J.P. Morgan downgraded Mattel Inc . (NASDAQ:MAT) to a Neutral rating (from Overweight) and cut their 12-month price target on the toy company to $19.00 (From $24.00), citing several key factors that raise concerns about the company's performance in the coming year. The downgrade comes as the toy industry faces headwinds, particularly in the aftermath of a challenging 2023 holiday season.
Firstly, J.P. Morgan highlights the anticipation of weak industry holiday sales in 2023, attributing it to the sustained pressure on the category. The firm predicts a lower base for 2024, emphasizing that major retailers under their coverage, including Walmart (WMT) and Target (TGT), are likely to manage inventory tightly, impacting sales across the sector.
Secondly, data indicates that the toy category will continue to grapple with share-of-wallet challenges, with readings still more than 20% above pre-COVID trends. CPI data further suggests that price deflation, which began to revert to its long-term trend in July, poses additional hurdles for the industry. This is particularly concerning given the economic pressures on lower-income consumers in the U.S., a demographic that constitutes a significant portion of MAT's customer base.
Thirdly, J.P. Morgan highlights the impact of the Barbie movie on MAT's results in mid-to-late 2023. While the movie initially provided a boost, its effect was short-lived, leading to challenging comparisons and concerns among investors.
Moreover, the analysts express apprehension about the 2024 holiday calendar, which is notably shorter than the favorable calendar in 2023. Historical revenue patterns, with two-thirds weighted to the back half of the year, raise the risk of a more conservative outlook.
Finally, rising freight costs pose an additional challenge, potentially causing gross margin pressures. Uncertainty looms over the ability to recapture these costs through price increases, especially considering the international exposure of both MAT and Hasbro (HAS).
In addition to the downgrade and price target cuts, J.P. Morgan introduced 2025 EBITDA and EPS forecasts of $919 million and $1.44, respectively.
Shares of MAT are down 0.95% in pre-market trading Monday morning.