Mattel Inc (MAT) reported second quarter 2011 earnings of 23 cents per share, beating the Zacks Consensus Estimate of 16 cents per share and the year-ago quarter earnings of 14 cents per share. The better-than-expected results were driven by strong sales of its brands including Barbie and Other Girl Brands as well as robust sales arising from the success of film Cars 2. The company also enhanced its operating margin through cost-saving initiatives.
Quarter Highlights
During the quarter, net sales were $1,161.7 million, up 14% year over year and also surpassed the Zacks Consensus Estimate of $1,101.0 million. Net sales included a favorable foreign currency impact of 5%. Worldwide gross sales were $1,264.2 million versus $1,102.0 million reported in the prior-year period. U.S. gross sales improved 7% year over year while international gross sales rose 23% year over year.
Worldwide gross sales for the Mattel Girls & Boys Brands business unit were up 22% year over year to $795.6 million. Worldwide gross sales for Barbie (up 12%), Other Girls Brand (up 29%) and Entertainment business (up 41%) also witnessed significant upside. However, worldwide gross sales for the company’s core brand Hot Wheels dropped 2%. Fisher-Price Brands sales also jumped 4% to $400.0 million while the American Girl line grew 13% to $66.4 million.
Gross profit rose 14% from the prior-year quarter to $556.2 million, but gross margin contracted 20 basis points (bps) year over year to 47.9% due to a 20-bp plunge in cost of sales. However, operating income expanded 57% to $109.3 million and operating margin expanded 260 bps to 9.4% due to lower other selling and administrative expenses (down 280 bps).
Financial Position
At the end of the second quarter, Mattel’s cash and cash equivalents were $418.5 million compared with $544.9 billion in the second quarter of 2010. Long-term debt was $950.0 million versus $460.0 million in the year ago quarter.
The company’s debt-to-total-capital ratio was 28.0% at the end of the reported quarter. As of June 30, 2011, shareholders’ equity was $2.5 billion versus $2.6 billion as of December 31, 2010.
During the quarter, Mattel also repurchased 5.8 million shares for approximately $152 million.
Our Take
The company reported robust results and we expect estimates to move up in the coming days. The Zacks Consensus Estimates for 2011 and 2012 are pegged at $2.07 and $2.30, respectively.
We have a Neutral rating 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 relating to ongoing litigation with MGA Entertainment and competition from private label toys and the video game industry.
Mattel currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
One of Mattel’s primary competitors, Hasbro Inc. (HAS) is slated to release its second-quarter 2011 earnings on July 18, 2011, before the opening bell.
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