Barbies Gone Wild?

If you've clicked on the headline looking for salacious details of Barbie's spring break in Daytona Beach (no doubt spent with three of her best girlfriends in a Hot Wheels convertible), this ain't the place.

However, if you're interested in how Barbie's wild sales figures are hurting Mattel (NYSE:MAT), you're in the right place.

First, a confession: I fell in love with Barbie back in August 2004, when I made Mattel one of my two inaugural picks for my Motley Fool Inside Value newsletter. You know what they say about hindsight, though.

I was obviously blinded by her charms
My investment thesis was that Fisher-Price and Hot Wheels would continue their modest growth and that American Girl would keep growing in the 10%-plus range. I thought the real catalyst for Mattel would be a resurgence in Barbie sales. To date, Ken isn't the only guy who's been crushed by Barbie. Compare these sales growth figures to profit margins:

Going by these figures, you might think Ken would be better off as a bachelor. Gross margins in recent years have tracked Barbie's sales performance. Net margins have been affected by other factors, such as rising material costs, but these are also tracking Barbie sales. However, the most important takeaway that I see is that individual brands are cyclical; if Barbie goes on a sales upswing, the margins will expand. So the question is: Will Barbie go wild?

Mattel has underperformed rivals Hasbro (NYSE:HAS) and JAKKS Pacific (NASDAQ:JAKK) over the past five years. But despite the almost relentlessly negative view of where Barbie's sales are going, she does have a few significant advantages:

• Barbie is still the No. 1 fashion doll in the United States and worldwide, according to the most recent rankings from the NPD Group.
• According to the comScore MediaMetrix, Barbie.com is the No. 1 website for girls, with Barbie-branded websites getting 51 million visits per month.
• Brand leverage is strong. The brand is instantly recognizable, and Mattel can develop new products -- Barbie direct-to-video movies, for instance -- to reinforce the brand.
• Ken wants her back. Yes, that's right -- after two years of utter rejection, Ken has shaped up and (according to Mattel) wants to win Barbie back.

Will Barbie continue to spurn Ken -- and investors? There are a number of risks to consider:

• In the United States, the slow demise of Toys "R" Us and the dominance of retail behemoths Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) give Mattel little pricing power.
• Raw materials, particularly oil-based plastics, have squeezed margins. I believe that oil prices remain cyclical and that they're more likely to retreat than continue to rise. If I'm wrong, however, Mattel and Barbie will feel the pinch.
• Traditional toys are losing out to consumer electronics. Robot Barbie, anyone?

Foolish bottom line
Mattel needs to let Barbie go wild to make the company a worthwhile investment at today's price of $17 and change. In the meantime, Mattel continues to produce a ton of free cash flow, pays a 2.9% dividend yield, and continues to buy back shares.

As for me, I'm still smitten with Barbie, and I'd be interested in a cheap date at around $15 -- even if she doesn't go wild!

Philip Durell is the lead analyst of Motley Fool Inside Value . If you'd like to be his guest at Inside Value for one month -- giving you full privileges (at no cost) to buy reports, intrinsic value estimates, and CEO interviews -- click here. (Malibu Dream House sold separately, batteries not included.)

Philip does not own shares of any company mentioned in this article. Hasbro is a Motley Fool Stock Advisor recommendation. The Fool's disclosure policy has not yet gone wild.