Barbie Is Turning Heads on Wall Street Again

Mattel's better-than-expected sales are making investors smile. But there's no guarantee of a happy ending to this toy story

What a difference a year can make. Twelve months ago, Mattel Inc. (MAT ) Chairman and Chief Executive Officer Jill Barad -- who launched Barbie into new markets but misfired with the acquisition of The Learning Company (TLC) -- resigned. The global toymaker's stock declined, eventually hitting a 52-week low of $8.94 on Mar. 10. The 55-year-old company, which started as a garage-based dollhouse-furniture business in a Los Angeles suburb, was floundering.

But look at Mattel now. While industry analysts stop short of calling the toymaker a turnaround story, investors again like what they see. On Feb. 1, Mattel surprised Wall Street by reporting fourth-quarter net income of $71.1 million on sales of $1.58 billion, a 4% jump from the year before. Mattel CEO Robert Eckert told investors in a conference call he expects the company to continue posting sales gains in the same range for the rest of the year. That sure beats losing $82.4 million on sales of $5.5 billion in 1999.

The Feb. 1 news gave a big boost to Mattel shares, which closed at a 52-week high of $16.30 on Feb. 2 and then hit a new high of $16.85 on Feb. 7. "Mattel has momentum and their act together," says Ronald Thomas, an analyst who covers consumer products and services for the Liberty Funds Group in Boston.


  But the toymaker, which, in addition to Barbie, owns such other venerable brands as Fisher-Price and Matchbox, isn't home free yet. As the 2001 American International Toy Fair gets under way in New York on Feb. 8, Mattel doesn't appear to have any hot new products in its stable. And like its competitors, Mattel got giddy in the late 1990s, taking chances that failed to produce the expected sales. Toymakers "were venturing into new projects without caring too much how much they paid," says Timothy Vick, a senior analyst with Arbor Capital Management, based in Munster, Ind. Costs mushroomed, putting pressure on the companies to squeeze profit margins, a tough task as consumer confidence in the economy waned.

Other industry trends are worrisome, too. The in-store shelf life for toys seems to be getting shorter -- which could translate into fewer per-item sales. Throw in a rougher-than-expected 2000 holiday season, and you have a toy climate that isn't exactly fun and games. Overall, analysts estimate toy-industry sales climbed roughly 4% in 2000 from 1999 -- making Mattel's growth during the fourth quarter exactly average. The increase is less than half the 9% overall gain the industry recorded a year earlier.

Amid such challenging market conditions, shareholders and Wall Street will be watching Mattel and Eckert closely as the company focuses on increasing sales, slashing costs, and concentrating on core brands -- a favorite Eckert theme. Vick says Eckert is sending the message that Mattel is cleaning up its act and "won't go willy-nilly into new projects. Investors won't tolerate that." (For more the lessons of investor intolerance, see "Commentary: How eToys Could Have Made It".)


  The Toy Fair may give the strongest clues to Mattel's near-term prospects. The company is expected to make several presentations at the fair, where the competition, as always, is fierce. Some 2,000 makers of children's and family-entertainment products have converged in hopes of finding a market among 27,000 toy buyers. But even without a blockbuster toy, Eckert has momentum for now. "It's the first time Wall Street has been convinced Mattel is back in the growth mode" since he took over the company helm in May, 2000, says Vick.

Belt-tightening, the latest pasttime at Mattel, has helped. During the buoyant 1990s, the company boosted its revenues and profits through acquisitions, including Fisher-Price, the No. 1 brand in infant and preschool toys, Tyco Toys, makers of Matchbox cars, and Pleasant Co., best known for its American Girl brand. Mattel also bought Britain's J.W. Spear, getting international rights to top-selling word game Scrabble. Sales of its licensed movie products were brisk, and Mattel continued to extend its global reach. Suddenly, girls in China were buying Barbies.

But such aggressive growth proved unsustainable. Under the direction of Barad, who became CEO in January, 1997, Mattel made the ill-fated purchase of TLC for $3.8 billion in May, 1999. The educational-software maker has reported losses ever since, at one point losing a half-million dollars a day. Mattel's financial health began to deteriorate. Eventually, Mattel gave the Learning Company business to an affiliate of Los Angeles-based Gores Technology Group in exchange for a split of any profits.


  The divestiture of TLC boosted Mattel into the black for fourth-quarter 2000. Stronger sales of Mattel's core brands, including Barbie, Hot Wheels, American Girl, and Fischer-Price, also helped to brighten prospects. Since coming on board in May, 2000, Eckert has embarked on a housecleaning. New managers have been urged to take charges and sell assets, much as Mattel did with TLC. Mattel is also changing the way it distributes its products to retailers to help eliminate of backlogs of unsold merchandise. "They're on the right track," says Liberty Mutual Group's Thomas about the company's moves.

But trying to squeeze out cash flow and boost the bottom line when growth in the toy industry is modest at best won't be easy. Analysts say that's why Eckert is betting on the company's well-known names, entering into software-development deals with interactive entertainment businesses for such strong brands as Hot Wheels and Matchbox. Thomas says Mattel also should be able to endure tough market conditions by lowering production costs wherever possible.

The upshot: Mattel is aiming for a stable earnings stream -- even when there's no must-have hot toy enticing consumers to buy. "You can't have a breakout hit every year," says Thomas. He noted a potential threat to Mattel and other toymakers: the growing emergence of private-label toys on shelves. Case in point: On the second floor of a Toys 'R' Us Inc. (TOY ) store in lower Manhattan, you'll find Mattel's Mini Xtreme Cycle, a radio-controlled dirt bike and rider for $37.99. But look across the aisle and you'll find a competing Xtreme Streetfighter for $19.99 -- courtesy of Paramus (N.J.)-based Geoffrey, and distributed by Toys 'R' Us.


  To be fair, Mattel's dirt bike and rider has more details -- more tire spokes, and the tires have treads. But while Mattel's Mini Xtreme Cycle and a larger version had just a corner of a shelf, Geoffrey and Toys 'R' Us had an entire shelf, tempting buyers with radio-controlled dirt-bike riders, jet skiers, monster trucks, semi-haulers, and Army tanks. "This is going to continue," Thomas says. While most parents will probably opt for a genuine Barbie during the holidays, they may pick up a non-Mattel truck if the price is lower and it has almost as many attractive bells and whistles, Thomas adds.

During the Feb. 1 conference call, Eckert acknowledged the threat of store-owned private brands but wouldn't speculate on which Mattel lines might be vulnerable. "We're fairly confident we can continue to grow our brands," he said. The company declines to offer more details related to products or strategy.

But a recent research note by analyst Margaret Whitfield of Tucker Anthony gives some insight into the company's strategy. According to Whitfield, Mattel is hoping to get a boost by turning to nostalgia and reintroducing hit toy lines from the past. Look for the company to reintroduce Tickle Me Elmo; '60s favorite Rockem, Sockem Robot; and its He-Man, Masters of the Universe line of action figures.


  Competitor Hasbro (HAS ) also is renewing its focus on classic toy properties and brand-building. It has relaunched Tinker Toys, and in 2001 it will emphasize G.I. Joe, according to Whitfield.

Mattel's prospects will depend largely on the economy and fickle consumers who may or may not embrace the industry's latest offerings -- whether they're new or repackaged favorites. Mattel still has plenty of challenges this year, but at least Barbie and her friends are finally getting a second look from investors.

By Heesun Wee in New York

Edited by Douglas Harbrecht

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