Mattel Inc. (MAT) posted a worse-than-expected 46% drop on
slumping sales, refuting the idea that toy makers are relatively
immune to economic downturns.
Executives with the largest U.S. toy maker said challenges will
continue in 2009, citing economic and employment conditions, weak
opportunities for new movie-themed toys and the credit squeeze some
of its vendors and retail customers are still facing.
"We have some anxiety on both sides of our supply chain,"
Chairman and Chief Executive Robert Eckert said during a conference
call.
Shares of Mattel fell 15.4% and pushed other toy makers lower.
Hasbro Inc. (HAS) shares were recently down 8%; Leapfrog
Enterprises (LF) fell 6.5%; Rc2 Corp. (RCRC) dropped 4.6% and JAKKS
Pacific Inc. (JAKK) was off 3.8%.
Mattel's "terrible" results are a bad sign for Hasbro and the
rest of the toy industry, JPMorgan analysts said.
"While we think Hasbro is much better positioned from a market
share standpoint in Q4 and 2009 given a strong movie pipeline, such
a large miss from the industry's top toy manufacturer clearly
highlights weak toy industry trends at retail," the brokerage firm
said in a note to clients.
Still, the toy industry seems to have outperformed other
categories in 2008, and Mattel gained market share, Eckert said,
citing NPD Group data through November, the most recent month
Mattel had available.
"Consumers in this kind of environment are focusing on core
products and brands with which they're familiar," Eckert said.
Mattel's report coincided with new government data showing U.S.
consumers are saving more by cutting their spending despite falling
prices. The Commerce Department said personal consumption
expenditures fell 1.0% in December from the month before, while
personal saving as a percentage of disposable income rose to 3.6%
from 2.8% in November and reached its highest level since 4.8% in
May 2008.
In response to the difficult consumer spending environment and
the continued hit to sales expected from unfavorable foreign
currency translation, Mattel is cutting capital spending and taking
new steps to cut costs. They include outsourcing information
technology, reducing the number of items in its product lineup and
boosting direct procurement. Mattel in November cut 1,000 jobs
worldwide, or about 3% of its work force, generating about $60
million in annual cost savings.
Chief Financial Officer Kevin Farr said Mattel is on track for
goals of $90 million to $100 million of net cost savings in 2009
and $180 million to $200 million in savings by the end of 2010.
Mattel also implemented mid-single-digit percentage price increases
Jan. 1.
Capital spending will decline to below $150 million, from about
$199 million in 2008 and Mattel expects to reduce its debt.
"Our priority is to protect the dividend, so you won't see a lot
of activity from us in either repurchasing shares" or mergers and
acquisitions, Eckert said. "This is a year really to hunker down
and run the cash machine for cash."
Eckert noted significant toy retailers, such as KBToys in the
U.S. and Woolworth's in the U.K., closed or filed for bankruptcy in
2008, while published reports said some 1,000 toy exporters in
China closed last year.
Mattel's fourth-quarter net income fell $176.4 million, or 49
cents a share, down from $328.5 million, or 89 cents a share, a
year earlier, which included a net 13-cent tax benefit.
Revenue decreased 11% to $1.94 billion, with nearly half the
drop due to the stronger dollar. International sales dropped 20%,
while sales in the slumping North American market fell 6%.
Analysts polled by Thomson Reuters expected earnings of 76 cents
on revenue of $2.21 billion.
Gross margins fell to 46% from 48%. Many toy retailers had been
cutting prices before Christmas in an effort to boost sales amid a
challenging holiday season.
Fisher-Price sales fell 10% while Barbie, Mattel's flagship
franchise, slumped 21% after a 1% drop in the third quarter. Mattel
is working on revamping Barbie for her 50th anniversary this year
to try to make the doll fashionable again with older girls, who are
dropping her for other, edgier playthings like video games. Sales
of Barbie products account for about one-fifth of the company's
overall sales.
Sales for the Wheels category - which includes the Hot Wheels,
Matchbox and Tyco R/C brands - declined 19%, while the
entertainment business, which includes games and puzzles, fell
17%.
American Girl Brands, Mattel's expanding high-end doll unit, saw
sales rise 5%.
One potential threat to its doll franchises could be eased
through its court victory over MGA Entertainment related to the
Bratz dolls that MGA sells but were created by a former Mattel
employee while still on the payroll there. Mattel lost one round in
the legal fight last month when a federal judge ruled MGA could
sell Bratz dolls through 2009 before turning the franchise over to
Mattel. The ruling stayed a previous decision that would have
forced MGA to give up control as soon as this month.
By Mattel's estimates, retail inventories of the company's goods
ended 2008 up mid- to high-single digit percentages, and Eckert
expects retailers to continue managing inventories conservatively.
Mattel ended the year with inventory up 13%, but about half of the
increase was tied to higher costs and Eckert said he was generally
pleased with Mattel's ability to pull back on production.
"Across the board, I'm pretty comfortable with our inventories
right now," he said. "If you look at the sales decline in the
fourth quarter, it was sizable and quick, and given our lead time,
either retailers or Mattel could have been hung with significant
inventory and neither of us were."
-By Mary Ellen Lloyd, Dow Jones Newswires; 704-948-9145;
maryellen.lloyd@dowjones.com
(Kerry E. Grace contributed to this report.)
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