What happened

Shares of Mattel (NASDAQ:MAT) were flying higher today after the struggling toy maker topped expectations in its fourth-quarter earnings report. In an industry that's been hammered by the Toys R Us bankruptcy and kids' increasing preference for screens over classic toys, Mattel jumped over low expectations and also seemed to outperform rival Hasbro (NASDAQ:HAS). Solid growth from the Barbie brand also impressed investors and as a result, the stock was up 22.5% as of 12:28 p.m. EST.

So what 

Mattel said sales in the key holiday quarter slipped 6%, or 3% in constant currency, which reflected an 8% impact from the Toys R Us liquidation. Revenue came in at $1.52 billion, which topped analysts' estimates of $1.44 billion.

A Barbie playset

Image source: Mattel.

Two of Mattel's "power brands" showed strength as Barbie gross sales increased 12% and Hot Wheels saw 9% growth. However, Fisher-Price and Thomas & Friends, and American Girl saw sales plummet by 13% and 28%, respectively.  

The toy maker also said gross margin improved for the first time in the fourth quarter in years as adjusted gross margin soared from 30.7% in the prior-year quarter to 46.6% due to cost-savings initiatives and lower inventory obsolescence costs. Adjusted operating income was $113 million, up from -$163 million in the quarter before, and the company posted adjusted earnings per share of $0.04, up from -$0.82 in the quarter a year ago. That beat expectations of -$0.18. 

CEO Ynon Kreiz sounded optimistic about the company's progress, saying, "Our fourth quarter results demonstrate meaningful progress in executing our strategy and significant improvement over last year. 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 intellectual property in the mid-to-long-term." 

Now what 

Mattel is clearly making progress in its turnaround bid, which explains the cheers from Wall Street today. Management said it would give 2019 guidance at the annual Toy Fair in New York next week, which is likely to move the stock one way or another.

The company is certainly moving in the right direction, but with sales falling and only minimal adjusted profit in its biggest quarter, there is still a lot of work to be done to restore the company to full health.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Hasbro. The Motley Fool is short shares of Hasbro. The Motley Fool has a disclosure policy.