Earnings Preview: Mattel

Mattel Inc.(MAT - Analyst Report), thelargest manufacturer of toys in the world, is slated to release its first-quarter 2012 results on Monday, April 16, before the opening bell. The Zacks Consensus Estimate projects earnings of 7 cents per share for first quarter 2012 on revenues of $986.0 million.

With respect to earnings surprises over the trailing four quarters, Mattel has outperformed the Zacks Consensus Estimate in two quarters and posted in-line results in the other two quarters. The earnings surprise ranges from flat to 43.8%, with the average at 24.9%. This indicates that the company has surpassed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Previous Quarter Recap

Mattel reported fourth-quarter 2011 earnings of $1.07 per share, which surpassed the Zacks Consensus Estimate of $1.01 as well as the year-ago quarter earnings of 89 cents per share. The better-than-expected results were driven by strong sales of its core brands including Barbie, Hot Wheels and Other Girl Brands. Net sales stood at $2,153.8 million, up 1% year over year but below the Zacks Consensus Estimate of $2,221.0 million.

Gross profit rose 6% from the prior-year quarter to $1,160.4 million and gross margin enhanced 230 basis points (bps) year over year to 53.9%, due to lower cost of sales. Operating income expanded 16% to $497.5 million while operating margin enhanced 290 bps to 23.1%, on the back of lower other selling and administrative expenses (down 110 bps). During the quarter, Mattel hiked its quarterly dividend by 35% to 31 cents per share.

For full-year 2011, the company reported a net income of $768.5 million or $2.18 per share compared with $684.9 million or $1.86 per share in the prior-year period. For 2011, net sales rose 7% to $6.27 billion.

Zacks Consensus

The analysts covered by Zacks expect Mattel to post earnings of 7 cents per share for the first quarter of fiscal 2012, higher than the prior-year earnings of 5 cents. Currently, the Zacks Consensus Estimate ranges between 4 cents and 9 cents a share.

Estimates Revisions Trend

Estimates have not budged in the last 60 days for the first quarter of 2012, implying that the analysts are maintaining their outlook post fourth quarter earnings.

Agreement of Estimate Revisions

In the last 30, out of the 11 analysts covering the stock for the first quarter of 2012, there has been no movement in the analysts’ estimates, implying the absence of any meaningful catalyst to drive the estimates.

For fiscal 2012 and 2013, 1 analyst revised the estimate in positive direction, while none of the analysts revised the same in the opposite direction, in the last 30 days.

The positive estimate revision for 2012 and 2013 was based on the benefit from the acquisition of HIT Entertainment, margin expansion through new round of cost saving initiative Operational Excellence 2.0, mid single-digit price increase in January 2012 to overcome cost inflation and turnaround in Fisher-Price brand initiated in mid 2011. The earnings are also expected to benefit from more share buybacks.

Over the last 7 days, no movement in estimates was noticed either for the first quarter or for fiscal 2012 and 2013.

Magnitude of Estimate Revisions

Over the last 30 days, there has been no change in the earnings estimate of 7 cents, $2.42 and $2.69 for the first quarter, fiscal 2012 and fiscal 2013, respectively, which implies that the analysts expect the company to report in line.

Maintain Neutral Rating

We expect Mattel to report first-quarter 2012 results in line with the Zacks Consensus Estimate.

We have a Neutral recommendation on Mattel as it has an industry leading position, a strong balance sheet and the benefits from 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 based on the ongoing litigation with MGA entertainment regarding the Bratz dolls rights. Moreover, spike in commodity expense, transportation cost as well as rise in wages in manufacturing hubs like China are concerning. In addition, competition from private label toys and the video game industry and unfavorable fluctuations in currency exchange rate continue to remain headwinds.

One of Mattel’s primary competitors, JAKKS Pacific, Inc. (JAKK - Analyst Report) will release its first- quarter 2012 results on April 18, 2012.