David Zorub Short Mattel: Sohn Canada Presentation ~ market folly

Thursday, October 1, 2015

David Zorub Short Mattel: Sohn Canada Presentation

We're posting up notes from the Sohn Canada Investment Conference 2015 (Capitalize For Kids.)  Next up is David Zorub from BlueMountain Capital who pitched short Mattel (MAT).

David Zorub's Sohn Canada Presentation

-    SHORT Mattel (MAT) 
-    Toy company with 12% global market share
-    Sales declined 7% in 2014 along with margins contracting
-    Brands make up a huge portion of this business at it is catered to retail
-    They are seeing weakness in several brands such as Barbie, Monster High (as seen in brand ranking)
-    Recent power brand Disney, specifically Frozen, has kept Mattel’s sales from cratering
-    Starting in 2016, Hasbro will hold the licensing for Disney creating a huge gap in sales targets by many sell side analysts projections and little is there to fill the gap
-    2016 consensus sales is $5.6Bn, BM projects $5.1Bn. Consensus EBIT of $710MM is much higher than the BM projection of $400MM
-    Bulls will think: new management team, legacy brands will fill hole
-    Not true for 4 reasons:
o    Difficult industry dynamics: children are fickle, it is a seasonal business (Q4 focus), low growth due to changing interests such as more digital options
o    Monster High is fading: Brand ranked #1 in 2012, #3 in 2013, and #6 in 2014, trend is assumed to continue. Analysis was done on the industry and it was found that often these trends continue at a rate of 25%+ declines per year.
o    Legacy brands are falling: Barbie is seeing lower sales as consumers are becoming more sensitive to what the toys stand for namely, thin body and dumb (blonde) etc. Barbie POS is on a 3 year decline.
o    Licenses & content strategy: Hasbro has been dominating all the movie names (Spider man, iron man, etc.) and is adding Disney. These are generally long-term contracts so Mattel will have a tough time catching up in short order.

-    Management is not new! The “new” CEO has been on the board since 1996.
-    Mattel is on its 4th restructuring since 2008, not sure how many more cost cutting initiatives are needed before they give up.

-    Risks: key product launch, if another “Frozen” were to happen – seen as unlikely. M&A activity is an option but will not likely be used as it is a bad signal to the market that they have no organic growth left. Activist or LBO – do not see a take private or activist due to the lack of growth potential or FCF generation.

Be sure to check out the rest of the presentations from Capitalize For Kids Conference.

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