Mattel Inc posted better gross margins on Friday as it kept a tight lid on costs and inventory in the first quarter, cheering investors to overlook a wider-than-expected loss for the period.

On the heels of a rough holiday sales season, Chief Executive Robert Eckert said Mattel would keep controlling costs as tough market conditions test the resilience of toy companies, which bank on indulgent parents to boost sales.

The world's No. 1 toymaker has already cut about 1,000 jobs and raised prices on its spring toys in the mid-single-digit percentage range as it works to boost results in 2010.

We're operating in a sea of challenging economic news, Eckert said during a conference call, noting that a lot needs to happen before the 2009 holiday season for Mattel to regain its footing.

Mattel has built a worldwide campaign this year to turn the spotlight on its iconic Barbie doll's 50th year. Barbie sales have dropped over the years as girls' taste in toys change.

Steps such as a Barbie fashion show in New York, a six-story flagship store in Shanghai and special designs of Barbie dolls appear to be reaping some early benefits.

Worldwide Barbie sales fell 5 percent in the first quarter, less than Mattel's total sales decline of 15 percent. Barbie sales jumped 18 percent in the United States.

Clearly, retailers have made room for Barbie in an otherwise difficult environment, said Wedbush Morgan Securities analyst Chris White. Retailers have been persuaded that Barbie looks good enough to take a chance on.

Mattel and MGA Entertainment have been locked in court over the Bratz doll, an edgier fashion toy from MGA that cut into Barbie sales in recent years. Mattel now has rights to all but four Bratz drawings but the future of the doll is unclear.

I haven't seen anything that leads me to conclude that MGA sincerely wants to resolve our differences, Eckert said.

Nearly two months ago, MGA CEO Isaac Larian said he was open to a royalty deal with Mattel.

Shares of Mattel gained 11.3 percent, while rival Hasbro Inc's shares rose 4.5 percent. Hasbro is set to report quarterly results on Monday.


The holiday sales period in 2008 capped a rough year for toy companies. U.S. toy retail sales fell 3 percent to $21.64 billion in 2008, according to market research firm NPD Group.

As parents shy away from spending money on toys and other unnecessary items in the recession, retailers have been reducing inventories to avoid selling toys at deep discounts and to keep from ending up with excess merchandise.

Mattel's first-quarter net loss widened to $51 million, or 14 cents per share, from $46.6 million, or 13 cents per share. Analysts, on average, expected a loss of 13 cents a share, according to Reuters Estimates.

Sales fell 15 percent to $785.6 million including a 7 percentage-point hit from the stronger dollar, which reduces the value of overseas sales, Mattel said.

Gross margin rose 80 basis points after a 200 basis point drop in the fourth quarter, and slightly above the rise in the first quarter of 2008, which one analyst flagged as good news.

I don't think people were expecting that swing, said Wedbush Morgan's White. So that begs the question -- have they turned the corner on margin contraction that was largely due to rising commodity prices, which are now on their way down?

Prices for commodities such as oil have eased through the past year, taking some pressure off toy makers.

Barclays Capital analyst Felicia Hendrix said in a note that Mattel keeping its inventory at $487.9 million at the end of the first quarter, flat with the year-end level, was a positive given the tough environment and the inventory build reported (at) the end of last year.

Mattel said it is on track to deliver $90 million to $100 million in net savings for 2009 and cumulative savings of $180 million to $200 million by the end of 2010. It is aiming for capital expenditures below $150 million this year, which it was on track to achieve through the first quarter.

Besides shaving capital spending, Mattel must trim the number of toys it makes to be successful in 2009, Eckert said.

Mattel shares rose $1.47 to $14.50, and Hasbro's shares were up $1.17 to $27.36 on the New York Stock Exchange.

(Reporting by Aarthi Sivaraman; Editing by Lisa Von Ahn and Steve Orlofsky)