TGT Target Corp

By Paul Ziobro 

Mattel Inc. reported a sharp drop in profit and sales during its critical fourth quarter, as weak demand for toys during the holiday season forced the company to resort to discounting to move unsold merchandise from store shelves.

The disappointing results come a week after the maker of Barbie dolls and Fisher-Price toys said it was hiring a Google executive, Margaret Georgiadis, to replace its Chief Executive Christopher Sinclair, who will step aside next month.

Mattel released its report a week ahead of schedule and the weak results surprised investors. Its shares fell 10% in late trading to $28.35. Mattel shares had gained 20% over the past year.

On Wednesday, Mr. Sinclair said Mattel was hurt by a significant slowdown in the U.S. toy market that "triggered elevated retail promotional activity and decreased shipping." That squeezed gross margins, which fell to 47% from 50.2% a year earlier.

Retailers like Kohl's Corp., Target Corp. and Wal-Mart Stores Inc. all devoted extra space for toys for the holiday season, trying to win over shoppers during a period when about half of all toy sales are made. While toys sold well during big promotional periods like Black Friday weekend and the days before Christmas, sales were soft in the middle of the shopping season, leaving stores stocked with toys that had to be cleared.

Toy sales are also quickly shifting online, creating additional challenges for retailers. One Click Retail, a research firm, estimated that Amazon.com Inc.'s toy sales rose 24% last year, more than three times faster than the over all industry.

The shift to online shopping not only increases price transparency but it reduces shopper visits to stores, which saps toy makers and retailers of impulse purchases.

"Holiday 2016 taught us that extra shopping days and earlier online promotions don't necessarily translate to more overall sales," said Juli Lennett, toys industry analyst at NPD Group. The research firm on Wednesday reported that overall toy sales increased 5% last year, less than earlier forecasts for growth of as much as 7%.

Mattel's fourth-quarter profit fell 19% to $173.8 million, or 50 cents per share. Global sales fell about 8% to $1.83 billion, hurt by the loss of the Disney Princess dolls business to rival Hasbro Inc. as well as currency swings. In North America, net sales fell 7%.

Excluding expenses related to acquisitions or asset sales, restructuring costs or currency devaluations, Mattel reported adjusted earnings of 52 cents a share for the quarter. On that basis, analysts were expecting Mattel to report a profit of 71 cents a share.

The report also dragged down rival toy maker Hasbro, whose shares fell 4% in late trading. Hasbro is scheduled to report its fourth-quarter results Feb. 6.

Write to Paul Ziobro at Paul.Ziobro@wsj.com

(END) Dow Jones Newswires

January 25, 2017 17:57 ET (22:57 GMT)

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