Excerps from the Street
Mattel Looks to Barbie to
Empower Earnings Growth
By Katherine Hobson
Staff Reporter
2/18/99 11:00 AM ET
Will Barbie's latest makeover bring improvements
at Mattel (MAT:NYSE) that are more than
skin-deep?
Designed to capture the imaginations of 8- to
13-year-old girls and their mothers, the new ad
campaign is part of Mattel's efforts to expand the
audience for Barbie, which accounts for about 35%
of the toy giant's nearly $4.8 billion in annual sales.
Barbie's U.S. retail sales rose 10% in 1998, less
than the previous year's 14%. The 40-year-old doll,
it was decided, needed a boost, including a focus
on consumers older than the doll's core 3- to
8-year-old audience.
But the 35% decline in Mattel shares over the past
year had less to do with consumer demand for
Barbie and more to do with changes in how many
toys the company's big retail customers keep on
the shelves. So while investors and analysts are
applauding the new campaign and product lineup
(including Working Woman, Millennium Bride and
World Cup Soccer Barbies, as well as a Rosie
O'Donnell doll and the Spice Girl-esque
Generation Girl dolls) unveiled at last week's Toy
Fair in New York, they want to see more than a
Barbie renaissance.
Last year, Toys R Us (TOY:NYSE) -- one of
Mattel's biggest customers -- reduced inventories
due to slower demand for traditional toys. It wasn't
until late fall that Mattel realized the full effect of the
cutbacks, says Mattel spokesman Glenn Bozarth.
In December, the company warned investors that
sales and earnings would trail expectations. Earlier
this month, it said that 1998 net sales fell 1% to
$4.78 billion, while earnings slipped to $363.8
million, or $1.20 per share, excluding charges. That
compares with earnings of $499.5 million, or $1.65
per share, in 1997, which also excludes charges.
Despite an increase in Barbie retail sales,
shipments to retailers of Barbie goods fell 14%
during 1998.
"The company claims they were caught off guard by
the magnitude of reorders that just weren't there,"
says Kevin Grant, an analyst with Oakmark
Funds, which owned about 13.4 million Mattel
shares, or about 4.7% of the company, on Sept. 30,
according to data tracker Technimetrics. (Grant
won't say whether the fund has changed its Mattel
holdings since then.) "To fault them, they were too
aggressive on the sales side."
Now the question is whether retailers have pared
inventories enough to start ordering again. Mattel
says they have. "The shelves are very clean at this
point in time," says Bozarth. "There'll be a fresh
start for the year."
And some investors agree. "I think [last year] was a
one-off," says Richard Glasebrook, fund manager of
the Enterprise Accumulation Trust, which held
about 3.1 million shares on Dec. 31. Mattel shares
have improved this year, outperforming the S&P 500
by more than 20% so far in February.
But others warn that Mattel's inventory woes may
not be over. Hayley Kissel, a Merrill Lynch
analyst, wrote in a recent report that while the
outlook for Mattel has improved and most of the
inventory adjustment is complete, "some fine-tuning
exists." Kissel wrote that Toys R Us "will look to
keep same-store inventory levels flat while
introducing other categories into the mix
Moreover, with big retailers carrying fewer products
and adopting just-in-time inventory practices, Mattel
is working to grow sales in other channels,
including catalogs and the Internet. Barbie
collectibles and customized dolls are already
available online, and Mattel is expanding that
selection. Other brands such as Fisher-Price and
Hot Wheels will also be offered online. To avoid
cannibalizing retail sales, Mattel's Bozarth says,
the toys sold online won't necessarily be the same
models available at the retail level. "We see this as
an incremental opportunity," he says.
Mattel is also responding to the increase in demand
for tech-related toys. In December, it said it would
buy The Learning Company, which will take Mattel's
software sales to $1 billion from $100 million and
help it leverage its brands into more products like
the popular Barbie Photo Designer Digital Camera
and CD-ROM. Mattel also is trying to boost sales
abroad, where the market for Barbie and other
brands isn't as saturated as in the U.S.
After last year's late profit warning, analysts say
Mattel is being cautious about the 1999 outlook.
Despite its big campaign, the company predicts
Barbie sales will rise just 7% to 10% this year, in
line with its overall sales forecast. Analysts
surveyed by First Call predict the company will
lose 3 cents per share during the first quarter, after
the effect of its acquisition of American Girl.
Analysts expect earnings of $1.51 per share for
1999.
And they're hoping the combination of CEO Barad's
marketing muscle and better inventory management
will add up to a turnaround. "This year is going to be
a year in which they re-exert control over their
business," says Enterprise's Glasebrook.
Regards
Neil
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