Summary
Business:
Toy company
Headquarters:
Los Angeles
CEO:
Robert A. Eckert
Market Cap:
$7.9 billion Dividend Yield: N/A
Total Liabilities:
$3.4 billion P/E Ratio: 23.0
Long-Term Debt:
$1.27 billion
Mattel Inc. is getting back in the game. The El Segundo-based company has been trimming costs by reducing its workforce, closing its last remaining factory in the United States, and taking a new look at its licensing agreements to manufacture toys connected to Walt Disney movies.
Consequently, investors again are being lured back to the $5.5 billion company famous for Barbie and Hot Wheels.
The toy company’s stock price of $18.46 on Oct. 24 was near the 52-week high of $19.60 last July 19. But it is still far off from the days in early 1998 when it was trading at around $46 under the auspices of former Chief Executive Jill Barad, who is best remembered for paying $3.5 billion for computer software entity The Learning Co. a price considered much too high.
The company recently reported stellar third-quarter earnings boosting the status of new Chief Executive Robert A. Eckert. For the third quarter ended Sept. 30, the company reported net income of $199.8 million (46 cents per share), compared with a net loss of $336.9 million (79 cents) in the like year-earlier quarter. Revenue was $1.61 billion vs. $1.58 billion.
“It is pretty clear that ever since Bob (Eckert) stepped in the door, the company has a clear mission statement,” said analyst Jill Krutick of Salomon Smith Barney. “Everyone at the company knows the plan and is executing it. The results speak for themselves.”
Kraft Foods veteran
Eckert, who joined Mattel in May 2000 after working for Kraft Foods Inc. for 23 years, knew that a mature company such as Mattel was not going to grow its revenues quickly. Profit margins could only be guaranteed by examining the weakest links within the world’s largest toy manufacturing company.
A year ago, the company embarked on a financial realignment plan that started by selling Learning Co. for rights to a share of future profits.
It also involved closing its plant in Murray, Ky. Those operations will be consolidated next year into existing Mattel-owned and operated facilities in North America. Worldwide, Mattel has eliminated more than 1,700 jobs.
This summer, a licensing agreement was terminated to produce toys tied to Walt Disney Co. films. Instead there is a licensing deal to make products related to Harry Potter, a character portrayed in a series of books and a soon-to-be-released movie.
“Mattel is a mature company and it is important for Eckert and the rest of the management team to adopt a slender operational structure because growing cash flows are not going to come from growing sales but growing margins,” said T.K. MacKay, an analyst with Morningstar Inc. “Operating expenses as a percentage of sales in the third quarter were 28 percent. Compare that to 40 percent just three months ago.”
Indeed, sales growth in the third quarter did not materialize for Barbie.
Worldwide Barbie sales declined 9 percent. In the U.S., sales of the plastic doll with the perfect figure declined 17 percent, offsetting overseas gains of 7 percent.
Company officials refused to comment for this story, but Eckert has acknowledged that lower sales of Holiday Celebration Barbie and the collector dolls for adults, which sell for more than $35, have been disappointing.
But analysts noted that for more than a year there has been a glut of Barbie dolls on the market.
“Before Jill Barad left, they stuffed the retail channels with Barbie product at a rate higher than they had before, creating an inventory glut,” said analyst Linda Bolton Weiser of Fahnestock & Co. “I am still expecting that for the fourth quarter, Barbie sales will be down 6 percent globally.”
But Mattel has been trying to diversify its girls division away from Barbie. It has introduced several new dolls such as Diva Starz, Polly Pocket and What’s Her Name. “By my estimate, by the end of this year Barbie will make up about 29 percent of the company’s sales compared with 32 percent last year,” Bolton Weiser said.
The company is expected to grow its sales despite a sluggish economy. Nearly 80 percent of Mattel’s product line, including the Fisher-Price division, retails for under $15, including Hot Wheels and Barbie.
Parents often will forego making purchases for themselves to ensure their children receive a gift for the holidays. Eckert is predicting revenue growth in the mid-single digits over the next three to five years.
