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5 Key Takeaways From Mattel's Q2 Earnings Call

Mattel (NASDAQ: MAT) reported its second quarter 2016 results last week. The leading toy maker's revenue and earnings declined from the year-ago period, but both numbers beat analyst estimates. Fisher-Price, Hot Wheels, and Barbie drove results.

The market has bid up shares of Mattel recently, encouraged by its turnaround progress. The stock has returned over 40% in the past year, significantly outpacing both Hasbro (NASDAQ: HAS) and the S&P 500.

My purpose here isn't to rehash the results but to share key takeaways from the company's earnings call.

The iconic fashion doll is more fashionable with the younger set than she was a year ago. Image Source: Mattel

1. Barbie's strength was broad-based

From COO Richard Dickson's remarks:

[C]ore dolls with the Fashionista cultural noise and new [body type] introductions have gained enormous traction . . . we introduced a new segment to the younger girl called Dreamtopia, which has a lineup of both doll[s] and accessor[ies] along with content and various other forms of IP extensions that has resonated incredibly well. In fact, the younger girl segment of our business is growing exponentially much faster than we had anticipated.

Dickson's comments indicated that Barbie's strength was quite broad-based. Sales of the iconic doll leaped 23% as reported, and 24% in constant currency, to $160.5 million, accounting for 15.2% of Mattel's quarterly revenue. This growth was encouraging since first quarter sales declined 3% on a reported basis and were flat in constant currency. In 2015, Barbie sales were down 10% and 1% in constant currency.

2. Overall doll sales were a little soft

From CEO Chris Sinclair's remarks, "And we've been a little soft on the doll business, which is obviously a higher margin."

Both American Girl and Monster High turned in weak results. American Girl, which makes moderate-to-higher-priced tall dolls, continues to struggle due to increased competition in the category with sales down 19%. Mattel anticipated such a decline, because its rejuvenation plans for the brand focus on the second half of the year. Monster High's tepid showing, on the other hand, seems to have been worse than the company expected.

From Dickson's remarks:

Monster High, as you know, has persistent challenges. Nevertheless, Monster High remains the No. 2 doll brand worldwide and a brand with strong consumer engagement. We're seeing some success with new product offerings and scales that are expanding play patterns. Shelf space challenges unfortunately [are] offsetting new gains, but we're working hard to capture those spaces.

Mattel is facing a rather common Catch-22 for companies that make products that are heavily sold through brick-and-mortar retailing outlets: They need to prove to retailers their products deserve increased and/or more desirable shelf space by showing sales growth, yet increased and/or more desirable shelf space is often times needed to help bump up sales. Dickson said the company plans to "reboot" the brand in the second half of the year.

So while Barbie shows signs of making a comeback, Mattel still faces challenges in its doll business -- a critical category with strong margins.

3. Jurassic World franchise has huge upside potential

From Sinclair's remarks:

[Jurassic World] is clearly the flagship franchise for Universal [...] We see huge upside to it. So I just would want to make sure this doesn't get characterized as a difficult franchise or one that was maybe there for the picking up. This was a highly, highly competitive process and one where [the license] was highly sought after.

Sinclair and Dickson both emphasized that Mattel is thrilled at being awarded the license from Comcast's Universal Studios to produce toys based on the Jurassic World movie franchise. The license will transition from Hasbro to Mattel in July 2017, ahead of the June 2018 release of a sequel to the 2014 blockbuster.

Sinclair added the characterization comment no doubt because of comments made by Hasbro CEO Brian Goldner during the company's recent earning call: "[W]e'll no longer handle Jurassic Park, because we were unable to arrive at a mutually beneficial financial arrangement on that brand."

Hasbro's Jurassic sales are about $100 million in a movie year, though the company has been experiencing a sharp sales drop-off this year. While Goldner didn't explicitly say so, his comments imply that declines in toy sales following movie years are steeper for Jurassic than is typical for other film franchises.

It remains to be seen how successful the franchise will prove to be for Mattel. 

4. Brazilian issues seem to be bottoming out

From Sinclair's remarks:

Look, Brazil is obviously the continued soft spot. [...] But I think Brazil has probably got a few or a couple more quarters to get through from our perspective. The good news is currency is stabilizing. I think some of the retail problems we had with credit and so forth, hopefully, are bottoming out.

It's obviously good news that Mattel sees the light at the end of the currency-induced Brazilian tunnel. Sinclair added that sales in other parts of South America are doing quite well.

5. 2016 gross margin target lowered 

From CFO Kevin Farr's remarks:

[W]hile we expect the negative impact of currency to be less in the back half for the year, we see additional challenges, primarily mix, continuing. [...] [W]e believe gross margins for the full year will be around 48.5% [...] [W]e expect gross margins will improve sequentially in the second half of the year. That means the second half gross margin of about 50%, which is roughly equivalent to what we achieved in the second half of 2015.

Mattel's previous gross margin target for 2016 was 50%. The company's reported gross margin in the second quarter was just 45.3%, with foreign exchange and an unfavorable product sales mix as the reasons it was lower than anticipated. Sales were slanted toward lower-margin brands such as Mega and Fisher-Price and away from the higher-margin doll business.

In short, I'd characterize Mattel's quarter as a mixed bag.

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Beth McKenna has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Hasbro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.