After disappointing analysts consistently over the past five quarters, Mattel Inc. MAT posted better-than-expected first quarter 2015 results. Hence, share price of this toy maker went up 6.5% in the aftermarket hours. Meanwhile, some improvement witnessed in two of its most troubled brands, Fisher-Price and Barbie, further boosted investors’ confidence. The upside reflects its new chief executive officer (CEO) – Christopher Sinclair’s focus to turn around the business that had been losing ground to electronic toys and tablets.
Mattel’s adjusted loss of 8 cents per share came in narrower than the Zacks Consensus Estimate of a loss of 9 cents. However, it compared unfavorably to earnings of 3 cents in the year-ago quarter. The significant downside reflects a year-over-year decline in sales and margins and higher interest expenses.
Adjusted earnings exclude costs related to integration and acquisition and intangible asset amortization expense related to Mega Brands and severance expenses.
Revenues declined 2.5% year over year to $922.7 million owing to a decline in gross sales at Barbie brands. However, it beat the consensus mark of $898.0 million by 2.8%.
Quarter Highlights
On a constant currency basis, worldwide net sales were up 5% for the first quarter of 2015. Gross sales from North America (including the U.S., Canada and American Girl) were up 9%, which reflects good POS momentum in Barbie, Ever After High and Hot Wheels, partially offset by declines in Monster High. Meanwhile sales from the International region were up 2% driven by broad based growth in the Asia-Pacific region as well as some parts of Latin America, partially offset by continuing challenges in retail inventory overhang in some key markets, particularly Europe.
The company reports under four segments, namely Mattel Girls & Boys Brands, Fisher-Price Brands, American Girl Brands and Construction and Arts & Crafts Brands.
On a constant currency basis, worldwide gross sales at Mattel Girls & Boys Brands were up 1% year over year to $605.2 million. Worldwide gross sales of the Entertainment business were up 4% year over year while gross sales of the Wheels category were up 10%. These positives were partially offset by a 5% decline in worldwide gross sales of the Barbie brand and a 1% decline at the Other Girls brand.
After posting year-over-year declines in revenues consistently over the past few quarters, sales at Fisher-Price Brands, which includes Fisher-Price Core, Fisher-Price Friends and Power Wheels brands grew 3% year over year to $264.0 million.
Gross sales at American Girl Brands were $106.1 million, flat year over year.
Gross sales from the Construction and Arts & Crafts Brands, which includes the Mega Bloks and RoseArt brands, were $38.3 million. This leading global brand in the construction building sets and arts & crafts category was acquired by Mattel in Apr 2014.
Adjusted selling and administrative (SG&A) expenses were flat year over year. These include ongoing SG&A expenses on Mega Brands as well as funding for cost savings initiatives, which the company is aggressively pursuing in 2015. Adjusted operating loss was $14.6 million compared to an adjusted operating profit of $27.7 million in the year-ago period. The downside reflects a year-over-year decline in sales and higher advertising spending.
Guidance for 2015
Mattel expects strengthening of the U.S dollar to negatively impact net revenue by approximately 4% to 6% and adjusted earnings per share by 30 cents to 35 cents per share in 2015. It also expects gross margins to be negatively impacted in 2015 by the strengthening of the U.S dollar.
The company expects advertising as a percentage of net sales in 2015 to increase and be at the higher end of the 11% to 13% range over the long-term. It expects adjusted SG&A expenses to be down in constant currency in 2015 owing to costs saving initiatives.
In fact, the company expects to deliver gross savings of $125.0 million in 2015 primarily in the second half of the year and savings at the higher end of the range of $250.0 to $300.0 million by the end of 2016.
Over the long-term, the company expects sales growth in the low to mid single-digits, gross margin of about 50%, advertising spending of 11% to 13% of revenues, SG&A in the range of 22% to 23% of sales and operating profit in the range of 15% and 20%.
Bottom Line
The newly appointed CEO is making necessary changes to perform well and it seems that these have started reaping benefits. However, the company agrees that it has a lot of work left to do.
The company presently has a Zacks Rank #5 (Strong Sell). Take-Two Interactive Software Inc. TTWO is a better-ranked stock in the same industry, sporting a Zacks Rank #2 (Buy).
Other toy makers like Hasbro Inc. HAS and JAKKS Pacific, Inc. JAKK are set to report their earnings on Apr 20 and Apr 21, 2015, respectively.
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