Mattel Is Executing Well

| About: Mattel, Inc. (MAT)

Toymaker Mattel (NASDAQ:MAT) reported solid fourth quarter results last Friday morning that were slightly worse than consensus estimates. Revenue grew 5% year-over-year to $2.3 billion, producing adjusted earnings per share of $1.13, also 5% higher than the year ago period. These results outpaced those of competitor Hasbro (NASDAQ:HAS), which missed the mark when it preannounced weak fourth-quarter results in late January.

Both domestic and international markets drove strength at Mattel, as North American sales jumped 5% year-over-year on a reported-basis (4% excluding currency) and International sales increased 8% year-over-year on a reported basis (10% excluding currency). Asia was incredibly strong, with sales jumping 27% year-over-year, and we think the future looks bright as income and wealth grow. Even Europe, which is plagued by exceptionally low birth rates and a challenging macro environment, saw sales growth of 7%.

Brand strength was also broad-based, though American Girl outpaced other brands, with sales increasing 13% year-over-year to $321 million. The firm opened three new stores during 2012 (St. Louis, Miami, and Houston), which all outperformed internal expectations. We think sales of these high-margin dolls helped lift gross margins, which were 290 basis points higher for full year 2012, coming in at 53.1%.

Revenue in the firm's Boys and Girls segment advanced 5% year-over-year to $1.4 billion, highlighting the continued strength of Hasbro's brand portfolio. NPD previously indicated that sales of toy cars were weak during December, but that seems to have had little impact on Mattel, which owns Hot Wheels and Matchbox.

We believe smaller toy makers are having a difficult time competing against Mattel, and it appears this brand will continue to be an anchor for the firm going forward. Barbie, though shipments fell year-over-year, continues to be a cash cow for Mattel.

While many skeptics see digital entertainment altering the toy landscape, Mattel continues to navigate market headwinds with ease. In addition to its Boys and Girls brands performing well, Fischer-Price posted an excellent fourth quarter, with sales growing 6% year-over-year to $745 million. Management noted that the brand is quickly gaining more international exposure, which is a net-positive considering birth rates in emerging markets greatly outpace those in the developed world. With echo-boomers entering the childbearing years in droves in the US, we think this segment has a solid future ahead of it.

On top of posting solid fourth-quarter results, Mattel raised its dividend 16% to $0.36 per share ($1.44 on an annualized basis), which leaves investors with an annual yield of 3.8% at current levels. With a strong cash position ($1.3 billion) to offset its debt load, the firm's balance sheet looks relatively strong. Although the firm performed very well in 2012, we already own shares of peer Hasbro in the portfolio of our Dividend Growth Newsletter, and we do not wish to add more exposure to the toy sector at this time. We plan to update our dividend report on Mattel soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: HAS is included in our Dividend Growth portfolio.