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Mattel Engaged in Channel-Stuffing, Says Securities Class Action

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Mattel Logo with Mattel Characters

The complaint for this class action claims that Mattel engaged in “channel stuffing”, a practice involving inducing buyers to stock up on inventory by offering price discounts, extended payment terms, or other concessions. According to the complaint, when channel-stuffing is used to create a false impression of a company’s financial and operational status, it is illegal.

The class for this action is purchasers of Mattel’s publicly-traded securities between October 20, 2016 and April 20, 2017.

Mattel is a multi-national toy company whose performance was declining, the complaint says; in 2015, it lost the rights to produce toys based on the Disney Princess characters. The complaint suggests that channel-stuffing began as a way to compensate for that loss, but the company’s public statements give no hint of this.

For example, the complaint quotes statements in a third-quarter 2016 press release of October 20, 2016 and a related conference call the same day:

  • “[W]e remain broadly on track to deliver on our full-year outlook.”
  • “[G]ross sales, excluding Disney Princess, are aligned to POS…”
  • “[W]e don’t see any significant changes to our full-year 2016 outlook.”

These statements were false and misleading, the complaint says, because they did not reveal the channel-stuffing or that the company was already giving retailers significant promotions and discounting offers. The complaint claims that Mattel already knew that the extra inventory would either be returned or sold at a steep discount.

But this case doesn’t simply contrast misleading company statements with later-revealed facts. The 49-page securities complaint quotes three former Mattel employees about conditions and pressures inside the company that led to channel-stuffing and that illustrate the full knowledge with which it was done to try to maintain financial figures.

On a January 2017 conference call on fourth-quarter 2016 and year-end results, CEO Sinclair admitted that gross margins were “significantly impacted by elevated sales adjustments and by heavier discounting…” The company also admitted that high levels of sales adjustments and discounting were needed because of excess inventory in its retail channels. At this news, the company’s stock price fell by about 18%.

Still, the complaint says, the company tried to mislead investors, claiming that its lower performance was due to industry-wide challenges. In January 2017, Moody’s put Mattel on review because of the discounting that led to narrowed profit margins and lower cash flow, but in a February conference call the company continued to minimize the inventory problem. The stock price continued to fall.

Only on April 20, 2017, when the company had to report results that the complaint calls “significantly below Wall Street consensus estimates” did it fully acknowledge the problem: “Our Q1 results were below our expectations due to the retail inventory overhand coming out of the holiday period…”

According to the complaint, the company’s prior refusals to admit this were violations of the Securities Exchange Act of 1934.

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