Morgan Stanley analyst Megan Alexander initiated coverage on the shares of Mattel Inc (MAT  ) with an Overweight rating and announced a price target of $27.

The toy industry went through a difficult holiday season in 2022, with store point of sale (POS) down ~5% in 4Q as per NPD, boosting inventory levels at retail to exit the year, said the analyst.

Mattel's 1H23 shipments fell 20%+ on destocking, combined with normalizing seasonality after two years of constrained supply chains, the analyst observed.

Also, its gross margins shrank in most of 2021 and 2022, with Y/Y compression accelerating in 2H22 as input cost pressures collided with retailer destocking and greater fixed cost deleverage on sales declines.

However, Mattel is turning the corner, and the analyst estimates 2023 and 2024 EPS to be 11% and 8% above the street, driven primarily by a strong gross margin recovery but also benefiting from higher capital returns as FCF accelerates.

The analyst sees significant tailwinds from highly accretive licensing efforts related to the Barbie movie, with the company recently quantifying the benefit to 2H billings will "exceed $125 million" and flow through at a ~60% blended operating margin.

The analyst expects a long tail for the brand and related consumer products, given the cultural resonance of the movie, and sees benefits continuing into 2024.

The movie's success raises Mattel's stature with consumer products partners and, in the analyst's view, should help catalyze future growth opportunities.

MAT continues to see a significant opportunity to capture the value of its IP, reinforced by the success of the Barbie movie.

Price Action: MAT shares are trading higher by 3.28% at $21.92 on the last check Wednesday.