Editors Note:

Surveys show sales in the toy sector declined -9% this holiday season. That is going to cause monster problems for Mattel.



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MAT - Mattel - Company Profile

Mattel, Inc. designs, manufactures, and markets a range of toy products worldwide. The company operates in three segments: North America, International, and American Girl. It offers dolls and accessories, vehicles and play sets, and games and puzzles under the Mattel Girls & Boys brands, including Barbie, Monster High, Disney Classics, Ever After High, Little Mommy, Polly Pocket, Hot Wheels, Matchbox, CARS, Disney Planes, BOOMco, Radica, Toy Story, Max Steel, WWE Wrestling, and DC Comics. The company also provides its products under the Fisher-Price brands, such as Fisher-Price, Little People, BabyGear, Laugh & Learn, Imaginext, Thomas & Friends, Dora the Explorer, Mickey Mouse Clubhouse, Disney Jake, the Never Land Pirates, and Power Wheels. In addition, it offers its products under the American Girl brands comprising Truly Me, BeForever, and Bitty Baby; and construction, and arts and crafts brands, such as MEGA BLOKS, RoseArt, and Board Dudes, as well as publishes the American Girl magazine. Mattel, Inc. sells its products directly to consumers via its catalog, Website, and proprietary retail stores, as well as directly to retailers, including discount and free-standing toy stores, chain stores, department stores, and other retail outlets; to wholesalers; and through agents and distributors. Company description from FinViz.com.

Retail surveys showed a 9% decline in toy sales over the holiday shopping season. Several of the high profile toys that did sell, suffered serious glitches that have buyers burning up the phone lines wanting refunds and/or replacements.

Zacks downgraded Mattel to a sell saying earnings growth at Mattel, even before the holiday disaster, was only 3.1% compared to the industry average of 21.2%. For the current year Mattel is only expecting 1.2% growth and that was before the holiday news. The company has already projected sales for 2016 to decline -1.9% and that forecast is sure to be revised lower. Analyst earnings estimates were already moving lower and the holiday sales news should accelerate that trend.

Toymakers are facing something called "age compression." Previously the age range for Barbie toys was 3 to 9 years. Now that has compressed to 3 to 6 years. Electronic games are making kids smarter and taking up a large percentage of their playtime. Toys are being left in the toy box. This is good news for companies like ATVI and EA but bad news for Mattel.

The company is also vulnerable to the strong dollar because of sales overseas. The dollar is at 14 year highs and Q4 earnings are going to be impacted.

Earnings January 18th.

This is going to be a short play. With earnings on the 18th, we are going to use a February option and we will exit before the earnings report. The expected market decline in early January should accelerate any drop in Mattel shares.

Buy Feb $27 put, currently $1.35, no initial stop loss.