Mattel Misses, Sales Lag - Analyst Blog

Mattel Inc (MAT) reported first quarter 2012 adjusted earnings of 6 cents per share, missing the Zacks Consensus Estimate by a penny. However, including an unfavorable impact of 4 cents related to the HIT Entertainment acquisition and integration costs, the company recorded earnings per share of 2 cents, which was below the year-ago quarter earnings of 5 cents per share. The lower-than-expected results were due to acquisition related costs and weak performance of its core brands including Barbie and Hot Wheels.

Quarter Highlights

During the quarter, net sales were $928.4 million, down 2% year over year from $951.9 million and were also below the Zacks Consensus Estimate of $986.0 million. Net sales included an unfavorable foreign currency impact of 1%. Worldwide gross sales were $1,017.2 million versus $1,041.1 million in the prior-year period. U.S. gross sales dipped 9% year over year while international gross sales rose 7% year over year.

Worldwide gross sales for Mattel Girls & Boys Brands business unit declined 4% year over year to $622.2 million, as worldwide gross sales for Barbie slid 6% and Entertainment business fell 17%, partially offset by a 22% upside in Other Girls Brand, driven by Monster High. Worldwide gross sales for the company's core brand Hot Wheels also dropped 5%. Fisher-Price Brands sales remained flat year over year at $310.2 million while the American Girl line grew 4% to $76.0 million.

Gross profit also remained flat year over year at $473.4 million, but gross margin expanded 130 basis points (bps) year over year to 51.0% due to a 130-bp plunge in cost of sales. Operating income also fell 22% to $28.7 million, but operating margin expanded 80 bps to 3.1% due to lower administrative and promotional expenses (down 20 bps), partially offset by a 230-bp rise in other selling and administrative expenses.

Financial Position

At the end of the first quarter of 2012, Mattel's cash and cash equivalents were $784.6 million compared with $1,049.4 million in the first quarter of 2011. Long-term debt was $1,150.0 million versus $950.0 million in the year-ago quarter.

The company's debt-to-total-capital ratio was 37.0% at the end of the reported quarter. As of March 31, 2012, shareholders' equity was $2.6 billion versus $2.5 billion as of March 31, 2011.

During the quarter, Mattel repurchased 700,000 shares for approximately $20 million and declared a quarterly dividend of 31 cents per share payable on June 15 to shareholders of record as of May 23.

Our Take

The company's first quarter results were below expectations as total revenue decreased on a year-over-year basis and we expect estimates to move down in the coming days. The Zacks Consensus Estimates for 2012 and 2013 are pegged at $2.43 and $2.71, respectively.

We have a Neutral recommendation on Mattel over the long term as it has an industry leading position, strong balance sheet and is reaping benefits from its cost-containment initiatives. Its focus on top-line growth, margin expansion, building new franchises, optimizing entertainment partnerships, expanding international footprint and effective cash deployment also augur well.

However, we remain cautious on the stock due to increasing input costs, uncertainty regarding the ongoing litigation with MGA Entertainment and competition from private label toys, unfavorable fluctuations in currency exchange rate, and the video game industry.

Mattel currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. One of Mattel's primary competitors, JAKKS Pacific, Inc.(JAKK) will release its first- quarter 2012 results on April 18, 2012.

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