After Mattel (NASDAQ:MAT) put up strong first-quarter numbers right after Hasbro (NASDAQ:HAS) did the same, it's safe to say the toy industry has put the bankruptcy and liquidation of Toys R Us behind it.

Although Mattel's results weren't nearly as good as its rival's, with revenue falling almost 3% to $689 million and a loss of $0.44 per share, they were much better than what Wall Street expected, suggesting Mattel's initiative to piggyback onto entertainment franchises for growth is paying off.

Young girl playing with Barbie dolls

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Adjusting for a big recall

It was a strong quarter for Mattel almost across the board. Gross revenue rose 2% on a currency-adjusted basis; adjusted gross margin came in at 38%, a 670 basis point expansion; adjusted operating income and EBITDA improved by $147 million and $136 million, respectively; and operating cash flows improved some $81 million.

All those adjustments were the result of asset impairments and recalls that Mattel suffered in the quarter. Its Fisher-Price division recalled 4.7 million Rock 'n Play sleepers, and the company said the impact to sales from the recall was $22 million, while operating income took a $27 million hit. The company expects to lose an additional $30 million to $35 million in sales across the rest of 2019, tied solely to the product and not a result of any spillage over to the Fisher-Price brand itself.

The classics outperform

The upside of the quarter was the result of better Barbie sales, which jumped 13% over the year-ago period, lifting the doll category as a whole some 3%. Other hot properties included Matchbox, also up 13%, and Hot Wheels, which saw sales rise 9%.

The American Girl brand, however, continues to languish, tumbling 32% and extending a long string of quarters in which sales fell 20% or more. Although management feigns confidence in the brand, particularly with an upcoming live-action feature film based on it, it's tough to see how American Girl will be embraced at the box office when it's being shunned at the store.

Movies, though, are key to Mattel's future, both for its own product-inspired films and those with other franchises.

Big box office opportunity

Along with the American Girl movie coming from Mattel's own portfolio, there is also one based on Barbie; Hot Wheels, another logical choice, especially if it can capture imaginations like Walt Disney's Pixar did with its Cars franchise; a Masters of the Universe reboot; and a project based on its stereoscopic 3D viewer View-Master, which just seems like a bad idea, though MGM Pictures says it's excited about the project.

It's about time Mattel leveraged its brand portfolio as Hasbro has been capitalizing on its toy characters for some time, particularly with Transformers, which has earned billions of dollars at the box office and boosted toy sales.

Mattel is also finally piggybacking on the franchises of others. Action figures, building sets, and games grew 22% as it shipped product ahead of Toy Story 4's release in the second quarter, while Jurassic World action figures also have legs, with Mattel winning Toy of the Year in the action figure category because of its partnership with Universal Studios.

Key takeaway

When a retailer like Toys R Us, which represented about 10% of Mattel's revenue, goes under, it's obviously going to create a drag on performance. That will be more pronounced when you have what has been an ailing toy maker to boot. But with new management that sees the potential in leveraging a deep bench of toys (though perhaps not nearly as deep as Hasbro's bench), Mattel gives rise to the hope that it can engineer a turnaround.

Mattel still has some headwinds before it, such as the recall's costs, which is why it didn't change its full-year guidance despite the outperformance, but for now, at least it appears to be heading in the right direction.

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