Mattel Inc. (MAT - Get Report) shares were indicated sharply lower in pre-market trading Monday after its equity and debt ratings were cut following disappointing holiday earnings and declining sales for the world's biggest toymaker.
Analysts at Jefferies cut Mattel's rating to to underperform from hold in a Monday note to clients, bumping its price target on the Barbie Doll maker to $13 a share from a previous peg of $12.50. The moves followed Fitch Ratings decision late Friday to lower its debt rating for Mattel deeper into junk status -- down two notches to B+ -- amid concerns that its leverage ratio could impact access to credit lines from U.S. banks.
"Execution missteps, including the inability of the company to effectively respond to evolving play patterns and ongoing retail challenges, with retailers cutting back on inventory purchases, and most recently the September 2017 bankruptcy of Toys 'R' Us, Inc., have pressured operating results and cash flow," Fitch noted. "Mattel's challenges are expected to remain obstacles to near-term EBITDA improvement, despite recently announced initiatives to drive topline growth and cost reductions."
Mattel shares were marked 3.85% lower from their Friday close in pre-market trading, indicating an opening bell price of $16 a share, a move that would trim its year-to-date gain to around 14.5%.
Mattel CEO Margo Georgiadis said the group had taken "aggressive action to enter 2018 with a clean slate so we can reset our economic model and rapidly improve profitability" when it surprised investors with a $281.3 million fourth quarter loss earlier this month -- amid a 12% slump in topline sales to $1.61 billion -- but Fitch noted that its 11x leverage ratio, which has surged from 2.7x in 2016, won't improve to the point where U.S. banks can lend it more cash without regulatory scrutiny until around 2020.
Last week, TheStreet's Brian Sozzi, however, has argued that Mattel needs to be more aggressive on cost cuts, which have only fallen some 4% since their 2013 peak while sales have tumbled by around 25%.
"At least Mattel's new CEO Margo Georgiadis, a former Google (GOOGL - Get Report) executive, is aware of the opportunity and looks ready to act. After meeting with management, UBS believes Mattel's net cost savings guidance of $515 million by 2020 could prove conservative," Sozzi noted.