Black Friday is less than six weeks away and Mattel (Nasdaq:MAT), the world's largest toy company, is rounding into form just in time for the holidays. Reporting workmanlike results in the third quarter, it's ready to deliver record earnings in 2012. I'll look at what this means for investors.

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From a company-wide perspective, the best number in the third quarter was its operating income, which grew 23% year-over-year to $487.4 million. A close second were operating margins, which increased by 360 basis points to 23.5%. Operating profits in the first nine months of the year increased 19% to $647.5 million while margins gained 230 basis points to 15.5%. Operating margins for the trailing twelve months were at 16.9%; investors can expect them to be over 18% for the entirety of 2012, easily its most profitable year in the last decade. In terms of sales, it was a more subdued affair, rising by 4% worldwide to $2.08 billion. By managing its cost of sales effectively, however, it was able to increase gross margins by 590 basis points. Anytime you can deliver a gross margin above 50% with a sales increase on top of that, you're doing great.

The best sales performance in terms of dollars came from Fisher Price, which saw increased revenues of $41.5 million to $790.4 million. On a percentage basis, however, American Girl was the big winner, boosting sales 16% to $102.0 million. Year-to-date its sales have grown 9% to $246.7 million thanks to its McKenna 2012 Girl of the Year doll. It will be a big hit this Christmas no matter how overall retail sales fare. Unfortunately, it's a tiny part of Mattel's overall business, otherwise the quarterly results would have been even better.


What's happened to Barbie? Revenues in the third quarter declined by 4%, were up 5% in the second quarter and down 6% in the first quarter. They're all over the place. Smart Money ran an article in April entitled Is Barbie Headed for Early Retirement? This is its second decline in three quarters. In the past two fiscal years, Barbie sales increased 12% in 2011 and 8% in 2010. Is it possible that MGA Entertainment, which makes the Bratz and Moxie Girlz dolls, and other competitors such as Hasbro (Nasdaq:HAS) and LeapFrog (NYSE:LF) are taking the fight to Barbie? Independent retail analyst Jeff Green likens Barbie to Kodak suggesting, "She is to toys what Kodak is to outdated photographic technology." I'm not ready to throw in the towel on the old girl just yet, but it does make you wonder.

Fourth Quarter

Extrapolating the results from the first three quarters, investors can expect revenues of $2.21 billion in the fourth quarter and operating income of $522.5 million. Adding this to the first nine months of the year, I expect revenues of $6.38 billion in 2012, an increase of 1.8% and net income of $889.2 million, an increase of 15.7%. Based on an earnings per share of $2.56, its dividend payout in 2012 will be 48%. Financially, it's been an excellent year for the toy maker.

The Bottom Line
The highlight for Mattel in 2012, besides its excellent profitability, is completing its $680 million acquisition of HIT Entertainment in February, which includes Thomas & Friends, Barney and Bob the Builder. Diversification in the toy business is essential; given Barbie's struggles of late, it doesn't hurt to have some other irons in the fire. Mattel has never looked so good.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

Tickers in this Article: MAT, HAS, LF

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