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The News

So much for lead paint worries. Buyers fought over

Mattel

Mattel, based in El Segundo, Calif., reported earnings of 89 cents a share for the fourth quarter, up from 75 cents a share a year ago. Wall Street analysts polled by Thomson Financial expected an average of 73 cents a share. Mattel attributed 13 cents per share on its bottom line to income tax benefits, but also reported an 18% increase in sales overseas, more than offsetting the 3% drop in the U.S.

That decline was precipitated by retailers' worries about the holiday shopping season as well as bad publicity over recalls of hazardous toys. Some of Mattel's Sesame Street vehicles were pulled off store shelves over lead paint, and some Polly Pocket Dolls met the same fate lest their small magnets end up lodged in children's throats.

"Considering the unexpected challenges we faced in 2007, I believe we delivered good results," CEO Bob Eckert said on the Thursday morning conference call. "While the U.S. business was down slightly for the year, in international markets we experienced double-digit growth across all regions."

The Analysis

Given a rocky run-up to a meager holiday shopping season and the recent pounding absorbed by Mattel's stock, expectations had been reset pretty low.

Preview notes from analysts at Wedbush Morgan and Needham & Co., painted a somber picture of the toy business in 2008. Chris White, at Wedbush, bemoaned the lack of a "must have product" such as 2006's Elmo TMX doll in a Tuesday note, and Needham's Sean McGowan wrote Wednesday that an anticipated 10% slide in domestic Barbie sales would hurt results.

As it turned out, Barbie sales sagged 12% Stateside in the absence of new fantasy-themed products, but rose 4% overall thanks to 13% growth overseas.

Eckert estimated that U.S. Barbie sales represent 6% of Mattel's total revenue, but noted that "there's more to the Mattel portfolio than one brand in one country"

World-wide, Polly Pocket sales increased 19%, and vehicles, including Hot Wheels climbed 15%. American Girl doll sales dropped 1.5%. Fisher-Price preschool toys such as the Smart Cycle exercise bike rose 4.3%.

"My checks suggest that despite the adverse retail environment and the economy, Christmas did come. It just came late," says Margaret Whitfield, an analyst at Sterne, Agee & Leach.

She says global sales were well-managed by Mattel International Vice President Brian Stockton and perhaps less vulnerable to bad publicity from the summer product recalls. Mattel spent $42 million in fourth quarter to recall some 21 million Chinese-made toys. The company also warned that earnings could be pressured by higher commodity and testing costs this year.

The Bottom Line

The big boys and girls on Wall Street are already anticipating next month's Toy Fair, an important trade show that often spurs advance buying on hopes for a blockbuster product release.

Whitfield says she doesn't anticipate any hits of Elmoesque proportions, but adds that investors should look more at Mattel's plans to increase prices "in the mid- to high single digits" in the second half of the year. "While that will not benefit them in the first half, it will certainly help their fortunes in the back half," she says.

In the near term, Mattel's rise is a matter of trading momentum and reduced expectations. Looking just ahead, high inventory levels could soon make its hot wheels wobble a bit.