefferies analyst Stephanie Wissink, the credit downgrades will put even more pressure on Mattel’s earnings since the company will now be paying higher interest rates on its debt. “Coupling sales declines with increased interest expense results in a headwind to EPS,” Wissink says. “Every 1 [percent] interest rate increase we estimate equates to a 5-cent hit to EPS.”

In October, Mattel announced a plan to cut annual costs by $650 million, reinvest $170 million in its business, improve margins and stabilize declining sales. Following this week’s developments, achieving those ambitious goals will be even more difficult.

However, with the stock now down more than 46 percent in 2018, BMO Capital Markets analyst Gerrick Johnson says pessimism about the holiday shopping season is fully priced into Mattel stock.

“We are optimistic that new management at Mattel can facilitate needed changes in culture, product development, digital content, and partner relationships to drive sales and earnings growth,” Johnson says.

BMO Capital has…

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