Barbie and Hot Wheels are two of the most recognizable brands in all of toy-dom. But after Mattel's (NYSE:MAT) latest results, it's apparent that popularity doesn't automatically translate into profitability.
Net income for the first quarter of fiscal 2005 was $6.5 million, compared with the $9 million earned in the year-ago period -- a 28% decline. Its earnings dropped sharply despite the company's revenues, which were flat for the year.
Net sales for the period were $783.1 million, roughly equivalent to last year's revenue mark of $780.9 million. While overall sales were flat, the same cannot be said for the Barbie and Wheels (which includes Matchbox, Hot Wheels, and Tyco) brands.
The need for a Barbie makeover has been known for some time. Apparently it hasn't happened yet; Barbie sales declined 15% from a year ago. Mattel's Wheels category blew out a tire with sales deflating 5% year over year. On the positive side, revenue for its American Girl and games and puzzles categories increased 25% and 18%, respectively.
While Barbie and Hot Wheels are in obvious need of a tune-up, the biggest disappointment for the quarter was the company's margin pressure. Mattel's profit margins are already thinner than Barbie's waistline, but they appear to be getting worse before getting better.
Out of the $783.1 million in net sales, the company's operating income was a meager $5.5 million. Its first-quarter operating profit margin of 0.7% was 56% lower than the year-ago period. The greatest hit to its profits were a result of higher cost of goods that increased nearly $10 million from last year's comparable quarter.
Mattel's cash of $778.7 million and a dividend yield of 2.4% are two of the reasons that it was made a Motley Fool Inside Value selection. But flat sales and eroding profit margins are two reasons why an investor needs to be patient, requiring an extra level margin of safety before being a buyer.
Check out these Foolish toy stories, to read up on Mattel's competition:
Fool contributor Jeremy MacNealy does not own shares in any of the companies mentioned.
