Fisher-Price Sleeper Recall Could Cost Mattel Up To $60M

Market analysts say Fisher-Price’s voluntary recall of nearly 5 million infant sleepers could cost Mattel Inc. MAT $40 million to $60 million not counting potential legal costs and increases the risk to its shares.

What Happened

The company, in cooperation with the U.S. Consumer Product Safety Commission, issued a recall notice for the Rock ‘n Play Sleeper after reports that over a 10-year period more than 30 infants suffocated or strangled when they rolled over in the sleepers while unrestrained. About 4.7 million of the sleepers have been sold in that time.

The company will refund the cost of the sleeper on a sliding scale based on how long the customer has owned the product. The sleepers ranged in price from $40 to $149.

Mattel says the deaths were the result of improper use, and that it stands by the safety of its products, though it agrees the best course of action right now is to recall the sleepers.

Mattel's stock was down 1.84 percent to $13.35 at publication time Monday.

Why It's Important

BMO Capital Markets analyst Gerrick Johnson kept an Outperform rating on the stock with a $20 price target.

Customers so far have been returning the sleepers at about a 15 percent rate - with many of those that were purchased no longer in use because the child has outgrown it. Still, Johnson noted, assuming a $60 retail price, a 15-percent return rate would cost the company more than $42 million, or 9 cents per share. On top of that, Johnson expects Fisher-Price will lose about $35 million in sales for the rest of the year.

Photo courtesy of Fisher-Price.

"Lawsuits and settlements are also likely to arise, giving rise to more financial liability," Johnson wrote in a note. "We think this issue will eventually subside as many recalls do, but we still have concern that it could become a much larger issue, a cash drain, and a distraction for management... We believe the company's turnaround is progressing well but fear the shares could be pressured in the near term owing to this issue and negative press."

UBS is estimating a direct recall impact of 10 cents to 15 cents in earnings per share, or $40 million to $60 million. UBS analyst Arpine Kocharyan has a Neutral rating on Mattel and lowered the price target from $15 to $14.

But Kocharyan also noted there could be an additional hit if there's heavy litigation costs or fines. Brand reputation is also a concern.

"[W]e note that historically Mattel has been able to limit the lasting impact of even more difficult product recalls (2007 lead paint) on its overall brand value by being very public about actions taken to remedy the situation," Kocharyan wrote to investors. "We do not believe the Rock 'n Play recall is comparable in scale to broader product safety concerns Mattel had to overcome in '07."

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