Impressive Profitability Ensues at Mattel as Cost Control Remains Top Notch; Shares Fairly Valued

Narrow-moat Mattel put up its first positive first quarter EPS mark since 2013, as shipments accelerated and cost absorption ensued. Gross sales rose 19%, to $1 billion, handily outperforming the single-digit metric we forecast, as all categories delivered robust growth (with dolls up 4%, vehicles 31%, infant toddler and preschool 12%, and action figures and other up 41%). The adjusted gross margin contracted only 40 basis points (to 46.6%), significantly better than the 300-basis-point downdraft we foresaw, despite 550 basis points of input inflation, as favorable foreign exchange, pricing, and cost savings helped defend profits. All in, an 8.7% adjusted operating margin is a high-water mark for the first quarter at Mattel, sending shares up 3% post print. With shares popping and additional 11% in the trading day prior to the report (due to speculation around private equity interest in the name), we view shares as fairly valued.