California-based Mattel Inc. (MAT), the world’s largest manufacturer of toys, reported its fourth quarter results on February 2, 2011 that surpassed the Zacks Consensus Estimate by 3 cents. The recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for both the short-term and the long-term outlook for the stock are covered in depth below.
Earnings Report Review
During the fourth quarter of 2010, Mattel reported earnings of 89 cents per share, in line with the prior-year quarter earnings. The earnings were primarily driven by strong sales from its core brands such as Barbieand Fisher-Price, partly offset by declines in Hot Wheels as well as cost escalation.
The company’s full-year earnings per share were $1.86, above the Zacks Consensus Estimate of $1.83 and up 28% from the prior year.
During the fourth quarter, worldwide gross sales were $2,327.4 million, ahead of $2,146.2 million recorded in the prior-year period as well as the Zacks Consensus Estimate of $2,074 million. Including the negative impact of foreign currency fluctuations, net sales reported were $2,124.6 million, up 9% year over year. U.S. gross sales improved 11% year over year and international gross sales increased 6% year over year.
In FY10, worldwide gross sales were $6,386.6 million compared with $5,934.3 million in 2009. Including the negative impact of foreign currency fluctuations, net sales rose 8% year over year to $5,856.2 million. U.S. gross sales jumped 9% year over year and international gross sales grew 6% year over year.
Earnings Estimate Revisions: Overview
Following the earnings release, the Zacks Consensus Estimate for the company increased, implying that the analysts do see meaningful catalyst for the time being. The earnings estimate details are discussed below.
Agreement of Estimate Revisions
Over the last 30 days, out of 14 analysts, 10 and 5 have upped their estimates for fiscal 2011 and 2012 respectively. Only one analyst has slashed his/her estimate for 2011 and none of the analysts have decreased their estimates over the last 30 days. Thus, a positive inclination can be witnessed among the analysts.
Over the last 7 days, same number of analysts hiked the estimates for both fiscal years 2011 and 2012. However, none of the analysts have moved in the opposite direction.
The analysts have raised the estimates based on improved sales trends in all lines of business, a lower effective tax rate, lower operating expense due to savings under cost reduction program and accretion from more share buybacks.
The analysts expect the top line to improve in 2011 and beyond, with the portfolio of evergreen entertainment properties such as World Wrestling Entertainment, Toy Story, Thomas & Friends, Dora the Explorer, and Disney Princess in 2011 and beyond.
Moreover, the company’s product line looks strong with film releases including Cars 2 and Green Lantern in 2011 and Batman and Superman in 2012. During the fourth quarter, sales also benefited from the launch of Monster High, which is expected to drive sales further in 2011.
Mattel recently entered into a new partnership with THQ Inc. (THQI - Snapshot Report). It is a multi-year alliance to publish and market video games based on the entire portfolio of Barbie, Hot Wheels, Fisher-Price, Monster High and others. The deal will widen the reach of the company’s toys and hence benefit the top line.
Management remains focused on margin expansion through its cost-cutting initiatives and is thus targeting an additional cumulative cost savings of $150 million to be achieved by the end of 2012. Half the savings are expected from lower legal fees and the other half from the execution of round-two of the global cost-leadership initiative.
The company also plans to increase prices in the high single digit in 2011 to compensate for the rise in input cost and remains focused on achieving its long-term annual goal of 50% of gross margin and 15% to 20% of operating margins.
However, for the first quarter of 2011, 8 analysts have trimmed their estimates over the last 30 days. None of the analysts have raised their estimates. Analysts have reduced the estimate based on lower gross margin expansion due to input cost pressure and legal expense as Mattel engages in the Bratz legal trial.
Magnitude of Estimate Revisions
In the last 30 days, earnings estimates for the first quarter 2011 have dropped by 2 cents to 6 cents. However for 2011 and 2012, estimates have been raised by 7 cents and 5 cents respectively to $2.03 and $2.21. The magnitude of estimate revisions indicates that the analysts expect earnings to improve over the year.
Mattel in Neutral Lane
We remain positive on Mattel as the company has an industry leading position, a robust balance sheet and continues to benefit 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 based on increasing input costs and adverse impact from currency exchange rate. Moreover, competition from private label toys and video game industry is intensifying and orders from retailers remain conservative.
Accordingly, we have a Zacks #3 Rank (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.