What: Shares of toy maker Mattel (NASDAQ:MAT) surged on Tuesday following the company's fourth-quarter earnings report. Mattel handily beat analyst estimates, driven by many of its core brands returning to growth. At noon Tuesday, the stock was up about 12%.
So what: Mattel reported quarterly revenue of $2 billion, up slightly year over year and $90 million higher than the average analyst estimate. On a constant currency basis, total revenue increased by 7%. North American sales were strong, rising 5% year over year, while international sales were flat adjusting for currency. On an adjusted basis, Barbie sales rose 8%, Fisher-Price sales rose 13%, Hot Wheels sales rose 28%, and American Girl sales slumped 14%.
Mattel reported adjusted earnings, which excludes both one-time tax items and the impact of currency, of $0.67 per share, up from $0.49 per share in the prior-year period and $0.06 higher than the average analyst estimate. Earnings growth was partly driven by cost cuts, with advertising expenses down 8% year over year, and other operating costs down 7% year over year. GAAP operating margin jumped to 13.5% during the quarter, up from 10.9% in the prior-year period.
Now what: Mattel expects 2016 to be a difficult year. The loss of the Disney Princess license, which accounted for 7% of gross sales during 2015, will make revenue growth difficult, although the company expects a significant portion of this revenue gap to be filled. Mattel is aiming for flat revenue on a constant currency basis, with currency having a 2%-4% negative impact.
SG&A costs are expected to decline again in 2016, with Mattel targeting $55 million-$65 million in cuts as part of its Funding Our Future initiative. Flattish revenue and falling costs could lead to earnings growth in 2016 despite the loss of the Disney Princess business.
Mattel proved during the fourth quarter that its turnaround is making progress. The core brands, particularly Barbie, are growing again, and cost cuts are making the company more efficient. Mattel still has work to do in order to achieve its long-term goals of low- to mid-single-digit annual revenue growth and operating margins in the high teens, but the company appears to be on the right track.