Mattel Gathers Up Its Toys

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Mattel (NYSE: MAT) may be the biggest toy company out there, but life for any toy supplier is tough when raw material costs are increasing -- and just a few customers control the majority of its sales. Particularly when those customers are Wal-Mart (NYSE: WMT) and Target (NYSE: TGT).

But Mattel, a Motley Fool Inside Value recommendation, announced Monday a move that might help leverage its stock price and its operational profitability: It will merge its Barbie and Hot Wheels toy business -- formerly known as Mattel Brands -- with its Fisher-Price infant toy business.

The most immediate effects will be on operational profitability. Mattel will cut costs by consolidating management and support functions between the two business units.

The first to go in the consolidation will be Matthew Bousquette, former president of the Mattel Brands business. Bousquette was named to lead Mattel Brands in 2003, when his boys entertainment division merged with the girls entertainment division of the company. Former Fisher-Price President Neil Friedman has been tapped to run the new consolidated "Mattel Brands" business.

As an investor who has considered owning shares in Mattel, I don't disagree with the decision. I prefer companies that consolidate and cut costs. Yet I also want to see growth. This consolidation is geared more toward improving the bottom line than driving top-line sales growth -- and sales growth needs to be a top priority for Mattel.

With third-quarter earnings due out next week, it is an interesting time for Mattel to announce a business reorganization. Hopefully, the reorganization announcement is not hinting at a weaker-than-expected quarter. But given the detrimental effects high energy prices can have on toy manufacturing and distribution costs, it will be interesting to see how well Mattel fared. I'll be paying close attention because, despite the lack of robust top-line growth, Mattel is still a solid business with a decent 2.8% dividend yield.

Toy with these other Foolish ideas:

• New Challenges for Mattel?
• American Girl Taunts Barbie
• Hasbro Goes Wrebbit Hunting

Mattel is a Motley Fool Inside Value selection. Wall Street can't keep a good company down for long. Philip Durell and his Inside Value team can help you find more top-notch companies selling at bargain-basement prices despite their intrinsic value. Sign up today for afree 30-day trial.

Nathan Parmelee has no financial interest in any of the companies mentioned. The Fool has an ironclad disclosure policy.