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Investors Profit From Variety of Businesses

There are plenty of familiar names atop the Business Journal’s annual list of the most profitable Los Angeles County companies. After all, lean-and-mean, high-margin businesses Herbalife Ltd. and Cherokee Inc. once again took the top two spots.

But there are also some unexpected names.

A variety of companies, from toymaker Mattel Inc. to restaurant chain owner DineEquity Inc., were able to climb up the rankings, demonstrating there is more than one way to turn a profit even a sluggish economy.

DineEquity, the Glendale owner of the Applebee’s and IHOP restaurant chains, is overhauling its entire business model in a process started several years ago. The company had owned many of its restaurants but is selling them off as it converts to a franchise model, which gives DineEquity royalties but insulates it from fluctuations in commodity prices and other costs.

The process is starting to pay dividends: After ranking No. 119 out of 129 companies last year, DineEquity surged all the way to No. 17 on this year’s list. The company reported record annual revenues of $75 million and in the process swung its average return on equity from negative 67 percent last year to 18 percent this year.

“Instead of pulling in restaurant-level earnings, they’re now pulling in royalty fees,” said Will Slabaugh, an analyst in Little Rock, Ark., with Stephens Inc. “It’s made for a much higher margin business.”

Each year, the Business Journal ranks the most profitable local publicly traded companies as determined by three-year average return on equity. By that measure, it was a mixed year overall for the county’s companies.

Herbalife, the downtown L.A. company that uses a global network of independent distributors to sell nutritional supplements and diet shakes, saw a slight dip in return on equity, to 72 percent, but retained its top ranking for the third straight year. Cherokee, a Van Nuys licenser of affordable apparel, upped its ROE modestly to 60 percent.

But not every company made such strides. Mall operator Macerich Co., last year’s 50th most profitable company, fell to No. 61 amid downsizing by many retail tenants, particularly large bookstores. Dole Food Co. Inc. fell even farther, plummeting from No. 25 last year to No. 60 this year.

Westlake Village-based Dole, which had an average return on equity of less than 5 percent, has suffered from falling commodity prices and weak sales in Europe. After its first quarter earnings, in which revenue and income were down year over year, the company announced a strategic review that could result in the separation of its business lines.

Improving profits

The risers have come from all industries, though. Online marketing company ValueClick Inc. and real estate company CBRE Group Inc. both improved profitability. Many of the biggest movers were firms willing to focus on internal operations and reducing expenses.

Consider El Segundo’s Mattel, which significantly upped its margins, an unexpected feat for the country’s largest toy company. Until recently, the maker of Barbie and Hot Wheels was burdened with high overhead costs, said Linda Bolton Weiser, an analyst with Caris & Co. in New York.

“They were pretty fat,” she said.

But in 2009, the company launched the first of consecutive two-year cost-cutting programs, dubbed Operational Excellence 1 and 2. The programs focused on improving efficiency in Mattel’s manufacturing plants and supply chain, reducing head count in certain areas and cutting legal expenses. The company plans to trim $175 million from expenses.

“It’s still not the leanest, meanest company out there, but it’s gotten better,” Bolton Weiser said. “That will improve their profit margins.”

The cost cuts coincided with strong sales growth due to its popular line of toys related to the “Cars 2” movie last year.

With an average return on equity of more than 26 percent, Mattel was the fourth most profitable company in the county. It has been steadily climbing the rankings. Two years ago, it was the 18th most profitable company; last year it ranked 11th.

In a conference call with analysts last week, Chief Executive Bryan Stockton pointed to Operational Excellence as a major driver in its strong recent earnings.

“We continue to work very hard to manage our overall basket of costs, including commodities, currency and labor,” he said.

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