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Mattel's Profit Rises 7%

Higher margins help its quarterly results, but falling sales of key brands worry analysts.

July 19, 2003|Abigail Goldman | Times Staff Writer

Toy maker Mattel Inc. said Friday that better profit margins and lower interest payments fueled a 7% gain in second-quarter earnings, despite weak sales in nearly all of its key categories.

But with the slumping fortunes of Mattel's most important brands -- domestic sales of Barbie fell by 29% in the quarter -- some analysts worried about the company's ability to maintain strong earnings.

"It was pretty bad. The earnings were not a big surprise, but there was weakness all over the place in sales," said analyst Sean McGowan of Harris Nesbitt Gerard in New York. "I don't know how they got the earnings they did with that kind of sales performance. I don't know how they can keep doing that."

The El Segundo-based company posted a profit of $20.9 million, or 5 cents a share, for the three months ended June 30, up from $19.6 million, or 4 cents, a year earlier. The latest earnings were boosted by a 37% drop in interest expenses. Excluding a $14-million pretax charge as part of an ongoing restructuring of various operations to cut costs, Mattel would have earned 7 cents a share -- in line with expectations.

Sales overall for the quarter fell 4% to $769 million from $804.4 million a year earlier. The second quarter is traditionally one of the slower periods for toy makers, accounting for about 15% of Mattel's annual sales.

Still, domestic sales were disappointing. Mattel said U.S. sales fell 15% compared with a year earlier. And although international sales rose 11%, some of that strength came as a result of favorable exchange rates.

Worldwide sales of Barbie and the firm's other core brands -- Hot Wheels, Fisher-Price and American Girl -- all declined.

In a conference call Friday, Chief Executive Robert Eckert told analysts and investors the weak sales were partly due to inventory adjustments and a sluggish retail environment that made toy sellers reluctant to stock up on new goods. The company also has suffered market-share losses as children have clamored for trendier dolls and parents have bought educational toys, two areas in which Mattel has lagged.

Eckert held out hope that new products would bolster sales. The company had announced plans to send 250 new toys to stores during the second half of this year and launch the company's biggest-ever marketing and advertising push.

"We have lost market share, and we've got a hole to climb out of," Eckert said. "It's hard for me to predict exactly how the year-end is going to look. But it is a holiday-driven season, and we aim to have a good holiday."

Analysts said that although Eckert and his team had strengthened the company's financial position, they must focus on reinvigorating Mattel's stable of products. Once the queen of girls' toys with its ever-popular Barbie doll, the company has lost some of its luster to upstarts including North Hills-based MGA Entertainment Inc., the creator of hip, urban Bratz dolls, which have drawn older girls who have long since left Barbie to their younger sisters.

In response, Mattel is launching Flavas, its version of a trendy, city-savvy doll. Last year, the firm introduced My Scene, which aimed to be a cooler branch of the Barbie family. But it has received mixed reviews.

"Mattel has not produced a dime of revenue growth domestically in the past 2 1/2 years," said Anthony Gikas, an analyst with U.S. Bancorp Piper Jaffray in Minneapolis. "It's all been international. At this point, it's becoming evident that Mattel will not be able to grow its revenue in the mid-single digits with its existing product franchises, and the prospect of having to do some acquisitions is becoming more and more evident."

Mattel shares fell 10 cents to $19.75 on the New York Stock Exchange.

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