Mattel Inc. (MAT.O) continued to shake off the liquidation of major customer Toys “R” Us Inc. and used aggressive cost cutting to blow past Wall Street estimates during the crucial holiday quarter. The shares rose sharply after the close of trading in New York.

Adjusted earnings of 4 cents a share were a welcome surprise for analysts who’d expected a loss of 14 cents.

Key Insights

Chief Executive Officer Ynon Kreiz set out a two-pronged strategy to turn around the ailing toymaker when he took the reins in April: first cut costs and boost profitability, then revive sales growth by creating more entertainment around properties such as Barbie and Hot Wheels.

Step one is paying off, and step two is in the works. Key to the profit beat was a big expansion in gross profit margin to 46.6 per cent, a marked improvement from 30.7 per cent a year ago.

The company accelerated a cost-cutting program aimed at administrative expenses, which it slashed by double digits this quarter. Barbie is once again a billion-dollar brand with $1.09 billion in annual revenue. That marks the first time it’s hit that threshold since 2014.

The impact of Toys “R” Us isn’t totally gone, with revenue posting a sixth-straight quarterly drop. But the drag should dissipate in the second half of 2019, Kreiz said in an interview on Thursday. “We aren’t claiming victory,” he said. “We have a long way to go, but we are tracking well.” Investors interested in the state of the toy industry will get more color on Friday when rival Hasbro Inc. reports. 

Market Reaction

Shares rose as much as 19 per cent on Thursday in after-hours trading. Through Thursday, the stock had fallen 27 per cent in the past year, compared to a 0.9 per cent gain for the S&P 500.