Fitch Ratings downgraded the toymaker one notch to the lowest investment level grade, BBB-, Tuesday, Oct. 31, just as investors are turning their backs on the Barbie brand. S&P, too, downgraded Mattel two notches last week, from BB to BBB-. Mattel's stock is nearly 10% down this week, after posting dismal third-quarter earnings.
Mattel blamed the bankruptcy of Toys 'R' Us for much of its troubles, but as Fitch maintained in the downgrade announcement, that Mattel's sales have declined for 12 out of the 15 past quarters. The credit rating company anticipates that revenue will continue to decline at a mid-single-digit rate and that EBITDA margins will also contract to 11% for the full year.
Meanwhile, analysts left and right are lowering their target prices for the stock. Despite CEO Margo Georgiadis' $650 million cost saving plan, Wall Street is skeptical that Mattel will bounce back.
"When the dust settles after today, we think the share price could move [further] down," wrote D. A. Davidson & Co. analyst Linda Bolton Weiser in a note Monday, Oct. 30.
KeyBanc Capital Markets' Brett Andress also painted a gloomy outlook.
"We continue to believe the turnaround may take longer than anticipated as MAT works to combat sustained (and potentially structural) portfolio weakness," he wrote on Oct. 27, citing the Toys 'R' Us Chapter 11 filing, looming debt covenants and the industry trend that favors film franchise products over evergreen toys, like Mattel's Barbie and Hot Wheels products.
Mattel's competitor Hasbro Inc. (HAS - Get Report) , for instance, saw its sales boosted by Marvel films that came out this year, as it has the exclusive license to manufacture Marvel Legends action figures. Movies historically have been drivers of sales in the $20 billion toy industry, and this past year has been unprecedented in the volume of films with toy prospects.
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"We suspected a rough quarter...but that was really tough," wrote Jeffries analyst Stephanie Wissink in a Oct. 27 note following Mattel's earnings miss.
BMO Capital Markets analyst Gerrick Johnson titled his post-earnings Mattel note, Not Quite the Kitchen Sink, But Close.
Meanwhile, interest from short sellers has skyrocketed to 21%, versus 12.6% in August. Just one day after Mattel announced its third-quarter earnings, short sellers were up $184 million, according to an S3 Partners report. An all-time high of 74.5 million shares were short then with $1.1 billion at risk.
The report noted, "As the market continues to roar ahead into the last quarter 2017, it doesn't appear that short sellers will take their foot off of the gas anytime soon."
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