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Earnings Preview: Mattel

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Toy company, Mattel Inc. (MAT - Free Report) is slated to release its second-quarter 2012 results on Tuesday, April 17, before the opening bell. The Zacks Consensus Estimate projects earnings of 21 cents per share for second quarter 2012 on revenues of $1,139.0 million.

Over the trailing four quarters, Mattel’s earnings surprise ranges from negative 14.3% to positive 43.8%, with the average being positive 11.8%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Previous Quarter Recap

Mattel reported first quarter 2012 adjusted earnings of 6 cents per share, missing the Zacks Consensus Estimate by a penny. The earnings miss was due to acquisition related costs and weak performance of its core brands including Barbie and Hot Wheels. Net sales stood at $928.4 million, down 2% year over year from $951.9 million and also lagged the Zacks Consensus Estimate of $986.0 million.

Worldwide gross sales for Mattel Girls & Boys Brands business unit declined 4% year over year to $622.2 million, as worldwide gross sales for Barbie slid 6% and Entertainment business fell 17%, partially offset by a 22% upside in Other Girls Brand, driven by Monster High. Worldwide gross sales for the company’s core brand Hot Wheels also dropped 5%. Fisher-Price Brands sales remained flat year over year at $310.2 million while the American Girl line grew 4% to $76.0 million.

Gross profit also remained flat year over year at $473.4 million, but gross margin expanded 130 basis points (bps) year over year to 51.0%, due to a 130-bp plunge in cost of sales. Operating income also fell 22% to $28.7 million, but operating margin expanded 80 bps to 3.1% due to lower administrative and promotional expenses (down 20 bps), partially offset by a 230-bp rise in other selling and administrative expenses.

Zacks Consensus

The analysts covered by Zacks expect Mattel to post earnings of 21 cents per share for the second quarter of fiscal 2012, lower than the prior-year earnings of 23 cents. Currently, the Zacks Consensus Estimate ranges between 18 cents and 25 cents a share.

Estimates Revisions Trend   

Estimates for the second quarter of 2012 have not budged over the last 30 days, implying that the analysts do not view any meaningful surprises for the time being. The current Zacks Consensus Estimates for 2012 and 2013 stand at $2.39 (reflecting a year-over-year growth of 9.84%) and $2.68 (reflecting a year-over-year growth of 11.8%), respectively.

Agreement of Estimate Revisions

In the last 30 days, none of the 12 analysts covering the stock for the second quarter of 2012 revised their estimates, implying the absence of any significant catalyst for growth.  

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

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

Magnitude of Estimate Revisions

Over the last 30 days, the earnings estimates remained unchanged at 21 cents, $2.39 and $2.68 for the second quarter, fiscal 2012 and fiscal 2013, respectively, which implies that the analysts expect the company to report in line.

However, over the past 60 days, the estimates for the second quarter, fiscal 2012 and fiscal 2013 have move down from 22 cents, $2.41 and $2.69, respectively.

Maintain Neutral Rating

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%, operating margin range of 15%–20% and a payout ratio of 50% to 60% in 2012.

However, tough comparison from Cars 2 in the near term, cautious retail ordering, higher input costs, the ongoing litigation with MGA and increased competition make us cautious on the stock.

One of Mattel’s primary competitors, JAKKS Pacific, Inc. (JAKK - Free Report) will release its first- quarter 2012 results on July 17, 2012.

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