Hasbro's earnings announcement certainly didn't wind up investors Thursday — the toymaker missed expectations and reported net income fell 71 percent.
Rival Mattel's first-quarter earnings Friday did beat the street despite a 33 percent drop in net income, thanks to strength in international sales.
Both reported large international sales, but also higher production costs.
During the company's conference call, Mattel CEO Robert Eckert emphasized the company's global growth, saying that "across our entire portfolio of brands, we experienced international growth in all regions of the world. Overall, Mattel continues to be well positioned to benefit from its scale advantage."
It's not a new toy leading the international growth but an old friend. "Barbie" posted her highest international gross sales since 2004 and the best double-digit sales growth in 14 years.
Mattel's digital marking campaign to reunite Barbie and Ken — the world's most famous toy couple, which "split up" on Valentine's Day 2004 — likely helped fuel sales around the world.
Hasbro also found strength outside the United States.
International revenue was up 15 percent for the quarter while revenue from the U.S. and Canada fell 8 percent.
Hasbro CEO Brian Goldner said the loss in net income is a result of product development costs, and that first-quarter results are "on track with our plan for the full year."
Citigroup analyst Greg Badishkanian questions in a research note whether the magnitude of higher product investment spending will continue over the next several quarters. However, Badishkanian doesn't believe this first quarter miss will derail Hasbro's full year.
"...(B)eyond the 1Q miss, 2011 could still be a decent year given a solid entertainment lineup (driven by movies such as "Transformers: Dark of the Moon," "Thor" and "Captain America") and potential positive traction from the Hub."
Toy makers can't ignore rising input prices and the impact on gross margins, and as a result both Hasbro and Mattel have increased prices.
Mattel's Eckert addressed the issue during the conference call, saying, "...(N)obody wants to raise prices. We have worked very hard and continue to work very hard on cost reductions to offset inflation in commodities...They [retailers] understand costs are higher" in plastic, labor and transportation.
"That's the environment we're in," he said. "It's unfortunate, but we're not alone in this."
With nine days to go until Easter, the second-biggest holiday for toymakers behind Christmas, MKM Partners analyst Eric Handler says toymakers have a unique ability to pass along price increases to the consumer.
"The good thing for the toy manufacturers is that every year 80% of the skews are brand new skews, so it's a lot easier to put forth price increases through the retail channel than it is for companies that have the same products year in and year out," he said.
Mattel is "a little more susceptible to rising commodities prices and changes in Chinese labor, because they do a lot of their own manufacturing in China in their own plants," he said. "Hasbro outsources a lot of their production, so they have a little bit more stability in their gross margins."
So where should investors place their toy bets? Handler prefers Hasbro to Mattel in the long run.
"I continue to prefer Hasbro over Mattel just taking a two-year outlook in some of the media and entertainment ventures that Hasbro is going into in terms of their joint venture with Discovery with the Hub Cable network and the promotional capabilities," he said.
"Mattel near-term looks good. They did have good solid first-quarter numbers. They are set up well for the second quarter with "Cars 2," but I do like Hasbro much more over the long term."
Believe it or not, orders are being placed now for the holidays (Christmas is 253 days away), because the toymakers need the long lead time for manufacturing.
While retailers are hopeful for another strong Christmas, they don't want to be stuck with a lot of extra inventory. So right now they are being cautious with their orders — though that could change as the consumer continues to improve.
