| (Bloomberg) |
In April toy maker Mattel’s stock price got a boost after the El Segundo, California–based company unveiled a new management team. The new group of leaders, headed up by CEO Christopher Sinclair, was expected to implement big changes to pull Mattel out of a difficult rut. But the company’s stock has sunk about 32 percent since the beginning of the year, to about $21 per share. Still, many investors remain bullish. David Zorub, a portfolio manager at New York–based BlueMountain Capital Management, is not one of them.
Zorub told the audience at the Sohn Canada Conference on Tuesday that he thinks Mattel’s 2016 sales will “meaningfully disappoint” versus consensus expectations. The company’s stock dipped another 4 percent the day after Zorub’s statement.
“Selling toys is a tough business,” Zorub said. He then proceeded to show just how tough he believes the foreseeable future will be for Mattel and recommended shorting the stock.
The biggest near-term hurdle facing the company is its recent loss of the license to sell Disney Princess merchandise, which includes Elsa, heroine of the 2013 smash hit film Frozen.
Mattel lost the Disney Princess license last fall. (Pawtucket, Rhode Island-based Hasbro, whose shares have far outpaced Mattel’s this year, will control the Frozen and Disney Princess brands starting in 2016.)
Customers’ lagging interest in its legacy brands is also a problem for Mattel, according to Zorub. Barbie, for instance, isn’t the draw she once was. Calling the toy Mattel’s “problem child,” Zorub detailed branding and story lines for the doll that have been off-putting for a prime target audience: millennial moms. A recent Barbie book showed the doll as a computer engineer, but the story emphasized that Barbie was only the designer — she needed “Steven and Brian” to help her make anything real. Zorub emphasized the impact that such “unfavorable stereotypes” are having on the company’s products.
Even with newer brands, Mattel is falling behind. Monster High, a collection of gothic-style dolls, appears to be “a fad, and it’s fading,” Zorub said. Mattel recently lost a legal battle to kill rival franchise Bratz, owned by Los Angeles–based MGA Entertainment, in a nearly decadelong intellectual property lawsuit.
In suggesting a short position, Zorub said Tuesday that Mattel might prove to be an appealing activist target down the road at a more attractive valuation.
The Sohn Canada Conference had its share of long pitches too. Richard (Mick) McGuire III of San Francisco–based Marcato Capital Management touted his firm’s investment in Sotheby’s and also recommended a position with multistrategy asset manager Virtus Investment Partners. Although Virtus is undergoing scrutiny from the Securities and Exchange Commission over insider trading allegations, McGuire argued that the focus on that has “confused the picture” for what is an otherwise healthy opportunity.
Jacob Doft of New York–based Highline Capital Management described his firm’s enthusiasm for cruise lines. As things get better economically for low-end U.S. consumers, cruises are becoming more popular, and in China — where the economy is shifting to one driven by consumers — the demand is skyrocketing. New cruise liners are being built just for the Chinese market, and they are filled as soon as they arrive, Doft said, adding that recovering relations between the U.S. and Cuba will free up a new cruise market soon.
This year’s conference was the second annual Sohn Canada event, presented by Capitalize for Kids, a nonprofit that raises money to support children’s brain and mental health. C4K, as the foundation is known, is run by Jeffrey Gallant, co-founder of C4K and formerly an associate portfolio manager at Alignvest Capital Management, and Veritas Investment Research financial services analyst Kyle MacDonald.
