Mattel Inc. (MAT - Analyst Report) reported weak third-quarter 2014 results with earnings and revenues missing the Zacks Consensus Estimate for the fourth time in a row. Adjusted earnings of 98 cents per share missed the Zacks Consensus Estimate of $1.05 per share by 6.7% and also declined 15.5% year over year. The significant downside reflects weak sales and lower margins.

Mattel, Inc - Earnings Surprise | FindTheBest

During the quarter, net sales of $2.02 billion missed the Zacks Consensus Estimate by 6% and also declined 8% year over year, primarily reflecting poor performance in the domestic as well as international markets. Sales of Barbie and Fisher-Price dropped significantly during the quarter. We believe increasing inclination of kids toward electronically driven devices has lowered the demand for traditional products.

The company agreed that the results did not meet its expectations. Nevertheless, it stated that global point of sale was positive for the quarter while inventories in domestic as well as international markets declined. The company also indicated that it remains focused toward the upcoming holiday season.

Quarter Highlights

Gross sales from North America (including the U.S., Canada and American Girl) and the International region were down 7% each.

The company acquired Mega Brands Inc. in Apr 2014. Therefore, beginning second-quarter 2014, the company started reporting under four segments Mattel Girls & Boys Brands, Fisher-Price Brands, American Girl Brands and the newly added segment Construction and Arts & Crafts Brands. Notably, Mega Brands Inc. was a leading global brand in the construction building sets and arts & crafts category.

Worldwide gross sales at Mattel Girls & Boys Brands declined 11% year over year to $1.32 billion. Worldwide gross sales of the Barbie brand plummeted 21% due to weak demand. Gross sales of the Other Girls Brands were up 1% driven by an increase in sales of Disney Princess and Ever After High, partially offset by a decline in sales of Monster High products. Gross sales of the Wheels category were up 4% while the Entertainment business plunged 23% due to lower sales of Radica and Games.

Sales at Fisher-Price Brands, which includes Fisher-Price Core, Fisher-Price Friends and Power Wheels brands, declined 16% year over year to $663.4 million due to weak demand.

Gross sales at American Girl Brands also declined 7% year over year to $113.3 million owing to sluggish demand.

Gross sales of Construction and Arts & Crafts Brands segment, which includes the Mega Bloks and RoseArt brands, were $123.4 million.

Gross margin was down 330 basis points (bps) to 50.5% due to a decline in total revenue. The decline also reflects the impact of costs related to the acquisition of Mega Brands.

Operating expenses declined 7.3% year over year. However, operating profit declined 22.5% year over year to $409.5 million due to a considerable decline in revenues. Operating margin declined 360 bps year over year to 20.3%.

Our Take

Mattel’s top and bottom lines fell short of our expectations in the reported quarter due to weak consumer spending. It seems that consumer spending uncertainty still lingers amid sluggish economic growth in the U.S. as customers curb their non-essential purchases.

Also, the loss of rights to make dolls based on The Walt Disney Company (DIS -Analyst Report) characters to Hasbro Inc. (HAS - Analyst Report) compounds woes. The company is likely to lose a substantial chunk of revenues, especially at a time when the toy maker is battling intense competition, as the result of increasing popularity of electronic and mobile games.

The company presently has a Zacks Rank #4 (Sell). Glu Mobile, Inc. (GLUU -Snapshot Report) is a better-ranked stock in the same sector with a Zacks Rank #2 (Buy).

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