Herb on TheStreet: Mattel's Earnings Woes:
You Coulda, Woulda, Shoulda Seen It Coming
By Herb Greenberg
Putting a fresh spin on yesterday's news: Really, can ya
believe the nerve of Mattel (MAT:NYSE)?
The company issued a year-end earnings warning yesterday, and investors reacted as if it were a
surprise. Some surprise!
Back in August there was so much chatter of possible problems
at Mattel that this column wrote, "Expect to hear more about
Mattel in coming weeks and possibly months, and much of it
won't be positive."
At the time, short-sellers and others thought Mattel would be
hurt after Toys R Us (TOY:NYSE), its biggest customer,
announced it would sharply cut back inventory levels at its
stores. Considering that Mattel had a reputation for stuffing its distribution channel, the shorts
figured the company would be
hard pressed to make its numbers. An added twist on the story,
at the time, came from Guy Judkowski and Howard Rosencrans
of H.D. Brous & Co., in Great Neck, N.Y. -- the only analysts
willing to publicly put their necks on the line. This pair
suggested a desperate Mattel had resorted to dumping
merchandise at discounters "at awfully friendly terms that will
create a shortfall in the second half."
Mattel denied it was offering any special deals to discounters
and reiterated earlier comments that it was "confident" its
full-year earnings would meet analyst estimates. Not only did
Mattel expect all core products to be up, but it was hoping for an additional kick from the toys tied to
Nickelodeon's Rugrats
movie (saw it last weekend; a big yawner, even for my
nine-year-old) and Pixar's (PIXR:Nasdaq) A Bug's Life (both of
us can't wait to see it).
So, in the face of so much bleak news, what did Mattel do? It
agreed to buy, of all companies, The Learning Co. (TLC:NYSE)
-- no stranger to this column. Sounds to some skeptics like two
desperate companies doing one desperate deal. Why else, they
wonder, would Mattel, which trades at 2 times sales, swap its
stock for a company that trades at 4.5 times projected sales?
Why else, they wonder, would Mattel buy a company that has
been the target of charges, for years, of stuffing the distribution channel to make its numbers look
better than they really are?
Along those lines, why else, they wonder, would Mattel buy a
company whose receivables, in recent quarters, have been
rising faster than sales -- if you included the amount of
receivables that had been sold off to investors?
Why else, they wonder, would Mattel buy a company that itself
has done upwards of $1.3 billion in takeovers, with much of the
combined purchase price being written off? (Makes some critics
wonder what was in those writeoffs, and adds further doubt to
the quality of TLC's earnings.) And why else, they wonder, would Mattel buy a company that has
bought numerous other
companies, including Broderbund, whose fundamentals have
failed
Why else, they wonder, would Mattel buy a company whose
operating earnings are an unusually robust 26%, twice the
margins of Electronic Arts (ERTS:Nasdaq), which is with little
doubt one of the best operators in the game industry? (Such a
big discrepancy doesn't sit well with some critics.)
Why else, they wonder, would TLC's management sell the
company, at this time, if the biz is so good?
Maybe the answer is that before getting into the software biz,
TLC Chairman and CEO Michael Perik was a currency trader in
Canada. Mattel's purchase of TLC, it would appear, is the
ultimate trade. |
