Can Mattel Survive The Covid-19 Recession?

Mattel Stock (NASDAQ: MAT) has declined by 24% since the beginning of the year. While the toy industry has experienced a 7.6% growth in the first quarter of the year (as per NPD group data), Mattel reported a decline of 14% in net sales. Despite the overall drop in consumer demand, reduced discretionary spending, and nationwide lockdown resulting in stores remaining closed, the U.S toy industry is on a growth trajectory. This is also evident from the 20% jump in North America's net sales of Mattel's peer - Hasbro. On the other hand, Mattel has struggled over the past few years and its problems are not just because of the Covid-19 crisis. 

A Covid recession will impact the company’s revenues, cash flows, and ability to pay dividends. We estimate that a recession that persists through late Q3/early Q4 2020 can reduce the company’s revenues by 40% from $4.5 billion in 2019 to $2.7 billion in 2020. Mattel has taken a string of measures to preserve its profitability and cash reserves, including reducing capital expenditures, suspending/delaying payments of dividends, and slightly reducing its workforce. Despite all these measures, the company’s cash flows have been adversely impacted, and it could be headed for a severe cash crunch if the condition deteriorates.

Trefis analyzes the Impact Of The Covid-19 Recession On Mattel in an interactive dashboard with a focus on Mattel’s liquidity reserves and concludes that Mattel has a weak financial position and a Covid-19 recession could have a major impact on the company’s cash reserves in FY2020.

Impact On Mattel’s Revenues 

• Despite the growth in U.S toy sales, the company has struggled in the first quarter, as consumers are buying outdoor and sports toys more – Mattel’s toy offerings mainly caters to infants and toddlers.
• While the stores have started opening, store traffic is expected to remain well below pre-pandemic levels for several months at least. Further, social distancing measures are likely to continue for a while, which will impact store capacity for the company.
• As a result, the company’s revenues could decline by about 40% in FY’20, on account of weaker demand, reduced mall traffic, and a reduction in discretionary spending. 
• In addition to that, the company derives nearly 51% of its revenues from the North America region (the U.S and Canada), where the U.S has been the epicenter of the outbreak over the last couple of months with the largest numbers of Covid-19 cases across the globe.

Impact On Mattel’s Cash Flows

• Mattel’s cash flows are likely to plunge in FY2020 due to a steep fall in revenues and reduced profitability.  
• The company will have to offer merchandise at a deep discount to clear out the existing inventory. Further, higher fixed costs, coupled with lower revenues, will hurt the company’s bottom line. 
• However, Mattel has taken several measures to mitigate the impact on its cash balance by raising $250 million under its credit facility and deciding to substantially reduce expenses across all operating heads. Further, it is likely to reduce its capital expenditures for the year due to the negative economic scenario.
• Additionally, the company has suspended dividends and is unlikely to make share repurchases.

Despite these measures to conserve cash, we estimate that Free cash flow from operations (excluding restructuring charges) (FCFO) will go down from $181 million in 2019 to around -$888 million in 2020. Also, with expected capital expenditures of $57 million for the year, FCFO-CapEx will be -$945 million in FY2020.

Cash Balance Impact

• This will lead to a 2020 cash balance of -$65 million, a steep decline from $630 million in 2019. 
• This balance includes $250 million, which Mattel has withdrawn from its revolving credit facility.
• While the decision to stop share repurchases and discontinue paying dividends may be a disappointment for existing investors, these moves by the company are essential for its survival. 

Conclusion

To sum things up, it is unlikely that Mattel can weather this recession through Q3/Q4 and a 40% decline in revenues without raising additional capital. An alternative scenario for Mattel’s cash flows with a 25% decline in revenue instead is detailed as a part of our full analysis.

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

While Mattel seems to be in a difficult position, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That'll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.  

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