Mattel's Losses Outpacing S&P 500's Loss Since 10% Tariff Threat -- Here's Why

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It's safe to say Mattel (MAT) - Get Mattel, Inc. Report hasn't been the Barbie doll of the stock market the past several trading days. 

The S&P 500 is down 3.25% since July 31, the day before President Trump's threat of an added 10% tariff on toys, apparel and electronics coming into the U.S. from China. In that span, Mattel is down 9.8%. 

Mattel's expected 2020 earnings per share could fall significantly should the tariffs go through. Goldman Sachs analysts are looking for 2020 EPS of 10 cents, a number the bank says would fall by 18 cents to a loss of about 8 cents if Mattel fully absorbs the added costs from the tariffs.

The Wall Street consensus is for 2020 EPS of 12 cents, according to data from FactSet. 

The Goldman analysts say Mattel would incur an added $77 million in costs if 10% tariffs are imposed. Wall Street is looking for $291 million in operating income for 2020.

The tariff would not only add costs to Mattel's existing imports, but it would also end almost all point-of-origin sales, which are sales made to customers directly from China, Goldman said.

Therefore, Mattel would have to import a higher portion of its goods, making the company bear more of those tariffs. Mattel's EBIT -- earnings before interest and tax -- margin would shrink by roughly 170 basis points, Goldman said. 

Mattel could mitigate the added costs by hiking toy prices, several analysts say. But Hasbro (HAS) - Get Hasbro, Inc. (HAS) Report , Goldman warns, may be the winner on the price-increase front, as that company's superior gross margin, historically a touch above 50%, indicates to the Goldman analysts that it has more pricing power than Mattel has. 

Another way Mattel could mitigate the tariffs would be to move production.

"Mattel's manufacturing footprint optimization plans are already in process and would help to diversify beyond China," the Goldman analysts wrote.

"That said, we note that a reallocation of sourcing globally typically represents a multiyear process, given the requisite underlying product qualifications and logistical considerations." 

To that point, D.A. Davidson & Co. analysts wrote in a note that Mattel would have a harder time moving production out of China because it outsources only half its production, while it owns the other half of its plants. Hasbro, on the other hand, outsources 100% of its production, the Davidson analysts said. 

See how Hasbro would be able to mitigate an added 10% tariff here

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