2023-08-01 12:23:16 ET
Summary
- I reiterate a buy rating for MAT as it continues to perform well.
- 2Q23 results exceeded expectations with higher revenue and adjusted EBITDA.
- Retail inventory issues are improving, and management believes the correction is nearly finished, leading to a return to normal shipping patterns.
Overview
My recommendation for Mattel, Inc. ( MAT ) is a buy rating, as I expect the business to continue performing in 2H23 and FY24 as retail inventory issues ease. MAT's valuation should revert back to its historical average as it continues to execute just as it has so far, which will convince the market that this growth trajectory is sustainable.
Note that I previously gave a buy rating to MAT due to the strong execution that management has demonstrated so far, and I expect the market to eventually wake up to MAT's true value.
Recent results & updates
MAT's revenue and adjusted EBITDA for 2Q23 were both higher than expected, primarily due to stronger-than-expected top-line growth across all major brands and improved adj EBITDA margins. Revenue came in at $1.08 billion , adjusted EBITDA was $148 million (about twice the consensus estimate), and adjusted EPS was $0.10.
The first thing to address is the fact that stockpiles are getting healthier, and regular shipping schedules should get back to normal in 2H23. During the call, MAT noted that retail inventory levels, which were relatively high at the beginning of 2023, showed further improvement during 2Q23. The inventory levels in terms of dollars decreased to an amount lower than those in 2Q22 by double digits %, and weeks of supply were also down in the high single digits compared to the same period last year.
“As previously discussed, retailer inventory levels were elevated heading into 2023. The position improved in the first quarter and has improved further this quarter.” 2Q23 earnings
The most significant statement made during the call was the management's belief that the correction of retail inventories is nearly finished. In the coming quarters, I anticipate a return to more typical shipping patterns. MAT's business is highly seasonal, with demand being highest in the second half of the year, so it's crucial that inventory be reset and prepared for this peak period. With the inventory level reset, I expect to see really strong growth in the coming quarters as it comps against an easy 2H22 as well.
Barbie impact
I think it's important to assess how the recent success of the Barbie movie has affected MAT's Dolls business. Barbie's POS was down by double digits in 2Q23, while Barbie's gross billings were down by 7%. In my opinion, the shift of promotions into 2Q to coincide with the release of the Barbie movie in July had an effect on both POS and shipping for Barbie, so 2Q23 results did not reflect the impact of the Barbie movie just yet. An early indication on the magnitude of the Barbie impact is that, according to management, POS sales for Barbie went from being down by the low double digits in 2Q23 to being up by more than 10pts in July. That said, I don't think the economics of the new Barbie movie are stable enough yet for insightful commentary. There was no mention of any potential benefits from shared movie economics from MAT, despite the fact that the Barbie movie had a record-breaking and blockbuster opening weekend. I anticipate that upper management will be pounding the table in celebration of this achievement. Something is wrong, or they're just being cautious. We won't know for sure until the third-quarter earnings call.
However, in the long run, I believe MAT's success with Barbie is indicative of its potential in achieving similar results with future movie and brand partnerships. On the call, MAT announced, among other things, 165 consumer product partnerships related to the Barbie movie, a partnership with HGTV for a Barbie Dreamhouse Challenge, and a soundtrack for the Barbie movie featuring Dua Lipa, Billie Eilish, and Lizzo.
Valuation and risk
Author's valuation model
According to my model, MAT is valued $30 in FY24, representing a 44% increase. This target price is based on the same assumptions I made previously. MAT should have no issues meeting FY23 guidance, especially with inventory levels normalizing. FY24 should be a big year for the business as it comps against an easy FY23 and as the business recovers to normalcy. In FY25, the business should start growing as per historical levels at mid-single digits.
MAT is now trading at 9x forward EBITDA, which I believe will rise over the course of the coming quarters as MAT exits the "turnaround" situation with earnings growth reverting to historical levels, and the negative retail inventory situation eases. I believe comparing MAT to its own historical trading range would make more sense here as it is a turnaround situation. Historically, over the past 10 years, MAT traded in the range of 9 to 13x forward EBITDA, with an average of 11.5x. I assumed that with the recovery, the market would rerate MAT back to its average level.
Summary
My recommendation for MAT is a buy rating. The recent 2Q23 results showed higher-than-expected revenue and adjusted EBITDA, indicating a positive trend. The retail inventory issue, which had been a concern, is gradually resolving, with inventory levels improving compared to the previous year. Management expressed confidence in the inventory correction nearing completion, and this should lead to a return to more typical shipping patterns, especially crucial for the company's seasonal demand peak in the second half of the year.
For further details see:
Mattel, Inc.: Retail Inventory Issue Is Finally Coming To An End