Sales Growth Set to Slow at Mattel, Raising Concerns Around Near-Term Cost Absorption

We don’t plan any material change to our $27.50 fair value estimate for narrow-moat Mattel after incorporating better-than-expected second-quarter 2022 results and moderating our second-half 2022 sales forecast. Mattel put up terrific top-line marks in its second quarter, growing net sales by 20%, as all categories rose more than 20%, with the exception of dolls (which increased 2%, on top of 50% growth last year). Nevertheless, rising sales and price increases weren’t enough to fully absorb higher input and supply chain costs and royalty expenses, leading Mattel to surface an adjusted gross margin decline of 260 basis points, to 44.9%. Despite gross margin headwinds, a more than 600-basis-point improvement in selling, administrative, and advertising costs proved Mattel had further operating margin gains to print, resulting in 9.8% adjusted operating margin in the second quarter, the best second-quarter figure since 2012. We expect some of these expenses (particularly advertising) to tick back up over the back half of the year as product launches accelerate.