Mattel Inc. (pronounced /məˈtɛl/; NASDAQ: MAT) is the world's largest toy company based on revenue.[4] The products it produces include Barbie dolls, Hot Wheels and Matchbox cars, Masters of the Universe, American Girl dolls, board games, and, in the early 1980s, video game consoles. The company's name is derived from Harold "Matt" Matson and Elliot Handler, who founded the company in 1945. Handler's wife, Ruth Handler, later became president, and is credited with establishing the Barbie product line for the company in 1959. Mattel closed its last American factory, originally part of the Fisher-Price division, in 2002, outsourcing production to China, the beginning of a chain of events that led to a scandal involving lead contamination.[5] On Friday, September 3, 2010 a mini "Flash Crash" appears to have occurred in Mattel shares which plunged 22% in pre-market trade for no apparent reason, only to recover shortly thereafter.

Mattel (NYSE: MAT) is the world’s largest toy manufacturer with over $5.4 billion of net sales in 2009.[1] Mattel makes some of the best known brands in the toy industry, including Barbie, Matchbox, Fisher-Price and Hot Wheels. Being the world's leading toy company, Mattel faces the full brunt of the slow-growing industry. Traditional toys have suffered at the hands of the fast-growing video game industry as children increasingly prefer to spend their time and parents' money on digital entertainment.

In addition to the threat from video games, profit margins at Mattel and other traditional toy manufacturers are being squeezed by macro-economic factors largely out of their control, including pressure from retailers and rising input and distribution costs.[2] The retail landscape for toys has shifted and specialty retailers such as Toys'R'Us and FAO Schwartz are slowly adopting to the shift in childrens' entertainment towards video games. Behemoth discount retailer Wal-Mart (WMT) is currently the largest retailer of children's toys in the U.S., a shift which has pressured Mattel's margins as Wal-Mart demands low prices from its suppliers. Exacerbating matters, since the U.S. recession began in late 2007, retailers have been struggling to move product.[3] Additionally, fluctuations in oil prices affect input costs for making plastic-based toys as well as distribution costs for transporting products from factories in Asia to other parts of the world.

Company Overview

Contents
1 Company Overview
1.1 Business and Financial Metrics
1.1.1 Fiscal 2010 Annual Performance
1.1.1.1 Q1 Performance (ended April 16th, 2010).
1.1.1.2 Q2 Performance(ended June 30, 2010)
1.1.1.3 Q3 Performance (ended September 30, 2010)
1.1.1.4 Q4 Performance (ended December 31st, 2010)
1.2 Business Segments
1.2.1 Mattel Boys & Girls Brands (55.6% of 2009 sales)[11]
1.2.2 Fisher-Price Brands (36.7% of 2009 sales)[11]
1.2.3 American Girl Brands (7.7% of 2009 sales)[11]
1.2.4 Geographic Sales
2 Trends and Forces
2.1 Video Games vs. Traditional Toys
2.2 Importance of Oil Prices
2.3 Changes in Toy Retailing
3 Competition
4 References
Mattel designs and manufactures a wide-range of toy and entertainment products, most of which are sold through third-party retailers, with the remainder being sold in a handful of Mattel's own retail outlets. Mattel's products include dolls, board games, outdoor play equipment, electronic games and a variety of other merchandise targeted primarily for children. Some of Mattel's electronic and board games are designed for an older customer, from teenagers to adults. Mattel markets its products throughout the world, with nearly half of its sales coming from outside the United States.[4]

Business and Financial Metrics
In 2009, Mattel's core brands had mixed results, as Barbie and Fisher-Price had gross sales decrease (-3% and -6%, respectively), while Hot Wheels had an increase in gross sales (+5%).[5]
In 2008, Mattel received over $5.9 billion in net sales, down 1% from 2007,[1] largely due to falling consumer spending during the U.S. recession.[3]
Mattel's revenues have grown at a CAGR of 3.7% since 2004, when total revenues were $5.1 billion.[1][4]
Gross margin has fallen from 49.0% in 2003 to 45.4% in 2008, due to a combination of price pressures from retailers and increasing input and distribution costs related to commodity and oil prices. Gross margin has adjusted for such distribution costs, as MAT's gross margin rose to 48.1% in 2009.[1][4]
In 2007, Mattel's reputation took a major hit when the company recalled 967,000 toys due to issues with lead paint in the products. The firm stopped two-thirds of the products from reaching consumers, but over 300,000 items were bought by consumers in the United States.[6] The products were manufactured by a Chinese sub-contractor but several lawsuits have been brought against Mattel for the incident, in addition to masses of bad press.
Mattel 2006 2007 2008 2009
Revenue ($M) $5,650 $5,970 $5,918 $5,435.7
Gross Margin 46.2% 46.5% 45.4% 48.1%
Operating Margin 12.9% 12.2% 9.2% 9.15%
[1][4]
Fiscal 2010 Annual Performance
MAT achieved top-line success in 2010, as annual net sales increased 8% compared to fiscal 2009.[7] Mattel achieved most of its sales success in the U.S., as domestic sales grew 9% and international sales grew 6%.[7] The sales increase translated into a 23.4% increase in operating income as well.[7] In addition, the firm posted net income of $684.9 million, a 29.5% increase compared to fiscal 2009.[7] Mattel attributes its success to healthier consumer confidence and strong performance from its the Mattel Girls & Boys Brands (11% sales increase) and Other Girls Brands (16%) segments.[7] Quarterly financial performance is as follows:


