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What's in Store for Mattel (MAT) This Earnings Season?

Mattel, Inc. MAT is slated to report first-quarter 2016 results after the market closes on Apr 20.

Last quarter, this toy products manufacturer had posted a positive earnings surprise of 5%, bringing the average positive surprise for the trailing four quarters to 31.50%.

Let’s see what is in store this season.

Factors to Consider

Of late, Mattel has aggressively been trying to improve point of sale (POS) and launch innovative products. The acquisition of the Canadian toy maker, Mega Brands Inc., in 2014 added its Mega Bloks and RoseArt brands to Mattel’s portfolio. Gross sales from these brands were in line with expectations in 2015 and should boost the top line in the coming quarters as well.

The company’s core brands like Barbie, Fisher-Price, Hot Wheels, and Thomas showed good sales momentum around 2015 end and we anticipate this trend to continue in the first quarter. Further, the company’s content partnerships with American Girl and Amazon Studios are likely to boost sales in the to-be-reported quarter.

Additionally, Mattel’s productive licensing agreements with major entertainment brands like Disney and Warner Brothers are expected to boost first-quarter revenues.

However, Mattel has a considerable international presence and is, therefore, highly vulnerable to fluctuations in exchange rates. In fact, foreign exchange translation has been hurting its revenues over the past few quarters and this trend is likely to continue in the to-be-reported quarter as well. The company expects the strengthening of the U.S. dollar to negatively impact gross margin and operating income in the first quarter.

Moreover, a lack of innovative schemes for brand awareness and brand innovation has been dampening the momentum in Mattel’s revenues and POS. Therefore, its brands have not been able to show consistent improvement yet. Further, weak demand for traditional toys and increasing inclination among kids for electronic devices have impacted sales of Mattel’s line of products. This is expected to keep the company’s first-quarter revenues under pressure.

Further, despite cost-saving measures, margins in the quarter could remain under pressure due to costs related to marketing and promotional initiatives.

Earnings Whispers

Our proven model does not conclusively show that Mattel is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below:

Zacks ESP: Mattel has an Earnings ESP of +0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at a loss of 8 cents.

Zacks Rank: Mattel has a Zacks Rank #2 (Buy), which increases the predictive power of the ESP. However, we need to have a positive ESP to be sure of an earnings beat.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies in the broader consumer discretionary sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

AMC Entertainment Holdings, Inc. AMC, with an Earnings ESP of +5.56% and a Zacks Rank #3.

Brunswick Corporation BC, with an Earnings ESP of +1.41% and a Zacks Rank #2.

Six Flags Entertainment Corporation SIX, with an Earnings ESP of +7.81% and a Zacks Rank #3.

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