Dive Brief:

• D.A. Davidson Senior Research Analyst Linda Bolton Weiser expects Mattel to underperform in the second quarter, as the toy company fights to recoup losses from the Toys R Us liquidation.
• Davidson originally expected Mattel to see a 5% sales decline in the second quarter, but now the financial services company estimates the toy maker will lose 13% due to inefficient operations and a failure to measure and meet consumer demands.
• While the Toys R Us liquidation is certainly hurting its former supplier Mattel, she said, the company has also struggled to manage inventory efficiently and several of its key brands are declining in consumer popularity.

Dive Insight:

According to Weiser, Toys R Us held 15% of the toy retail market share, and as that market share is redistributed among other retailers, toy supply chains will experience disruptions and setbacks.

"[The second quarter] is going to be one of the most problematic quarters for the whole year for the toy industry because of the Toys R Us liquidation," Weiser told Supply Chain Dive in an interview. "The numbers will reflect very poor shipments. The other retailers will just order the most recent and popular toys, they won’t order the basics, so it’s kind of flooding the market with a bunch of toys all at once."

And Mattel isn't the only one struggling. Weiser expects Hasbro, which was also a Toys R Us supplier, to see a 24% sales decline in the second quarter. At the same time, she said, Hasbro is in much better shape than Mattel because its inventory management and cash flow are healthier.

Even though Mattel's stock has risen 29% since April, Weiser thinks it isn't an accurate representation of the company's health. RapidRatings gave Mattel a financial health rating (FHR) of 27 back in March, reckoning the toy maker would struggle to recover from losing its top customer throughout fiscal year 2018.

"Mattel has a lot of issues pertinent to its manufacturing footprint," Weiser said. "50% of its manufacturing is in-house, and needs to be more outsourced."

According to RapidRatings' report, Mattel's asset turnover has been falling and the toy maker currently takes about 84 days to collect payments from customers but pays suppliers in 68 days, which means Mattel is operating at a cash disadvantage of 16 days.

To recover in the third and fourth quarters, Mattel needs to get its supply chain in order by outsourcing more operations and gaining better control of its inventory, especially in the key brands that drive most of its sales during the extremely important holiday season.

"Thomas and Friends in North America is declining, and that’s an important brand for them, and they also need to fix American Girl, which gives them most of their money in the third and fourth quarters," Weiser said.