After a rough 2018, Mattel, Inc. (NASDAQ:MAT) is off to a strong start. The company reported results that beat estimates on both the top and bottom lines as strong sales and cost savings of $521 million last year helped it generate its second consecutive quarter of profitability. In many ways, Mattel produced its best quarter since 2009. Investors cheered the results, sending the stock up more than 20% on Friday.
For the fourth quarter, Mattel reported net sales of $1.52 billion, a decline of 5% year over year, and 3% in constant currency -- easily surpassing analysts' consensus estimates of $1.44 billion. Gross sales (before returns, sales discounts, and sales allowances) were down 11%, and 9% in constant currency, which reflected an 8% negative impact from the Toys R Us bankruptcy, showing just how devastating the loss of the retail giant was for the toymaker.
The company continued its spending discipline, cutting operating expenses by 19% and saving nearly $144 million in the process. This led to operating income of $107.4 million, compared with a loss of $251 million in the prior-year quarter. Earnings per share of $0.04 were significantly better than the $0.82 loss in the year-ago period, and soared past the loss of $0.16 per share expected by analysts.
Sales in North America, which accounts for the bulk of Mattel's business, fell by 6% year over year. International sales declined by 7%, but just 2% when adjusting for currency changes as foreign exchange headwinds in the fourth quarter took a toll.
Barbie regains her popularity
There were many things that contributed to Mattel's better-than-expected performance. Sales of Barbie were particularly notable, up 12% year over year and 15% in constant currency. This marked the fifth consecutive quarter of year-over-year growth, producing Barbie's best gross sales in the past five years. Hot Wheels was also a highlight, as sales increased 9% year over year, and 12% in constant currency. It also boasted the highest full-year gross sales in the brand's history.
The resurgence in the popularity of Barbie and Hot Wheels couldn't come at a better time. Mattel has reached agreements over the past month to develop motion pictures based on its two most well-known properties, as part of a broader shift to capitalize on its intellectual property (IP).
The American Girl segment continued to struggle, with sales stumbling 27% year over year both in local and constant currency. Fisher-Price and Thomas & Friends also lagged, down 17% and 15% in constant currency. The American Girl segment recently announced it would be closing flagship stores in the Mall of America and Boston, leaving 17 retail locations.
On the earnings call, Mattel CEO Ynon Kreiz pointed out that the Fisher-Price segment was the "most heavily impacted" by the closing of Toys R Us. He was optimistic, saying, "The infant, toddler and preschool category is the single largest category in the toy industry and ... we have been and remain the number one in the category globally and we believe if we are successful in our Fisher-Price turnaround plan there is significant upside potential to be captured." He also said the company launched new content in 2018 that will help slow flagging sales of Thomas & Friends.
The ongoing reorganization of Mattel's business and the forecasted cost savings exceeded its goal. The company had anticipated achieving a run rate of cost savings of $500 million by year's end, but delivered $521 million in savings, and is still on track to exceed the $650 million in cost reductions it had targeted to close out 2019. These efforts showed in the improvements in Mattel's financial metrics, as gross margin, operating income, and earnings per share all improved dramatically since this time last year.
"Our fourth quarter results demonstrate meaningful progress in executing our strategy and significant improvement over last year," said Kreiz. "We remain focused on advancing our strategy to restore profitability and regain top-line growth in the short-to-mid-term and are laying the groundwork to capture the full value of our IP [intellectual property] in the mid-to-long-term."
What the future could hold
Mattel hasn't yet provided a forecast for the current quarter or full year. On the conference call, CFO Joe Euteneur said the company would provide insight into the coming year at the 2019 Toy Fair the second week of February.
In the absence of guidance, we can look to Wall Street analysts to get a baseline for expectations, though we don't want to get caught up in their quarter-to-quarter mindset. For the first quarter, analysts' consensus estimates are calling for revenue of about $697 million, a decline of 5% year over year, and a loss per share of $0.37, a 38% improvement from the prior-year quarter.
Based on the past two quarters, Mattel has been executing well in achieving its long-awaited turnaround. That said, challenges remain and the company still has a long way to go. Investors should take this for what it is: a positive sign and another step on the long road to recovery.