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Mattel profit falls, but investors push up stock

Even though net income declined 3.5% last quarter to $229.8 million, wider profit margins and cost cutting could spur revenue growth in the fourth quarter and next year, analysts say.

October 17, 2009|Nathan Olivarez-Giles

Shares of the nation's largest toy maker, Mattel Inc., rose 4.5% on Friday, despite a small drop in third-quarter profit and a prediction of flat Christmas sales this year.

Mattel Chief Executive Robert A. Eckert said the company expected little sales improvement over last year's holiday season and had cut toy production. But, he added, it's prepared for a possible uptick.

"We still have a lot of toys; retailers still have a lot of toys," he told analysts during a conference call. But there should be no glut of leftover toys as retailers saw last Christmas, Eckert said. "The good news is neither of us have as many toys as we had last year at this time."

With "retailers tightly managing inventory, foreign exchange rates and the lack of entertainment-inspired toy lines," generating sales remains tough, Eckert said. But a scaling back of toy production that began in the second quarter may save the company as much as $200 million over two years, he said.

Profit for Mattel's third quarter dropped 3.5%, but investors were encouraged by the El Segundo company's recent cost-cutting measures and wider profit margins, analysts said. Mattel shares rose 88 cents to $20.46.

"They've been able to successfully raise prices and aggressively shave operating expenses," said Chris White, an analyst with Wedbush Securities Inc. "So the thinking is, with these improvements in place, there's a lot of earnings leverage and earnings can grow."

White said he expected Mattel to show revenue growth during the rest of this year and next.

A year ago, the company's profit was helped by strong sales of movie-related toy lines, including Kung Fu Panda, Speed Racer and the Dark Knight, but demand for those products has waned, Eckert said. Sales of toys tied to entertainment properties were down 15% for Mattel in the third quarter.

Hot Wheels, a stalwart brand for the El Segundo company, recorded a 9% sales jump in the quarter. American Girl sales rose 4%.

"The Hot Wheels business itself has really overcome what we lost in Speed Racer" over the last year, Eckert said.

Barbie products recorded an 8% sales decline in the third quarter, which ended Sept. 30. The doll's sales in the U.S. stayed flat but fell internationally.

Mattel is working with Universal Studios to produce a Barbie live-action movie that could reach theaters as early as 2011, Eckert said. That could help revive the brand, he said.

A Barbie movie could prove to be a key area of sales growth for Mattel, especially if Universal can build the property into a franchise, as has been done with Hasbro's Transformers and G.I. Joe films, said Robert Carroll, an analyst at UBS.

"Turning toy brands into movies, if done right, is a profitable business model," Carroll said. "With Transformers, Hasbro brought in $485 million in toy sales." Hasbro Inc. reports its third-quarter earnings Monday.

Other core brands for Mattel saw sales drops as well: Sales of Polly Pocket dolls shrank 19% and Fisher-Price sales slipped 6%.

Profit was down to $229.8 million, or 63 cents a share, matching the expectations of most analysts, Mattel said. A year earlier, profit was $238.1 million, or 65 cents.

Revenue fell 8% to $1.79 billion. Worldwide net sales decreased by 8% as well.

Amid all of Mattel's declining numbers, Eckert said, he remained sure of one thing. "There will be a Christmas," he said, "and Mattel toys will be under the tree and will likely sell more toys than anyone else."


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