Mattel, Inc. MAT is scheduled to report first-quarter 2018 financial numbers on Apr 26, after market close.

Last quarter, the company’s earnings missed the Zacks Consensus Estimate by a huge margin of 523.5%. In fact, Mattel witnessed earnings miss in each of the trailing four quarters, with an average negative surprise of 192.7%.

What to Expect?

The Zacks Consensus Estimate for the quarter under review is pegged at a loss of 37 cents, which is wider than a loss of 32 cents in the year-ago quarter. Notably, the consensus mark has also witnessed downward revision over the past 30 days. Moreover, analysts polled by Zacks expect revenues of nearly $694.9 million, down 5.5% from the prior-year quarter.

Dismal Sales Run to Continue

We believe Mattel’s top line will continue to be impacted by challenging sales environment and Toys “R” Us bankruptcy in the to-be-reported quarter. In the third and the fourth quarter of 2017, Mattel was particularly affected by Toys “R” Us bankruptcy resulting in a decline of revenues and profits year over year.

Further, sluggish performance of certain key brands has been hurting the company’s performance. In this context, at the Mattel Girls & Boys Brands, performance of the Other Girls brand has been a matter of concern for quite some time, given the declines in Monster High and Ever After High sales.

Although the company heavily relies on a growing pipeline of tech-enabled products that capitalize on new play patterns and allow it to extend beyond traditional toy age ranges, the results is expected to take time. Mattel plans to bring these new-scaled, digitally-connected toy offerings to market beginning in fall 2018.

However, on the international front, the company will continue to report robust sales. Since U.S. market is somewhat saturated, toy companies are exploring growth opportunities abroad. In fact, international markets offer greater potential based on the pace of economic growth that they currently enjoy. Particularly, given the fact that emerging markets are expected to be the leading driver of future industry growth, Mattel aims to accelerate its presence therein.

Mattel, Inc. Price, Consensus and EPS Surprise

Margins & Earnings to Remain Under Pressure

The company’s bottom line is expected to be hurt by rise in operating expenses. Costs related to marketing and promotional initiatives, and for cleaning up inventories coupled with the development of digital platforms are likely to keep margins under pressure, going ahead. Thus, the company pushed out its longer-term target of achieving the low end of the 15-20% operating margin range from 2018 until 2019.

Additionally, owing to the Toys ‘R’ Us bankruptcy, the company’s gross margins are likely to decline in the first quarter. In the fourth quarter and 2017, adjusted gross margin contracted to 32% and 38.3% from 47% and 46.8%, respectively. A persistent decline in the top line is likely to result in gross margin contraction due to higher inventory write-downs and discounts offered to clear inventory.

Our Quantitative Model Does Not Predict a Beat

Our proven model does not show that Mattel is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Mattel has an Earnings ESP of -8.95% and a Zacks Rank #5 (Strong Sell).

As it is we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks Poised to Beat Earnings Estimates 

Here are two stocks from the Consumer Discretionary sector that investors may consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Boyd Gaming Corporation BYD has an Earnings ESP of +2.44% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Las Vegas Sands Corp. LVS has an Earnings ESP of +4.09% and a Zacks Rank #3.

Extended Stay America, Inc. STAY has an Earnings ESP of +3.03% and a Zacks Rank #3.

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