Q1 Performance (ended April 16th, 2010).
Net sales increased 12% from Q1 FY 2009.[8]
Operating income was $45 million for the quarter, compared to a $55.2 million loss in Q1 FY 2009.[8]
Geographically, net sales were up 9% in Europe, up 10% in Latin America, and up 32% in Asia Pacific.[8]
Worldwide Mattel Girls & Boys sales were up 14%, worldwide Fischer Price sales were up 11%, and worldwide American Girl sales were up 9%.[8]
MAT reported a Q1 net income of $24.8 million compared to a net loss of $51 million in Q1 2009.[8]
Mattel launched its WWE line of toys in January, and announced that Toy Story 3 toys will be made for the film's Q2 release.[8]
Q2 Performance(ended June 30, 2010)
Mattel posted net sales of $1.02 billion, a 13% increase compared to Q2 fiscal 2009.[9] U.S. net sales increased 17% and international net sales increased 9%.[9]
Net sales of the Mattel Girls & Boys Brand segment were $653.2 million, a 21% increase compared to Q2 fiscal 2009.[9] Net sales to the Fischer Price Brands segment were $385.2 million, a 4% increase compared to Q2 fiscal 2009.[9] American Girl Brand segment net sales were $58.9 million for the quarter, a 4% decrease.[9]
Operating income doubled from $32.5 million in Q2 2009 to $69.4 million.[9]
Net income increased from $21 million in Q2 fiscal 2009 to $51 million.[9] This lead to a Earnings Per Share (EPS) increase from $0.06 in Q2 fiscal 2009 to $0.14.[9]
Q3 Performance (ended September 30, 2010)
MAT posted worldwide net sales of $1.83 billion, a 2% increase compared to Q3 fiscal 2009.[10] In addition, U.S. net sales increased 3% compared to Q3 fiscal 2009.[10]
By brand, Barbie sales increased 6%, Hot Wheels decreased 2%, Fischer Price decreased 10%, and American Girl increased 2%.[10]
MAT posted operating income of $358.6 million, a 9% increase compared to Q3 fiscal 2009.[10]
Net income increased 23% to $283.3 million, but missed analyst estimates. From this, MAT stock price decreased 6.5% on 10/15/2010 -- the day of release.[10]
Q4 Performance (ended December 31st, 2010)
Mattel posted worldwide net sales increase of 9%, which consisted of an 11% increase in domestic net sales and a 6% increase in international sales.[7]
MAT posted net sales of its core brands as follows: Barbie up 8%; Hot Wheels up 1%; Fisher-Price flat and American Girl up 8%.[7]
Despite growth in other areas, quarterly net income decreased 1%, to $325 million.[7]
Business Segments
Mattel groups all of its products into three major brand groups:

Mattel Boys & Girls Brands (55.6% of 2009 sales)[11]
This segment includes most of Mattel's traditional products and licensing agreements from other companies such as Disney (DIS), Time Warner (TWX), and DC Comics. The Girls brands include: Barbie, Polly Pocket!, and Disney Classics. The Boys brands include: Hot Wheels, Matchbox, Tyco R/C brands, and licensed DC Comics products such as superhero action figures. This category also includes Radica Games, an electronic game maker acquired by Mattel in 2006. This segment experienced a 2% decline in gross sales during 2008.[1] In 2009, Mattel Boys & Girls Brands gross sales were $3.29 billion, down 10%.[5]

Fisher-Price Brands (36.7% of 2009 sales)[11]
This segment includes products designed for younger children. The core brands within this category include: Fiscer-Price, Little People, BabyGear and View-Master. The Fisher-Price segment also includes licensed products from Nickelodeon (Dora the Explorer and Go-Diego-Go), Sesame Street, and Disney (Winnie the Pooh). Gross sales for the Fisher-Price group increased 1% worldwide during 2008.[1] In 2009, Fisher-Price group gross sales were $2.17 billion, down 8%.[5]

American Girl Brands (7.7% of 2009 sales)[11]
American Girl operates as a subsidiary of Mattel and sells most of its products directly to customers exclusively in the U.S., although Mattel operates a handful of American Girl doll retail stores throughout the country. American Girl products include a range of dolls, books, clothes, toys, and accessories for girls aged 3 and up. American Girl sales increased 7% in 2008,[1] largely driven by the summer 2008 release of the film Kit Kittredge: An American Girl which led to increased sales of dolls and products related to the movie.[2] In 2009, American Girl Brands had gross sales of $462.9 million, flat from the previous year.[5]

Geographic Sales
Mattel divides its business into two primary sectors: Domestic/North America and International. Mattel products are sold directly to retailers in most European, Latin American and Asian countries; in Australia, Canada and New Zealand, its products are sold through agents and distributors (Mattel has no direct sales presence). Except for American Girl, which is not sold internationally, Mattel offers the same products in both domestically and abroad. It does tailor product mix to regional fads and the quality is varied due to price sensitivity.

