Mattel: The Stronger Toy Company?

William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On April 17, toy maker Mattel (NASDAQ: MAT) came out with its earnings report. Compared to its competitor Hasbro (NASDAQ: HAS)), Mattel certainly came out on top in terms of growth. Looking at Mattel’s quarterly results from the perspective of strengths, weaknesses, opportunities, and threats will give you a good understanding of its performance.

Strengths

Newer toys – Mattel possesses a definite strength in its relatively newer brands. Growth in Mattel’s Monster High product line, which came out three years ago, and its American Girl chain of stores contributed to overall sales growth of 7%.

American Girl, a line of high-end dolls, came out in 1986. Acquired by Mattel in 1998, American Girl represents its highest-growing segment at 32%, according to the company's latest quarterly earnings presentation. Max Steel, a high school superhero introduced in South America in 2001, generated $100 million per year in revenue, according to a Forbes article.

In contrast, rival Hasbro’s strongest product lines lie in its traditional core brands -- Transformers, G.I. Joe, Magic: The Gathering, Monopoly, and Play-Doh. Hasbro wants to lean on its tried-and-true brands for the foreseeable future while Mattel wants to incorporate new products into its growth plans.

Leadership – Mattel’s CEO, Bryan Stockton, keeps the company going by trying to understand the thinking that goes into the demand for American Girl and Monster High; its hottest items according to an article from Forbes.

Fundamentals – Mattel’s revenue growth nearly tripled Hasbro’s in the most recent quarter (see tables below). Mattel’s interest expense declined more due to the refinancing of $350 million of its debt. Its times-interest earned clocks in at 3.2 versus Hasbro’s 0.5 for the quarter. Mattel’s long-term debt-to-equity ratio comes to roughly half of Hasbro’s.

Mattel sits on roughly $1.2 billion in cash, exceeding Hasbro by $200 million, giving Mattel a slightly bigger wallet.

<table> <thead> <tr><th> </th><th> <p><strong>Hasbro</strong></p> </th><th> <p><strong>Mattel</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Metric</strong></p> </td> <td> <p><strong>% Change</strong></p> </td> <td> <p><strong>% Change</strong></p> </td> </tr> <tr> <td> <p>Revenue</p> </td> <td> <p>2.3%</p> </td> <td> <p>7.2%</p> </td> </tr> <tr> <td> <p>Gross Profit</p> </td> <td> <p>1.1%</p> </td> <td> <p>14.1%</p> </td> </tr> <tr> <td> <p>Operating Income</p> </td> <td> <p>-32.4%</p> </td> <td> <p>129.1%</p> </td> </tr> <tr> <td> <p>Interest Expense</p> </td> <td> <p>-0.6%</p> </td> <td> <p>-3.6%</p> </td> </tr> <tr> <td> <p><em>Operating Cash Flow (ytd)</em></p> </td> <td> <p>4.5%</p> </td> <td> <p>-136.6%</p> </td> </tr> <tr> <td> <p><em>Free Cash Flow (ytd)</em></p> </td> <td> <p>4.4%</p> </td> <td> <p>-186.9%</p> </td> </tr> </tbody> </table>

*Compiled from SEC filings

<table> <thead> <tr><th> </th><th> <p><strong>Hasbro</strong></p> </th><th> <p><strong>Mattel</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Metric</strong></p> </td> <td> <p><strong>MRQ</strong></p> </td> <td> <p><strong>MRQ</strong></p> </td> </tr> <tr> <td> <p>Gross Margin</p> </td> <td> <p>59.7%</p> </td> <td> <p>54.2%</p> </td> </tr> <tr> <td> <p>Operating Margin</p> </td> <td> <p>1.6%</p> </td> <td> <p>6.6%</p> </td> </tr> <tr> <td> <p>Profit Margin</p> </td> <td> <p>-1%</p> </td> <td> <p>3.9%</p> </td> </tr> <tr> <td> <p>Cash to SE</p> </td> <td> <p>72.9%</p> </td> <td> <p>41.3%</p> </td> </tr> <tr> <td> <p>Long term debt to SE</p> </td> <td> <p>95.4%</p> </td> <td> <p>52.5%</p> </td> </tr> <tr> <td> <p>Total Debt to SE</p> </td> <td> <p>177.8%</p> </td> <td> <p>103.2%</p> </td> </tr> <tr> <td> <p>Times Interest Earned</p> </td> <td> <p>0.5</p> </td> <td> <p>3.2</p> </td> </tr> </tbody> </table>

*Compiled from SEC filings

Weaknesses

Older brands – In stark contrast to Hasbro, Mattel’s weaker brands come from its older well-known brands such as Barbie, Hot Wheels, and Fisher Price. According to Mattel’s latest 10-Q, Barbie North American sales declined 7% in the most recent quarter. However, Barbie did show a slight increase of 2% in the international scene. Hot Wheels showed declines in both the North American and internationals segments of 3% and 1%, respectively. Overall, Fisher Price sales declined 7%.

You can blame market saturation and brand fatigue. There are a limited number of ways to leverage small toy cars. You can leverage Barbie in many different ways, but in the end it’s all the same lady.

Opportunities

Licensed brands – Mattel benefits greatly from its relationship with Walt Disney (NYSE: DIS) and other companies for whom it makes toys under license. Mattel anticipates a great deal of success in selling toys based on the future release of Disney’s Planes playing on a previous movie with a similar premise based on talking machines called Cars

Moreover, the future release of the next Thor movie and Iron Man 3 will provide Disney shareholders with future merchandising income as well as opportunities for Hasbro to capitalize on its merchandise arrangement, as well. Disney's diverse line of businesses from its theme parks, studios, and cruise lines will provide its shareholders with superior returns.

Also, Hasbro's focus on its brand blueprint of historically successful line of products will serve as a catalyst for potentially superior shareholder returns.

In addition, Mattel anticipates the re-invigoration of the Disney’s Princess line with the release of the movie Frozen in the Fall. Disney’s Jake and Never Land Pirates also serve as a buffer from complete disaster for Mattel’s Fisher Price segment.

Moreover, Mattel sees increased sales in its licensed Superman toy line with the upcoming release of the next Superman movie.

Multimedia – Mattel plans to bring the South American high school superhero Max Steel to the rest of the world. The brand will exist across the multimedia spectrum in the form of television shows, online content, and toys.

Emerging markets – As Mattel faces market saturation in more mature economies, most of its future growth will come from international markets such as China, Brazil, and Eastern Europe. Sales increased 1% and 9% for the North American and international segments, respectively.

Threats

Global slowdown – Emerging economies will begin to show the same cyclical patterns as they approach more mature phases. China’s economy recently showed signs of a slowdown, and the crises in Europe may put the brakes on Mattel’s growth.

Conclusion

On the whole, Mattel shows growth momentum backed by product innovation, a savvy leader, and a strong licensed-product portfolio even with the slight declines of traditional products like Barbie, Hot Wheels, and Fisher Price. In addition, it possesses a strong balance sheet that will enable Mattel to get through any short- term slump brought on by a cooling international economy. Mattel is here to stay.


William Bias has a position in Disney. The Motley Fool recommends Hasbro, Mattel, and Walt Disney. The Motley Fool owns shares of Hasbro and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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