Toymaker Mattel (Nasdaq:MAT) had lower net income, though its revenue increased during its first quarter. Strong sales of its Barbie line pushed revenue up, but input costs and legal costs drove income down.

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Barbie Stars Again
Revenue for the famed Barbie brand grew by 14%. Other doll brands in the Mattel line, Disney Princesses, American Girl and Monster High dolls also did well. In other toy categories, Hot Wheels did well while Fisher-Price sales fell after the expiration of Mattel's agreement with Sesame Street. Barbie's performance and the other strong sellers weren't enough to overcome the downward factors on Mattel's profits.

Bratz Spoils the Party
Mattel's lawsuit with MGA over the Bratz doll line cost it $18.2 million during the quarter. Later in the day, the earnings report came out, a judge threw out Mattel's ancillary lawsuit claiming MGA fraudulently transferred funds to prevent having to pay anticipated judgments. The original suit by Mattel against Bratz saw a verdict which awarded Mattel $100 million, but that verdict was overturned and currently jurors are deliberating in a retrial. MGA has counter sued also. Confused? There are a lot of tabloid-TV type details; suffice it to say, legal handicapping is even more tenuous than stock picking, but a good guess is that eventually Mattel is the favorite to recoup something.

Input Costs Spoil Profits
The rising costs of commodities served to push up input costs for Mattel. Mattel raised prices on April 1, 2011, with an increase in the high-single-digit percentage range. So although Mattel's revenue rose to $951.9 million from $880.1 million in last year's same first quarter, with the higher costs, net income this time around fell to $16.6 million, or 5 cents per share, from $24.8 million, or 7 cents per share.

The playland for toy companies has been a bruising one. The recession was harder on toy companies than any recession in recent memory. Competition remains rough, and a hit or a miss on a toy line can still mean a lot. Rival Hasbro (Nasdaq:HAS) recently turned in a poor quarter, plagued by costs and inventory increases. But the companies continue to battle away. Hasbro picked up the deal with Sesame Street that had expired for Mattel. Hasbro also continues to build its Hub network, still in its infancy, with Discovery Communications (Nasdaq:DISCA).

The big push by both Hasbro and Mattel will be with tie-in toys for upcoming movies. While Hasbro has deals for Thor and Captain America movies, Mattel has deals for Cars 2 and Green Lantern. These huge film product tie-ins are part of the scale for Mattel and Hasbro, while the smaller industry players such as Jakks Pacific (Nasdaq:JAKK), Leapfrog Enterprises (NYSE:LF) or RC2 (Nasdaq:RCRC) have to be even more innovative and original in order to keep their niches strong.

The Bottom Line
The first quarter is a prelim in the toy bouts. The real action will take place during the summer and beyond, with the movie deals and Christmas. Mattel looks to be momentarily ahead of Hasbro right now, but that could change quickly. (Financial discipline is the key to successful growth in the retail industry. Check out The 4 R's Of Investing In Retail.)

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