Mattel: Searching For Turnaround Barbie

But shareholders are wary of CEO Barad's promises

Jill E. Barad is known as one of the great performers on Wall Street. Rare is the presentation before analysts and investors where the chief executive of Mattel Inc. doesn't dance or sway on stage, usually dressed in a colorful Chanel or Escada suit, as she shows off Mattel's latest Barbie or Winnie-the-Pooh commercial.

But when a more subdued Barad appeared before investors and analysts at the Phoenician resort in Scottsdale, Ariz., on Aug. 6 to unveil Mattel's new toys, she failed to work her usual magic. She gave a seven-minute overview and left hours of rousing speeches promising strong performance to the heads of her brands, which include Barbie, Hot Wheels, Matchbox, and Fisher-Price. But instead of the usual bump up after a Barad presentation, the stock actually fell a point over the next two days. "People left shaking their heads, saying these numbers don't link with reality," says one analyst in attendance.

STREET SKEPTICS. The problem: After overpromising and underperforming spectacularly last year, Barad, 48, is under the gun to prove she can deliver the goods this holiday season. But she still faces a deeply skeptical audience on Wall Street. After a multibillion-dollar acquisition spree and an overhaul of top management, investors still aren't buying Barad's projections that she can increase sales by 5% to 7% this year and generate 15% annual earnings gains in '99 and beyond.

There are plenty of reasons for skepticism. Last December, just a month after Barad enthusiastically reassured investors that Mattel would meet its projections, she shocked them with the news that revenue would fall $500 million short. For the year, operating income tumbled 27%, to $364 million, on slightly lower sales of $4.8 billion. Sales were flat through the first half of '99, and analysts question whether Barad can find the 8% to 10% growth she's counting on in the second half. That has helped slash the stock price by 45% over the past 12 months.

So far, Barad--who declined to be interviewed--seems to have kept the support of her board. "There has been zero talk of Jill leaving," says William D. Rollnick, a board member for 16 years who describes Barad as "the best marketing person I've ever met in my life." But some investors say that could change if Mattel fails to meet expectations again. "This Christmas is the seminal moment. If she had another shortfall, the board would have to take action," says Erik P. Gustafson, a portfolio manager at Stein Roe & Farnham Inc., which bought 4 million shares this year, betting on a turnaround.

Barad has a lot to prove before she wins back investors' confidence. Many outsiders laud her strategy to broaden Mattel beyond toys. But it could be more than a year before investors know if there will be big rewards from deals such as its $3.5 billion purchase this spring of educational software giant Learning Co., and its development of the Internet site. In the meantime, Barad must squeeze more growth out of her core brands.

The biggest challenge Mattel faces is measuring up to its recent glory. Fueled by the phenomenal success of Barbie, revenues more than tripled in the past 10 years, while operating earnings climbed an an average annual 25%. But to get those numbers in recent years, Mattel overstuffed the retail pipeline. Meanwhile, retailers have been cutting the number of toys they order and shoving the risk of carrying inventory back to manufacturers.

Barad ran into trouble last year because she refused to scale back Mattel's revved-up goals. In early 1998, Toys `R' Us Inc., now the second-biggest toy retailer behind Wal-Mart Stores Inc., announced it was slashing its total annual inventory by $500 million. Barad still assumed other retailers would reload as usual after Thanksgiving. When they didn't, Mattel was stuck with high overhead costs.

Barad vows that won't happen again. Mattel claims it is shipping in line with what retailers are selling. It has slashed costs through a restructuring and a 13%, 4,000-person layoff. Barad cut out a layer of management, pushing out chief operating officer Bruce L. Stein, a toy marketing whiz she had lured from Sony Corp. 2 1/2 years earlier. Mattel's brands are now consolidated under four newly promoted division presidents who report directly to Barad and have autonomy over everything from production to sales. Meanwhile, Ned Mansour, Mattel's longtime chief of administration and legal affairs, was made president. "This is a different company than we were two years ago," he says.

The new structure is designed to speed decision-making and allow Barad to focus more on her strength--product strategy and marketing. That should address a key weakness: In the last two years, some products were not ready to ship until the fourth quarter. Some investors wonder, though, whether the shakeup and Mansour's promotion will be enough to temper Mattel's go-go culture and Barad's excessive optimism. "I don't see financial discipline emerging from Jill," says Joseph G. Kinnison, an analyst at American Express Financial Advisers, which sold its Mattel stock in the fall of '98.

Indeed, it's not clear where Barad will get the growth she's promising. She has to start with the 40-year-old Barbie franchise. The doll still accounts for 29% of Mattel's revenues and an estimated 40% of profits. But Barbie sales fell 14% last year and were flat through June of this year. Mattel is counting on a 10% increase in Barbie sales in the second half. But girls are bailing out at younger ages, so Barbie is undergoing a hipness overhaul. Mattel recently launched a line of Barbie friends called Generation Girl. The six trendily outfitted characters come with talents ranging from skateboarding to poetry writing. Early signs are encouraging: In July, retailers reported that Generation Girls helped drive a 17% increase in Barbie retail sales.

Barad has also made considerable strides in diversifying. Her 1997 purchase of Tyco Toys Inc. added the Sesame Street and Matchbox brands, providing dominance in the infant, preschool, and boys' wheels aisles. And when Mattel bought Pleasant Co. for $700 million last summer, it added the popular American Girl line of historically based dolls and books for older girls, ages 7 to 12. Analysts expect American Girl to increase its $300 million sales by 10% a year. More important, the deal helps Mattel reduce its dependence on a few mass retailers. Pleasant Co. sells through catalogs and the Internet, and brings along the warehouses and packaging to handle up to $1 billion in direct orders.

Mattel hopes to build a $1 billion direct-to-customer business within a few years, double what it will do this year, though some of that could certainly come out of its traditional retail sales. Pleasant Co. is developing catalogs for Mattel's major brands. Mattel is folding 80 separate toy and software Web sites into, which it hopes to spin off as a separate company. Still, the Web venture is expected to lose $70 million in '99.

WIGGLE ROOM. Even pricier is Barad's push into the interactive world through Learning Co. Mattel instantly acquired $1 billion in software sales, to add to its Barbie digital cameras and PC software. And unlike toys, software is selling fast--Learning Co. and Mattel's other software posted 20% growth in the first half of '99. Mattel plans to add more distribution and advertising muscle to the games, which include Reader Rabbit, Carmen Sandiego, and Myst. But Mattel paid a steep 3.5 times sales for the company, so Learning Co. has to maintain a double-digit growth pace to justify the deal. And some analysts question whether that can be sustained, citing the age of some of the software outfit's brands and the difficulty of sorting out its growth following a spate of acquisitions.

The good news is that after a year of slow shipments from Mattel, store shelves have been cleared of excess Barbies and other toys. And through a restructuring charge taken this summer, Mattel probably bought enough wiggle room to meet its earnings target. "We feel completely comfortable," Mansour says. But investors are inclined to wait and see what turns up under the Christmas tree. Come December, if they're not staring at a big turnaround, it may not matter what kind of song and dance Barad has planned.

Before it's here, it's on the Bloomberg Terminal.