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Mattel: Up the Hill Minus Jill


After a four-year absence, toymaker Mattel Inc. (MAT) plans to start selling one of its classics again this spring: the 35-year-old Rock 'em Sock 'em Robots. As any baby boomer remembers, that's the game where robots box in a miniature ring until one gets its little plastic head knocked off. But this time around, Mattel is also bringing out Rock 'em Sock 'em Robot action figures, as well as a handheld electronic game and a video version for Sony Corp.'s PlayStation 2. Those electronic takes on the classic toy are a key part of Mattel's conservative back-to-basics strategy--one that its new CEO, Robert A. Eckert, hopes will keep investors from demanding his head.

Eckert, 46, came to Mattel last year after 23 years at Philip Morris Cos.' Kraft Foods Inc. division, the last three as president. His mission: revive Mattel after three years of anemic earnings and a disastrous foray into computer games that cost his predecessor, the flamboyant Jill E. Barad, her job. The new boss wants to resuscitate the world's largest toymaker by emphasizing such tried-and-true products such as Barbie dolls, Hot Wheels cars, and Fisher-Price toys. He is pushing hard to increase the use of technology in Mattel products. And instead of developing its own computer games, Eckert plans to offload the risk by letting other companies pay to develop games sporting Mattel's brand names. Finally, he plans to tread warily into the fickle field of licensing, where toymakers hitch their products to cartoon, movie, or TV characters. "My philosophy," he says, "is to play to the strength of our existing brands--and if we get a hit, it's a lucky-strike extra."

Mattel does seem to be on the mend. It reported 17% higher profit from continuing operations in the fourth quarter and finished the year with income before special charges of $293.3 million. Its sales in 2000 rose 2%, to $4.7 billion, despite a 1.4% dip in U.S. toy industry wholesale revenues. Sales of Mattel's biggest brand, Barbie, grew 10% in the U.S., helped by the doll's redesign and aggressive merchandising. Mattel, for instance, put 200 Barbie boutiques in Toys `R' Us stores, and more will follow. "Bob's first priority is to have strong core brands that take the risk out of business. Barbie is a great example of that," says Toys `R' Us Inc. Chairman John H. Eyler Jr.

This year, analysts expect Mattel profits to rise about 18%, to $345 million. The stock has already climbed from about $10 a share last summer to $18. "Eckert is transforming Mattel from a volatile, hit-driven toy company to a slower-growing but more stable consumer-products company," says Morgan Stanley Dean Witter toy analyst Brian P. McGough. Adds Ralph V. Whitworth, a Mattel investor and board member: "Bob has focused on doing a lot of smaller things right. He's just what the doctor ordered."

In many ways, Eckert is the anti-Barad. Where she was known for a hot temper, Eckert is low-key and taciturn. Barad looked to splashy acquisitions and new businesses. Eckert values proven properties, seeking only modest new ventures. Barad loved to tell analysts how well Mattel would do. By contrast, Eckert doesn't provide Wall Street with quarterly earnings forecasts, although he has said that profits, percentage-wise, should show annual growth in the low double digits over the next five years. Even Barad's and Eckhart's personal styles differ. While Barad wore eye-catching pastel Chanel suits and high heels, Eckert pads around Mattel's El Segundo (Calif.) headquarters in ordinary khakis and polo shirts.

One of Eckert's first moves at Mattel was to clean up the Learning Co. fiasco. "We had a tremendous run for a decade. Everything went well. And then we lost our focus," he says. Last October he ditched the money-losing computer game subsidiary Mattel paid $3.5 billion for in 1998. He sold the management headache to Los Angeles investor Alec Gores for no cash--only a 50% share of future profits--and took a $441 million charge.

BIG BET. Eckert's conservative bent shows in the volatile licensing field, where Mattel is more closely scrutinizing its deals. Last year, Mattel renegotiated its agreement with Walt Disney Co. to keep rights to such established characters as Mickey Mouse but gave up licenses for toys based on new Disney films, some of which have fared poorly. That business went to archrival Hasbro Inc.

But if the property--and the price--is right, Eckert will go along. Prime example: Harry Potter. The CEO says Potter toys will have long-lasting and international appeal. For the Potter license, Mattel is paying Warner Bros. Inc., maker of the Harry Potter movie, 15% of gross revenues while guaranteeing royalties of $20 million, says Playthings, an industry trade publication. By contrast, Hasbro paid Star Wars creator George Lucas 20% and royalties of $500 million for toys based on Star Wars Episode I The Phantom Menace. (Neither Mattel nor Hasbro would comment on licensing fees.) Mattel's first Harry Potter toys--some board games--hit the market late last year. The rollout accelerates toward the movie's Nov. 16 opening, with collectibles such as the electronic dragon Roarin' Snorin' Norbert. Although whispers at this year's February Toy Fair trade show suggested that sales of Potter toys may disappoint, Eckert is optimistic: "We're seeing very good sell-through from retailers."

Mattel is also betting big on embedded computer chips and voice recordings. Mattel Girls Div. head Adrienne Fontanella had a hit last year with Diva Starz, a line of doe-eyed dolls that came with an internal clock. Put an evening gown on one in the morning and it says, "Girl, it is way too early for that dress." At $29.99, they were last year's top-selling new doll, says sales tracker NPD Group. Some 80% of the toys in Mattel's kiddie-toy division, Fisher-Price, now have an electronic component. Five years ago, only 20% did. Even a plain wooden wheelbarrow now talks when prompted. "Electronics are the biggest change we've had in the industry in years," says division head Neil Friedman.

There's a risk that Mattel could overdose on chips. Its $100 Miracle Moves Baby doll, introduced last year, had sensors all over its body and reacted to human touch by cooing, burping, or falling asleep. Too pricey to sell well, it was yanked from the market to be reintroduced this year with half the sensors, at half the price.

FULL TOY CHEST? The company does seem to have learned its lessons in computer games, though. Mattel will stay in the business but won't go it alone. This year, it signed deals to have computer game makers Vivendi Universal and T-HQ Inc. develop games based on brands such as Barbie and Hot Wheels. Mattel gets a cut of sales and spends no money up front.

There are risks with Eckert's model. For one, nostalgia products may miss the mark. The market could get swamped, too--Hasbro is already dusting off its own standbys, such as Tinker Toys. And the big move into electronics could short-circuit--kids, after all, often prefer playing with just their imagination. Andrew Segal, a real estate investor in Houston, says his son Samuel quickly tired of a Fisher-Price toy phone that made funny sounds: "If something makes a lot of noise, he knows it's a toy and it becomes uncool, even in the realm of a 14-month-old." Eckert has begun to reassure investors. Now if he can also satisfy those toddlers, he'll have it made. By Christopher Palmeri in Los Angeles


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