Mattel: Earnings Preview

Jul.14.11 | About: Mattel, Inc. (MAT)

The world’s largest manufacturer of toys, Mattel Inc. (NASDAQ:MAT) is slated to release its second quarter 2011 results on Friday, July 15, before the opening bell. The current Zacks Consensus Estimate for the second quarter is pegged at 16 cents per share, representing an annualized growth of 13.33%. The Zacks Consensus Sales estimate for the second quarter is $1,101 million.

With respect to earnings surprises over the trailing four quarters, Mattel witnessed significant upside from approximately negative 6.67% to positive 3.49%. The average earnings surprise was negative 0.17%. This implies that the company has missed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Previous Quarter Recap

Mattel reported first quarter 2011 earnings of 5 cents per share, which missed the Zacks Consensus Estimate of 7 cents and were in line with the prior-year quarter earnings.

During the quarter, net sales were $951.9 million, up 8% year over year and also beat the Zacks Consensus Estimate of $907 million. The company witnessed strong sales driven by core brands such as Barbie and Hot Wheels. Other brands such as Monster High and Disney Princess also contributed to the company’s robust sales.

Worldwide gross sales for the Mattel Girls & Boys Brands business unit were up 15% year over year to $656.4 million. Worldwide gross sales for Barbie (up 14%), Other Girls Brand (up 38%) and Hot Wheels (up 6%) witnessed significant upside. However, Fisher-Price Brands sales dropped 2% to $309.9 million while the American Girl line grew 4% to $73.0 million.

Operating income plummeted 19% to $36.8 million and operating margin contracted 120 bps to 3.9% due to higher other selling and administrative expense (up 190 bps).

Estimates Revisions Trend

Estimates have not budged significantly in the last 30 days, implying that the analysts do not see any meaningful catalyst in the near term and maintain their view on the stock.

Agreement of Estimate Revisions

In the last 30 days, out of the 15 analysts covering the stock, 2 analysts raised their second quarter 2011 estimate while none of the analysts moved in the opposite direction. For fiscal 2011, two analysts out of the 15 increased their estimates, while one reduced the same. However, for 2012, one analyst raised the estimate while one trimmed the same, thus providing no clear directional pressure. The trend remained identical for last seven days also.

The analysts have raised their estimates based on higher growth arising from the success of film release Cars 2. The top line is expected to improve further in 2011, due to higher growth from Monster High, Toy Story 3, World Wrestling Entertainment and Thomas and Friends.

The margin of the company is also expected to improve through incremental savings under the company’s cost reduction program and high single-digit price increases in 2011 to curtail input cost inflation. The earnings are also expected to benefit from increased share buybacks andefficientmanagement of retail inventory.

However, one analyst slashed its estimates for 2011 due to below expectation revenues from the film Green Lantern, input cost inflation and uncertainty relating to ongoing litigation with MGA Entertainment.

Magnitude of Estimate Revisions

Over the past 60 days, Mattel’s estimates for the upcoming quarter remained unchanged. Therefore, the analysts expect the company to report in line. The Zacks Consensus Estimate inched up by a penny for both 2011 and 2012 in the last 30 days. The Zacks Consensus Estimates for 2011 and 2012 are pegged at $2.07 per share (reflecting year over year growth of 11.22%) and $2.30 per share (reflecting year over year growth of 11.28%), respectively.

Maintain Neutral Rating

We expect Mattel to report in line second quarter 2011 results.

We have a Neutral rating on Mattel given its industry leading position, strong balance sheet and benefits of its cost containment initiatives. The company primarily focuses on top-line growth, margin expansion, building new franchises, optimizing entertainment partnerships, international expansion and effective cash deployment, which bode well with the investors. The company also remains committed to maintaining its long-term gross margin target of 50% and operating margin range of 15%–20%.

However, we remain cautious on the stock based on the ongoing litigation with MGA over the rights to the Bratz dolls, as in the recent ruling, the federal jury rejected Mattel’s Bratz doll copyright claim and awarded MGA with $88.4 million in damages for misappropriation of trade secrets. Furthermore, spike in royalty costs and other input costs will keep margins under pressure. In addition, competition from private label toys and video game industry and unfavorable currency exchange rates continue to remain headwinds.

One of Mattel’s primary competitors, Hasbro Inc. (NASDAQ:HAS) will release its second quarter 2011 results on July 18, 2011.