Mattel, Inc. (NYSE:MAT) is benefiting from solid contributions from the Hot Wheels brand and cost-saving initiatives. Increased focus on core brands and an expanding product portfolio bode well for the company.

Mattel stock has risen 9.5% in the past three months, outperforming the Toys – Games – Hobbies industry’s growth of 8.8%.

However, this toy manufacturing company’s growth is impeded by inflationary pressure and the dismal performance of the North American segment.

Factors Favoring Mattel

Mattel’s Hot Wheels brand continues to impress investors with its growing performance trend. During the first quarter of 2023, gross billings at the Hot Wheels brand rose 1% (on a reported basis) and 2% (at constant currency “cc”) year over year. The company has been witnessing an improving sales trend for Hot Wheels and is quite confident about the brand’s long-term prospects.

Using its Optimizing for Growth program, Mattel remains focused on achieving cumulative cost savings and enhancing its margins. The company is simplifying its organizational structure and optimizing processes and supply chains to generate savings across operations. The program contributed $106 million of incremental savings in the cost of goods in 2022. Mattel anticipates the program to deliver incremental savings of $96 million and additional savings of $300 million by 2023.

Mattel remains well positioned for growth, given a strong product lineup, which includes core brands, licensed brands, and lucrative product associations. In January 2022, the company entered into a multi-year global licensing agreement with Disney to develop and market the latter’s Princess and Frozen branded line of products. Built upon its existing licensing arrangement with Disney for Pixar Animation Studio’s Toy Story and Cars franchises as well as for Lightyear, the company anticipates launching the new products starting in 2023. Also, the return of Disney Princess and Frozen to Mattel’s portfolio is likely to boost strength and act as a growth driver in the upcoming periods.

Factors Impeding Growth

Mattel is consistently facing pressure from increasing economic inflation, which is, in turn, affecting its margins and growth prospects. In the first quarter of 2023, the adjusted gross margin contracted 660 basis points year over year to 40%. The downside was mainly caused by inventory management efforts, including higher close-out sales and inventory obsolescence expense, cost inflation, and unfavorable fixed cost absorption. The challenging environment is likely to persist for some time.

Also, the North American segment performed unimpressively, affecting the company’s growth trend. In the first quarter of 2023, gross billings declined 27% (as reported and at constant currency) year over year. Per our model, net sales and gross billings of the North American segment in 2023 are likely to decline by 2.4% and 3.4%, respectively, year over year.

Featured Image: Unsplash @ Baby Natur

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