Mattel's international sales accounted for 46% of its gross sales in 2009.[11], as international sales declined 13% in 2009.[11] From 2008 to 2009, domestic sales fell 4% while international sales declined 15% in Europe, declined 12% in Latin America, and declined 7% in Asia Pacific.[11]

Trends and Forces

Video Games vs. Traditional Toys
Toy sales in the U.S. have been growing at a very low rate for the last few years. In fact, in 2008 toy sales in the U.S. fell 3%.[12] This is mainly because of the shift from traditional toys towards video games. In 2008, sales of video game software units (actual games as opposed to consoles) grew 15% in the United States and 26% in the United Kingdom.[13]

Mattel's 2006 acquisition of (Radica) is the company's attempt to tap into the potential in the digital gaming industry, but Radica produces handheld electronic games (such as electronic devices that offer games such as 20 Questions, Checkers, etc) while the major growth in electronic games is in console gaming (Sony's PlayStation3, Microsoft's Xbox 360 and Nintendo's Wii). Without a major foray into video gaming, Mattel could stand to lose significant market share as youth turn to digital entertainment over traditional toys.

Importance of Oil Prices
A considerable amount of Mattel's manufacturing cost comes from plastic resin, which accounts for approximately one-quarter of cost of goods sold. In recent years, resin prices have soared because of a rise in prices of its key component: petroleum. Oil prices skyrocketed in 2007-2008 before peaking in August 2008, when price began to fall drastically. These price movements caused the price of manufacturing plastic-based toys rise considerably in 2008, hurting Mattel's profit margins (gross margin down to 45.4% in FY08 from 46.5% in FY07)[1][4], but if the price of oil remains low, Mattel's costs would be significantly lower in 2009 allowing the firm to earn higher profit figures. This effect is augmented because oil prices play a primary role in Mattel's distribution costs related to transporting its products from manufacturing plants in Asia to customers and retailers around the world. Conversely, a return to rising oil prices would put downward pressure on Mattel's profit margins.



Crude oil prices have been volatile over the past five years, causing Mattel to adjust to stop margin pressure.[14]
Changes in Toy Retailing
The toy retailing environment has changed greatly in recent years. Specialty retailers such as Toys'R'Us and FAO Schwartz have faced difficulty in the current decade. The latter has already been in and out of several bankruptcies and Toys'R'Us has flirted with bankruptcy. Part of this change has been driven by the slow growth of the traditional toy market and the rapid rise of video games, a category that toy stores were slow to adopt. Instead, the video game market became dominated by electronic retailers such as Best Buy (BBY). Mattel's sales to Toys'R'Us decreased in 2007 to $0.7 billion from $0.8 billion in 2006 as the firm cut down on its purchases.

Compounding the woes of toy stores is that growing dominance of large discount retailers such as Wal-Mart (WMT) and Target (TGT), both of which have captured a significant chunk of both the traditional toys market and the video game market. Mattel's three largest customers (Wal-Mart, Target and Toys'R'US) accounted for approximately 41% of sales in 2007,[4] giving the three firms considerable leverage over Mattel when negotiating prices.

This has become increasingly pertinent as the U.S. entered a recession in late 2007 and retailers have had to drop product prices to counter a decline in consumer spending on unnecessary purchases, such as toys.[3][12] This adds to the pain of falling unit sales by lowering the revenue Mattel earns on each sale.

Competition

Mattel is the largest manufacturer of toys in the world in terms of revenue, with $5.4 billion revenue in 2009.[1] Its primary competitor is Hasbro (HAS), which received $4.1 billion in 2009 revenue.[15]

Hasbro: The manufacturer of major toy and game brands such as Monopoly, Mr. Potato Head and Transformers. Mattel and Hasbro have different core segments -- Hasbro makes a large of portion of revenue from board games (Clue, Monopoly and Scrabble) while Mattel’s core business is dolls (Barbie). On the other hand, the two companies compete head-to-head over certain segments, as Hasbro's Playskool goes after the same younger audience as Mattel's Fischer-Price division.
JAKKS Pacific (JAKK): A smaller toy manufacturing company, with licensing deals with Nickelodeon's Blue Clues and Disney's Hannah Montana, among others. JAKKS Pacific is considerably smaller than Mattel, with $800 million in 2009 revenue, but could become stronger with more licensing deals.
Secondary competitors of Mattel include LEGO (toy brick building sets), Bandai (Japanese action figures and video games) and video game manufacturers such as Electronic Arts (ERTS), Microsoft (MSFT), Sony (SNE), Atari (ATAR) and others. However none of these companies compete directly in the toy market for the same demographic of customer as Mattel.
 
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