Collapse of Stock a Game Changer for Toymaker

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Because of its sinking stock price, Mattel Inc.’s market cap slipped below that of rival toymaker Hasbro Inc. last week, a symbolic defeat for the struggling El Segundo giant, which had long been the world’s largest publicly traded toy company.

But for Mattel and its shareholders, a more meaningful milestone came Jan. 9 – the day the company’s market cap fell below $10 billion, the cutoff for so-called large-cap companies.

With Mattel now well below that threshold – its market cap April 1 was $7.8 billion – the company’s shares are likely to be picked up by different types of investors and could see more volatility, said Stephanie Wissink, a toy industry analyst for Minneapolis investment bank Piper Jaffray Cos. who follows Mattel.

Many investment funds are dictated by market-cap ranges and large-cap funds are now likely to dump Mattel, she said. (A market cap is the total value of a company’s outstanding shares.)

“What is happening for Mattel is, because its market cap has compressed, as a large-cap investor, you can’t justify having it in your fund,” Wissink said.

Indeed, Mattel’s stock has fallen by a full 40 percent over the past year. On April 1, shares closed at $23.08, down from $38.37 a year ago. Rival Hasbro, of Pawtucket, R.I., has seen its shares climb 17 percent over the same period, closing April 1 at $63.71, making its market cap $7.9 billion.

With Mattel shares falling so far, they now might be picked up by midcap investors, who trade differently than large-cap investors, Wissink said.

“Large cap is based on stability,” she said. “Midcap has more volatility, so (investors) tend to trade a little bit more. They look for certain criteria – brand equity and growth – and expect to generate more return for that volatility.”

Midcap investors might capitalize on a stock’s volatility and might sell their shares rather than hold on to them for years, unlike large-cap investors, who are more likely to buy and hold. Wissink said all this could mean Mattel’s stock could see more volatility ahead.

Mattel declined to comment on its market capitalization or share price.

Innovation ahead

But Mattel’s slumping stock is far from its only worry. The company had a dismal fourth quarter last year, reporting net income of $150 million, a decline of 60 percent from the same quarter a year earlier. For all of last year, its net income of $499 million was down 45 percent from 2013, and sales slid 7 percent to $6 billion.

The poor performance led to a management shakeup at the company. In January, former Chief Executive Bryan Stockton stepped down and Mattel’s board replaced him with longtime board member and Chairman Christopher Sinclair. He served as interim chief executive until being named permanent chief last week.

When Sinclair took over in January, he pledged to turn around the company’s flagging financials, in part by focusing on innovation.

That’s an area where Mattel has lately fallen behind Hasbro, said Wissink, who suggested Mattel rested on its size and well-known brands for too long without coming up with fresh ideas. Hasbro, meanwhile, has diversified from traditional toys, a strategy Wissink said has served the company well.

“You rest on the things you’ve always done instead of doing what you need to do to stay current,” she said. “Consumers are not just picking a brand because it’s the biggest and most common, but because of innovation and ideas.”

But Alex Clark, a Mattel spokesman, points to two new products that he says show the company is taking Sinclair’s push for innovation seriously.

In February, the company announced a new version of its classic View-Master, developed through a partnership with Mountain View tech giant Google Inc. The high-tech viewfinder uses Google’s virtual reality platform Cardboard and a smartphone to give users panoramic, 3-D views of landscapes.

In addition, the new Hello Barbie doll uses software from San Francisco’s ToyTalk Inc. to actively communicate with children by analyzing what they say.

Clark said those two products illustrate the type of innovation Mattel wants to pursue: adding 21st century twists to existing brands and partnering with technology companies as it tries to re-engage with tech-savvy consumers.

“We’re exploring a variety of innovative partnerships to bring new perspectives and dimensions to our products in 2015 and beyond,” Clark said. “This is a sign of things to come.”

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