It looks like the same old problems for Inside Value selection Mattel (NYSE:MAT) are still plaguing the toy company.
Looking at the company's financials for the first quarter, the most painful items are anemic sales growth and continued increases in raw materials costs. Sales of Barbie were down 8% worldwide, although they were up 1% in the U.S., which is somewhat encouraging. Its toy-car brands (Hot Wheels, Matchbox) were down 4%. Even American Girl sales, which had been a shining star for the company, dipped 9%. The lone bright spot was the Fisher-Price unit, where core sales were up 12%. Adding it all up, the company delivered 1% total sales growth, but with cost of goods sold up 5%, there's not much to be happy about.
In a strange twist of fate, the Fisher-Price products are also the company's heaviest consumer of petroleum-based raw materials. So even when Mattel wins, it loses, since this bit of good news on the sales front puts a dent in the company's bottom line.
Moving down the income statement, the quarter gets uglier, with an operating loss of $32 million and net income of $30.2 million that materializes only because of one-time tax benefits. Looking ahead, things should get slightly better from an operating-cost standpoint, since $13 million of the company's operating loss was due to severance payments made as part of a workforce reduction. It's not a happy moment to see a company cut jobs, but sometimes it's necessary to survive.
Looking at the big picture, the first quarter is not very important to the business as a whole, since it's usually a quarter when cash is consumed, not made. The company has new products coming out in support of the new Superman movie and the Pixar (NASDAQ:PIXR) film Cars that should help boost the top line. Mattel has also put price increases into effect that should take hold in the second quarter, although I must admit that I doubt those price increases will keep pace with raw material increases. Finally, the company still maintains a solid balance sheet, and it did manage to reduce its inventory balance in comparison to last year's first quarter.
Given Mattel's problems, I'm curious to see whether Hasbro (NYSE:HAS) is suffering from any of the same problems when it reports next week. As it stands today, I have a tough time seeing Mattel getting much cheaper than it is, as long as the business doesn't melt down entirely. The 2.9% dividend yield isn't too shabby and should reward patient long-term investors. However, in the near term, it could be a little bit longer before Mattel gets its cost structure back under control. Until that happens, its profitability is unclear. All this leads me to think the dividend might be the only return shareholders can expect to receive in the near term. That's not so bad if you're a patient investor by nature and can afford to wait for a sales turnaround.
For more Foolishness on Mattel:
Mattel is a Motley Fool Inside Value recommendation. Pixar and Hasbro are both Motley Fool Stock Advisor recommendations.
Nathan Parmelee has no financial interest in any of the companies mentioned. The Fool's disclosure policy is better than a Malibu Dream House.
