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Mattel's shares sink as the Street loses confidence in its turnaround

Key Points
  • Lackluster first-quarter sales and weaker-than-expected earnings has prompted questions about whether Mattel can execute its promised turnaround
  • The company expects its retail inventory overhang is behind it
  • Mattel's success is riding on sales of its soon-to-be-launched "Cars 3" toy line
A young girl plays with a Mattel Barbie doll in Tiskilwa, Ill.
Daniel Acker | Bloomberg | Getty Images

It seems Wall Street is losing faith in Barbie-maker Mattel.

Lackluster first-quarter sales and a weaker-than-expected gross margin have lead to questions about whether the toy maker can complete its promised turnaround.

Shares of the company closed over 13 percent lower on Friday, last changing hands at $21.79.

Mattel blamed retail inventory overhang from the holidays for the 15 percent drop in sales that impacted its most famous brands including Barbie, Fisher-Price and American Girl.

The company had forecast in its fourth-quarter earnings report that year-end inventories would negatively impact 2017 revenue by less than 2 percent. Mattel's CEO Margo Georgiadis said during an earnings conference call Thursday that the overhang is largely behind the company.

The toy company posted a loss of 32 cents per share, excluding items. That was worse than the expected loss of 17 cents per share, according to a consensus of analysts polled by Thomson Reuters.

Mattel reported net revenue of $736 million for the quarter, below estimates for $801 million. A year ago, Mattel had a loss of 13 cents a share and revenue of $869.4 million.

"[The first quarter] is seasonally less important, but nonetheless a disappointing start to the year," Drew Crum, an analyst at Stifel, wrote in a research note Thursday. "While we think performance will improve beginning in 2Q with the theatrical release of 'Cars 3' driving growth, our confidence around sustaining the dividend continues to wane, which could serve as an overhang for the shares, at least near-term."

Mattel adjusted its 2017 outlook because of the disappointing first-quarter results, now expecting revenue growth to be in the mid-single digits. In February, the company said that it had expected revenue to grow in the mid- to high-single digits.

"Given the missteps seen in four of the last five years, we are skeptical about the current turnaround," Eric Handler, managing director of MKM Partners, wrote in a research note Friday.

Handler said that a lot is riding on the success of "Cars 3" toys, which are slated to garner about $300 million in sales for the company. Mattel will likely also see a boost from sales of "Wonder Woman" toys.

Linda Bolton Weiser, senior analyst at B. Riley. told CNBC earlier this week that the comparisons between the first and second quarter will be "night and day" for the toy industry. She said that the inventory issues from the fourth quarter will have been worked through and companies will begin to reap the benefits of entertainment licenses.