Argus Downgrades Mattel As Top-Line Concerns Mount

Argus' John Staszak downgraded shares of toymaker Mattel, Inc. (NASDAQ: MAT) from Buy to Hold as the analyst believes the company's first-quarter earnings report signals that a turnaround will take "at least several quarters."

Staszak stated in his downgrade report that he is concerned with Mattel's declining revenue and expanding losses. The analyst also highlighted the company's gross margins which fell by 680 basis points in the first quarter to 37.0 percent, which was notably lower than the 43.7 percent the consensus estimate was calling for.

Q1 Concerns

Staszak further noted that Mattel oversees four business segments and all four of them saw declining revenue on a year-over-year basis as follows:

1. Mattel girls and boys brands fell 16 percent to $441 million.
2. Fisher Price fell 8 percent to $247 million.
3. American Girl fell 12 percent to around $82 million.
4. Construction arts and crafts well 38 percent to around $39 million.

Given the sales decline in each segment, it shouldn't come as a surprise Mattel's management slashed its 2017 guidance which was issued on February 17. Specifically, the company is expecting full-year sales to rise by a mid-single-digit as opposed to a prior guidance of a mid- to high-single-digit.

Staszak's estimates is now calling for a 3 percent full-year sales growth from 2016 to $5.6 billion, down from a prior estimate of $5.7 billion.

Finally, the analyst briefly discussed a source of concern among Mattel's investors, namely its current dividend, which is yielding 6.82 percent. Staszak believes the company is on track to pay shareholders $1.52 per share on an annual basis in 2017 and can even raise its annual dividend payout to $1.64 per share in 2018.

Bottom line, Staszak believes Mattel's success depends on its ability to "stay ahead of trends" in the toy industry. But if it falls behind, then investors can expect to see even more downside in the stock.

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