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Mattel shares get all dolled up

Bratz ruling and better- than-expected earnings boost the stock.

July 19, 2008|David Colker | Times Staff Writer

Barbie and Ken might be getting some new neighbors.

And Wall Street is pulling out the welcome wagon.

On the heels of Mattel Inc.'s sweeping court victory in its copyright infringement battle over the popular Bratz dolls, the toy company's shares shot up 13%, or $2.38, to $20.66 on Friday.

A federal court jury decided Thursday that the Bratz characters -- which provided stiff competition to Barbie -- were created by a designer who had an exclusivity contract with Mattel at the time.

The decision wasn't the only factor in the stock rise.

Mattel earnings for the second quarter, announced before the market opened Friday, came in better than analysts had expected. The El Segundo toy maker benefited from toys tied to the recently released movies "The Dark Knight" and "Kung Fu Panda."

But the fight over the Bratz line with rival MGA Entertainment Inc., which brought out the saucy dolls in 2001, was key to bolstering the fortunes of recall-plagued Mattel.

"It could be worth north of $1 billion over the history of the doll," Margaret Whitfield, an analyst with Sterne Agee & Leach, said of the Bratz decision.

Plus, the verdict could cripple MGA, she said, "the main competition for girls 5 and up."

Mattel's signature dolls, Barbie and her cohorts, have been suffering in recent years. In the second quarter, sales of the line plunged 21% in the United States compared with the same period last year, Mattel disclosed.

Overall, Mattel's profit fell to $11.8 million, or 3 cents a share, compared with net income of $22.8 million, or 6 cents a share, for the same period in 2007. Analysts polled by Thomson Financial had expected a profit of about 2 cents a share for the quarter.

Sales were up about 11% to $1.1 billion compared with $1 billion in the year-earlier quarter.

The Bratz case began in 2004, when Mattel filed a lawsuit over ownership of drawings and other materials involved in the creation of the doll line.

The company contended that the Bratz dolls were secretly created by one of its Barbie designers who then defected to Van Nuys-based MGA. The jury in the copyright infringement case agreed and found that MGA aided the breach of contract.

It's not clear how much benefit Mattel will get from the decision.

The next phase of the trial, beginning Wednesday, will determine damages and whether or not Mattel ends up with a stake in the doll. MGA is expected to argue that the drawings don't constitute creation of the actual doll.

Also, MGA will argue that Mattel has no rights to the spinoffs of the line, including Bratz Babyz, Bratz Kidz and Lil' Bratz.

But even if Mattel wins nothing more, its considerable legal costs in fighting MGA are likely to lessen, analysts said.

"We believe the imminent decline of one-time legal expenses should support earnings even in a difficult sales environment," Chris White of Wedbush Morgan Securities said in a note to clients.

Mattel said its legal fees rose during the quarter, attributing more than $16 million of the jump to the MGA case.

A Mattel win could have been even more significant at the time the suit was first filed.

"Currently, fashion dolls do not seem in vogue with young girls," Whitfield said. "They are playing online instead."

Whitfield isn't hopeful that Barbie will ever again be the unassailable doll queen she once was.

"The damage to Barbie," she said, "has already been done."

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david.colker@latimes.com

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