Mattel's Bad Holiday Guidance Plunges Credit Rating To 'Junk'

Struggling toymaker Mattel, Inc. MAT was dealt another blow with credit downgrades from S&P Global and Moody's.

The Analyst

Jefferies' Stephanie Wissink maintains a Hold rating on Mattel's stock with an unchanged $14 price target.

The Thesis

S&P's downgrade of Mattel's corporate credit from BB to BB- with the assignment of a negative outlook came right after the company said in an 8-K filing that its fourth quarter and full year 2017 performance will likely fall short of prior expectations, Wissink said in a Monday note.(See Wissink's track record here.) 

Moody's downgraded Mattel's senior unsecured bonds from Baa3 to Ba3, according to Jefferies. 

The downgrades comes at an inconvenient time, as Mattel has communicated an "ambitious" plan to slash $650 million worth of costs, reinvest $170 million in the business, stabilize sales and drive margins higher, the analyst said. But the cost-cutting plan may now not be big enough to offset any increased interest expense from higher yield debt offerings, she said. 

The analyst estimates that a $1 billion debt offering at 6.5 percent would increase the company's total interest expense by around $40 million, which equates to around 11 cents in annual earnings per share. Moreover, every one percentage point rate increase equates to a 5-cents-per-share EPS hit.

Finally, the toymaker has to simultaneously address its ongoing woes — which include sales declines, overdevelopment of brands, SKU over-assortment and an oversized cost structure, according to Jefferies. 

Price Action

Mattel was trading down 4.65 percent at $14.65 late in Tuesday's session.

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