Earnings Preview: Mattel

The world’s largest manufacturer of toys, Mattel Inc. (MAT) is slated to release its first-quarter 2011 results on Friday, April 15, before the opening bell. The current Zacks Consensus Estimate for the first quarter is 5 cents per share, representing an annualized negative growth of 28.57%. The Zacks Consensus Sales estimate for the first quarter is $907 million.

With respect to earnings surprises over the trailing four quarters, Mattel witnessed significant upside from approximately negative 6.67% to positive 333.3%. The average earnings surprise was a positive 83.21%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Previous Quarter Recap

Mattel reported fourth-quarter 2010 earnings of 89 cents per share, which surpassed the Zacks Consensus Estimate of 86 cents and were in line with the prior-year quarter earnings. The better-than-expected results were primarily driven by new product lines such as Monster High and core brands such as Barbie and Hot Wheels, partly offset by declines in Fisher-Price Brands and cost escalation.

Worldwide gross sales in the fourth quarter 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, while international gross sales increased 6% year over year.

During the quarter, gross margin dropped 180 basis points (bps) year over year to 51.6% due to higher royalties and input costs, and operating margin contracted 110 bps to 20.2%.

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. Worldwide gross sales were $6,386.6 million in 2010 compared with $5,934.3 million in 2009.

Estimates Revisions Trend

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

Agreement of Estimate Revisions

In the last 30 days, out of the 14 analysts covering the stock, 1 analyst slashed its first quarter 2011 estimate and none of the analysts moved in the opposite direction. For fiscal 2011, only 1 analyst out of the 15 increased the estimate, while none reduced the same for 2011. For 2012, none of the analysts have hiked or trimmed their estimates, which reflects a lack of near-term catalysts.

For the first quarter, one analyst reduced the estimate as retail orders remain conservative due to sufficient inventory on hand after a sluggish holiday period. During the fourth quarter, retail inventory was up low-to-mid double digits. Moreover, margins are expected to compress as product cost and royalty expense move higher.

One analyst has upped the estimate for 2011 based on the company’s strong product line with film releases including Cars 2 and Green Lantern in 2011. The top line is expected to improve further in the year due to higher growth from Monster High, Toy Story 3, World Wrestling Entertainment, Thomas and Friends, Dora the Explorer, and Disney Princess.

The analyst also remains optimistic regarding Mattel’s recent master toy license agreement with DreamWorks Animation, which covers 5 films including Kung Fu Panda 2 and The Penguins of Madagascar television series toys slated to release at Toy Fair 2011.

The margin of the company is also expected to improve through incremental savings from a new round of the global cost leadership program and high single-digit price increases in 2011 to curtail input cost inflation. The earnings are also expected to benefit from more share buybacks.

None of the analysts made any revision to their forecasts over the 7-day period, thus providing no clear directional pressure.

Magnitude of Estimate Revisions

Over the past 30 days, Mattel’s estimates for the upcoming quarter did not budge. Therefore, the analysts expect the company to report in line. The Zacks Consensus Estimate for 2011 remained unchanged at $2.03 and inched up by a penny to $2.23 for 2012 in the last 30 days.

Maintain Neutral Rating

We expect Mattel to report first-quarter 2011 results in line with the Zacks Consensus Estimate. However, total revenue of the company in the first quarter is expected to suffer due to the calendar shift of Easter holiday from March to April in this year and higher retailer ending inventory in the fourth quarter due to lower consumer demand. Moreover, margins are estimated to remain under pressure in the first quarter due to input cost inflation and higher royalty expense.

We have a Neutral rating on Mattel as it has an industry leading position, a strong balance sheet and the benefits of 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. 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 on account of increasing input costs and adverse impact from currency exchange rates. Moreover, competition from private label toys and the video game industry is increasing and orders from retailers remain conservative.

One of Mattel’s primary competitors, JAKKS Pacific, Inc. (JAKK) will release its first- quarter 2011 results on April 18, 2011.

JAKKS PACIFIC (JAKK): Free Stock Analysis Report

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