MAT Mattel Inc

Mattel Inc (MAT), the  largest manufacturer of toys in the world, reported fourth quarter 2011 earnings of $1.07 per share, beating the Zacks Consensus Estimate of $1.01 as well as the year-ago quarter earnings of 89 cents per share. The better-than-expected results were driven by strong sales of its core brands including Barbie, Hot Wheels and Other Girl Brands.

During the quarter, net sales were $2,153.8 million, up 1% year over year but below the Zacks Consensus Estimate of $2,221.0 million. Net sales in the quarter included an unfavorable foreign currency impact of 1%.

For full year 2011, the company reported a net income of $768.5 million or $2.18 per share compared with $684.9 million or $1.86 per share in the prior-year period. For 2011, net sales rose 7% to $6.27 billion.

Quarter Highlights

Worldwide gross sales were $2,352.6 million versus $2,327.4 million in the prior-year period. U.S. gross sales fell 2% year over year, due to stiff competition through promotions while international gross sales rose 5% year over year.

Worldwide gross sales for the Mattel Girls & Boys Brands business unit were up 7% year over year to $1,357.0 million. Further, worldwide gross sales of Barbie (up 6%), Hot Wheels (up 11%), Other Girls Brand (up 19%) and Entertainment business (up 3%) witnessed significant upside. American Girl line also grew 4% to $283.9 million, but Fisher-Price Brands sales decreased 10% to $700.4 million.

Gross profit rose 6% from the prior-year quarter to $1,160.4 million and gross margin enhanced 230 basis points (bps) year over year to 53.9%, due to lower cost of sales. Operating income expanded 16% to $497.5 million and operating margin enhanced 290 bps to 23.1% on the back of lower other selling and administrative expenses (down 110 bps).

Financial Position

At the end of 2011, Mattel’s cash and cash equivalents were $1,369.1 million compared with $1,281.1 million in 2010. Long-term debt was $1,500.0 million versus $950.0 million in the year-ago quarter.

The company’s debt-to-total-capital ratio for 2011 was 37.4%. As of December 31, 2011, shareholders’ equity was $2.61 billion versus $2.63 billion, as of December 31, 2010.

During the quarter, Mattel repurchased 4.0 million shares for approximately $112 million. The company also hiked its quarterly dividend by 35% to 31 cents, thus bringing the annualized dividend to $1.24 per share compared with the previous payout of 92 cents per share.

Our Take

The company reported solid results for the third consecutive year and holiday season sales were also impressive, despite uncertain economic environment and lower consumer spending.  The company also enhanced its shareholders’ value by increasing dividend. Hence, we expect estimates to go up in the coming days. The Zacks Consensus Estimates for 2012 and 2013 are pegged at $2.13 and $2.33, respectively.

We have a Neutral recommendation on Mattel over the long term as it possesses 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. We also remain positive about Mattel's recent deal of acquiring HIT Entertainment for $680 million to own the intellectual property and marketing rights of pre-school toy brands in the long run.

However, we remain cautious on the stock based on the challenging economic conditions, volatility in consumer demand, higher manufacturing costs, ongoing litigation with MGA over the rights to the Bratz dolls. In addition, competition from private label toys and video game industry and unfavorable currency exchange rates continue to remain headwinds.

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 fourth-quarter 2012 earnings on February 6, 2012, before the opening bell.

 
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