Moody's Downgrades Mattel (MAT) Baa2; Outlook Stable

Moody's Investors Service downgraded Mattel Inc.'s (NYSE: MAT) senior unsecured ratings to Baa2 from Baa1 and affirmed the commercial paper rating at Prime-2. The outlook is stable. These actions conclude the review for downgrade initiated on January 30, 2017.

"The rating downgrade reflects our view that Mattel's efforts to restore profit margins and reduce leverage will take longer than originally expected" said Linda Montag, Moody's Senior Vice President. Challenges during the critical holiday selling season in 2016 led to increased discounting, which, together with FX headwinds, reduced Mattel's operating margins to below 11% for the year including Moody's standard adjustments. As a result, cash flow did not fully cover Mattel's dividend, and debt/EBITDA leverage at the end of 2016 rose to 3.2x from 2.6x from the year before. Moody's had expected leverage would remain about flat. Moody's had previously said that leverage sustained above 2.5x could lead to a downgrade.

Although Mattel stands to show increased sales and improving margins in 2017, Moody's expects that a full recovery of credit metrics will not be sustained until at least 2019. This is due to continued FX headwinds, margin pressure, and because Mattel's dividend payout is very high relative to its cash flow which has declined. Positively, Mattel managed to offset expected sales declines both from the loss of the Disney Princess and Frozen licenses (transferred to rival Hasbro as of the beginning of 2016) and falling Monster High demand. It was able to generate roughly flat constant currency revenues for the year despite a loss of over 10% of total sales from these two franchises. The ability to fill the sales gap reflects good momentum in Mattel's core brands, which Moody's expects will continue. This, together with growth potential on the back of several entertainment releases in 2017 and beyond, will support top line growth going forward. But Moody's expects that Mattel is likely to struggle to restore operating profit margins to its target range of 15%-20% over the next 12 to 18 months. This is because the environment remains highly competitive, Mattel's product mix is shifting, and consumer shopping patterns continue to evolve.

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