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Making Money with Barbie

February 01, 2012 | About:
The Science of Hitting

The Science of Hitting

On Tuesday morning, Mattel ([url= ]MAT[/url]), the producer of some of the most widely recognized toy brands in the world, reported fourth quarter and full year 2011 earnings. In the fourth quarter, sales increased 1% from the year ago period to $2.15 billion, with a 5% increase in international gross sales being counterbalanced by a 2% decline in domestic sales. For the full year, sales increased 7% to $6.27 billion, led by a 12% increase in international sales.

In the Mattel Girls & Boys Brands segment, sales increased 13% for the year to $4.15 billion, marking the second consecutive year of double digit sales growth. The strong growth in the segment was on the back of a 12% increase in brand Barbie, which was the No. 1 property in the toy industry for the holiday season for the fifth consecutive year.

In the Fisher-Price Brands segment, sales decreased 3% for the year to $2.16 billion, partly due to the expiration of the company’s license agreement with Sesame Street (sales were roughly flat excluding this piece). American Girl Brands, the company’s smallest segment, reported 2011 sales of $511 million, a 5% increase year over year and a record for the brand.

As noted by Bryan Stockton, who recently became CEO, the company thinks that giving excess cash back to shareholders is a good way to allocate capital:

“With strong operating results throughout the year, Mattel's business model generated strong cash flow, which we continue to deploy to shareholders. As you already saw on today's press release, we have raised our quarterly dividend by 35%, reflecting an annualized dividend of $1.24 [a yield of 4.00% at Tuesday’s close, and slightly above the midpoint of the company’s payout target of 50-60% of EPS]. Dividends remained an all-important component in our deployment strategy, a key driver of our TSR [total shareholder return] and an effective way for us to share the value we are creating with our shareholders.

We also continue to repurchase shares, buying back a total of $536 million for the year [20.4 million shares] and almost $1 billion over the last two years [equal to 9.5% of the current market cap]. In 2011, we executed against these strategic priorities that we laid out for you in the beginning of the year, which were to deliver consistent growth through continued momentum in core brands, the building of new franchises, optimization of our entertainment partnerships and continued expansion of our international footprint.”

At the end of the day, the story for Mattel continues to be the potential for long term international growth. As noted by Mr. Stockton, one example is the Latin American business, which grew by 14% in 2011, and reached nearly $1 billion in revenues; by their estimate, this region alone would be the fifth-largest toy company in the world on a standalone basis.

For the fourth quarter, EPS came in at $1.07, an increase of 20% ($0.18) versus the prior year. EPS for full year 2011 was $2.18, an increase of 17% ($1.86 in 2010) due to higher operating margins (lower gross margin was outweighed by leverage in SG&A). The stock was up nearly 5% on the day, and closed at $31 per share; it currently trades at 14.2x earnings.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves (potentially over a period of years). As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

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