Mattel Inc. (MAT), the largest manufacturer of toys in the world, reported third quarter 2011 earnings of 86 cents per share, in line with the Zacks Consensus Estimate, but above the year-ago quarter earnings of 77 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 as well as robust sales of the company’s entertainment property Cars 2.
During the quarter, net sales were $1,998.8 million, up 9% year over year and also surpassed the Zacks Consensus Estimate of $1,962.0 million. Net sales included a favorable foreign currency impact of 2%. Worldwide gross sales were $2,183.2 million versus $1,996.9 million reported in the prior-year period. U.S. gross sales improved 6% year over year while international gross sales rose 13% year over year.
Worldwide gross sales for the Mattel Girls & Boys Brands business unit were up 15% year over year to $1,343.1 million. Further, Worldwide gross sales for Barbie (up 17%), Hot Wheels (up 6%), Other Girls Brand (up 32%) and Entertainment business (up 14%) witnessed significant upside. Fisher-Price Brands sales also spiked 1% to $748.9 million while the American Girl line grew 4% to $87.6 million.
Gross profit rose 2% from the prior-year quarter to $956.1 million, but gross margin contracted 330 basis points (bps) year over year to 47.8% due to higher cost of sales. Operating income expanded 11% to $397.6 million and operating margin enhanced 30 bps to 19.9% due to lower other selling and administrative expenses (down 370 bps).
At the end of the third quarter, Mattel’s cash and cash equivalents were $254.5 million compared with $960.5 million in the third quarter of 2010. Long-term debt was $900.0 million versus $960.0 million in the year-ago quarter.
The company’s debt-to-total-capital ratio was 33.0% at the end of the reported quarter. As of September 30, 2011, shareholders’ equity was $2.4 billion versus $2.9 billion, as of September 30, 2010.
During the quarter, Mattel repurchased 6.6 million shares for approximately $173 million. The company’s board of directors also approved an additional share repurchase program worth $500 million.
The company reported robust results and we expect estimates to move up as holiday season is approaching and the company generates a large proportion of its net revenues during this period based on the strong demand for toys. The Zacks Consensus Estimates for 2011 and 2012 are pegged at $2.14 and $2.35, respectively.
We have a Neutral rating on Mattel over the long term as it holds 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.
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 third-quarter 2011 earnings on October 17, 2011, before the opening bell.