Mattel, Inc. 2023 Q1 Form 10-Q Summary
Business context and reporting period
Mattel designs, manufactures, and markets toys and entertainment products globally, including Barbie, Hot Wheels, Fisher-Price, American Girl, UNO, MEGA, and licensed franchises. The report covers the three months ended March 31, 2023. Results are seasonal, with a significant portion of annual toy purchases occurring during the holiday season.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $814.6 million | $1,041.3 million | Down 22% |
| Gross profit | $325.8 million | $482.9 million | Down 33% |
| Gross margin | 40.0% | 46.4% | Down 640 basis points |
| Operating income (loss) | $(115.0) million | $80.1 million | Declined materially |
| Operating margin | (14.1)% | 7.7% | Down 2,180 basis points |
| Net income (loss) | $(106.5) million | $21.5 million | Declined materially |
| Diluted EPS | $(0.30) | $0.06 | Declined $0.36 |
| Cash flow from operations | $(206.4) million | $(143.8) million | Used $62.6 million more |
| Capital expenditures | $43.0 million | $36.0 million | Increased approximately $7.0 million |
Gross billings were $911.3 million, down 22% year over year, including an unfavorable currency impact of approximately one percentage point. Category gross billings declined 23% for Dolls, 27% for Infant, Toddler, and Preschool, and 39% for Action Figures, Building Sets, Games, and Other, while Vehicles increased 1%.
Accounts receivable were $673.8 million and inventories were $961.0 million at March 31, 2023. Cash and equivalents were $461.7 million, compared with $761.2 million at December 31, 2022 and $536.6 million at March 31, 2022. Total debt was $2.33 billion, with no borrowings under the $1.40 billion revolving credit facility and approximately $8 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Net sales decreased primarily because retailers reduced elevated inventory levels and because Q1 2022 benefited from earlier retailer inventory purchases.
- Gross margin fell from 46.4% to 40.0%. Major pressures included inventory management actions, higher close-out sales and obsolescence, cost inflation, unfavorable fixed-cost absorption, and product mix. Pricing and cost savings partially offset these pressures.
- Advertising and promotion expense increased to 9.3% of sales from 7.1%, while other selling and administrative expense increased to 44.8% of sales from 31.6%.
- Operating results included $20.7 million of Optimizing for Growth restructuring charges and $3.2 million of additional organizational streamlining severance costs. Corporate and other expense also included $4.3 million of Fisher-Price Rock ’n Play Sleeper recall litigation expense.
- North America sales declined 27% and segment operating income declined to $43.9 million from $171.4 million. International sales declined 15% and segment operating income declined to $0.3 million from $46.8 million. American Girl sales declined 5%, while its operating loss improved to $11.8 million from $17.2 million.
- Mattel repurchased $34.0 million of shares during the quarter; approximately $169.0 million remained authorized at March 31, 2023.
- Mattel repaid the $250 million 2013 Senior Notes in December 2022, reducing debt versus March 2022 and lowering quarterly interest expense.
Guidance, outlook, commentary, risks, and unusual items
Management expected retail inventories to normalize by the end of the first half of 2023 and anticipated shipping patterns more consistent with historical trends in the second half. The filing does not provide a clear full-year revenue or earnings guidance figure.
In February 2023, Mattel expanded its Optimizing for Growth program and increased targeted annual gross cost savings to $300 million. The company estimated incremental 2023 employee severance charges of $20 million to $25 million, total program actions of $210 million to $245 million, and cumulative targeted annual gross savings of $375 million by 2023 when including prior Capital Light actions. Mattel had realized approximately $300 million of cumulative cost savings as of March 31, 2023.
Management stated that cash, operating cash flows, revolving-credit availability, and capital-market access are expected to be sufficient for working-capital and operating requirements over the next twelve months and in the long term. Mattel was in compliance with its credit-facility covenants at March 31, 2023. In April 2023, S&P upgraded Mattel to BBB- with a positive outlook, following Moody’s upgrade to Baa3 in November 2022. These upgrades resulted in a Fall-Away Event that released certain guarantees and collateral and relaxed or suspended specified covenants.
Key risks include weak or shifting consumer demand, retailer inventory policies, concentrated customers, inflation, commodity and labor costs, supply-chain disruptions, foreign-exchange volatility, competition and licensing risks, cyberattacks, product recalls, litigation, regulatory changes, and the Russia-Ukraine war. Approximately $65.0 million of foreign-subsidiary cash was held in Russia and its movement outside the country was limited.
Pending matters include litigation and regulatory discussions related to the Fisher-Price Rock ’n Play Sleeper. Mattel stated that probable losses accrued for this matter were not material, but a reasonable estimate of possible additional losses could not be made. The company also disclosed a tax contingency: unrecognized tax benefits could decrease by approximately $15.1 million within the next twelve months, although settlements could materially affect the financial statements.
Most important facts for investors to verify
- Whether retailer inventories normalized as expected and whether second-half shipping patterns recovered.
- Whether gross margin recovered from the 40.0% Q1 level after close-outs, obsolescence, inflation, and fixed-cost underabsorption.
- Progress toward the $300 million annual gross savings target and the related restructuring cash costs.
- Cash generation, seasonal borrowing requirements, covenant compliance, and the impact of the $2.33 billion debt balance.
- Trends in Barbie, Fisher-Price, Hot Wheels, and licensed entertainment products, particularly after the significant Q1 declines.
- Developments in Rock ’n Play Sleeper litigation, CPSC discussions, tax audits, foreign-exchange exposure, and restricted Russian cash.