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Mattel Inc.'s (MAT - Analyst Report) second-quarter 2013 earnings of 21 cents per share fell short of the Zacks Consensus Estimate of 32 cents by 34.4% and were 25% lower than the year-ago earnings of 28 cents per share. Sluggish sales growth along with higher overhead expenses led to the decline in earnings. However, the quarterly earnings include the asset impairment charges.

During the quarter, net sales nudged up 0.9% year over year to $1.17 billion but missed the Zacks Consensus Estimate of $1.21 billion by 3.3%. There was no impact of currency translation on sales.

Quarter Highlights

Gross sales from North America (including the U.S., Canada and American Girl) decreased 2% year over year while international gross sales leaped 4.0% year over year.

Mattel’s product segments comprise Mattel Girls & Boys Brands, Fisher-Price Brands and American Girl Brands.

Gross sales at Mattel Girls & Boys Brands increased 1% year over year to $792.4 million. Barbie sales were down 12%. However, Other Girls Brands sales shot up 23% buoyed by the Monster High brand.

Gross sales of the Wheels business, which consists of Hot Wheels, Matchbox and Tyco R/C brands slumped 6%. Sales from the Entertainment business were flat year over year.

Sales at Fisher-Price Brands, which includes Fisher-Price Core, Fisher-Price Friends and Power Wheels brands, slipped 3% to $396.7 million. We believe that the segment was hurt by the Fisher-Price Core brand.

American Girl Brands leaped 14% to $78.2 million, primarily led by Saige, 2013 Girl of the Year, and Caroline products.

Gross margin was flat at 51.3% while operating margin plunged 320 basis points (bps) to 8.1%. Operating margin suffered as a result of higher overhead expenses as well as asset impairment charges.

Increased Share Buyback Activity

During the second quarter, Mattel repurchased 2.7 million shares worth $119 million. Further, the toy-maker extended its stock repurchase program by $500.0 million.

Our Take

Mattel failed to sustain the wining momentum of the first quarter. Persistent sluggishness in its powerhouse brand Barbie remains a key concern.

However, the second half of the year is seasonally stronger for toy-retailers since it includes the holiday season. In such a scenario, expansion of the company’s retail footprint under the American Girl Brands and the restructuring of the Fisher-Price portfolio might prove to be favorable for this Zacks Rank #2 (Buy).

Other toy makers Jakks Pacific Inc. (JAKK - Analyst Report), Hasbro Inc. (HAS - Analyst Report) and LeapFrog Enterprises Inc. (LF - Snapshot Report) are slated to report their quarterly earnings soon. While Jakks Pacific is reporting today after the market closes, Hasbro and LeapFrog will likely report on Jul 22 and Jul 29, respectively.

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