Mattel Inc. (MAT) is expected to release its third quarter results on Oct 16. The Zacks Consensus Estimate is pegged at 64 cents per share. The company had reported earnings of 66 cents per share in the year-ago period.
 
Mattel’s second quarter earnings of 6 cents per share were 4 cents, ahead of the Zacks Consensus Estimate. Despite a significant drop in sales in the quarter, quarterly results were ahead of estimates as the company benefited from cost containment measures.
 
As the world’s largest manufacturer of toys, Mattel has numerous well-known toy brands that have been the category leaders in multiple product segments for a number of years. Of the company’s leading brands, Barbie and Hot Wheels remain the premier toy brands for girls and boys, respectively.
 
Given its strong brand recognition, Mattel has successfully extended both these brands into other consumer products such as apparel, fashion accessories and bikes.
 
Mattel is also focused on implementing its cost reduction initiatives. The company initiated its Global Cost Leadership Program in 2008. This included a reduction in its global workforce of approximately 1,000 employees implemented in Nov 2008, a coordinated strategic plan that included structural changes designed to lower costs and improve efficiency, and additional procurement initiatives aimed at fully leveraging Mattel’s global scale.
 
Management expects this program to generate approximately $90 million to $100 million of net cost savings in 2009 and approximately $180 million to $200 million of cumulative net cost savings by the end of 2010.
 
Management is also focused on top line growth, margin expansion and cash conservation. The company implemented modest price increases for its 2009 product line that went into effect on Jan 1.
 
Mattel is planning to tightly manage its capital expenditures in 2009 to retain consistency with 2003 through 2007. In addition, given the current volatile global economic environment, Mattel is prioritizing protecting dividends to shareholders and minimizing strategic acquisitions and share repurchases in 2009.
 
Recently, Universal Studios and Mattel announced a new 10-picture, four-year worldwide marketing and distribution agreement. Universal has also acquired the rights to distribute all previous Barbie titles beginning Jan 1, 2010, making Universal the primary distributor of the entire Barbie catalog. The deal, which covers the U.S. and all international territories, runs through 2013.
 
However, the economic slowdown has severely impacted discretionary consumer spending, which has deteriorated sharply in the U.S. and in many countries around the world. As a result, the balance sheets of toy manufacturers like Mattel, Hasbro Inc. (HAS) and JAKKS Pacific Inc. (JAKK) have been impacted significantly.
 
Mattel also continues to feel the impact of the global recession and has recently faced difficulties with respect to margin pressures and deterioration in some of its core brands. The company has reported a significant drop in sales in the second quarter though the cost containment measures provided some relief.
 
Although the quarterly results contained some positive signs, in light of the current economic environment, we expect these challenging macro conditions to continue pressurizing Mattel’s earnings throughout 2009.
 
As one of the dominant companies in the industry, however, the economic downturn may enable Mattel to strengthen its position at the expense of smaller rivals. Consequently, we have a Neutral recommendation on the shares of Mattel.
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