Not Much Fun and Games at Mattel


By Chris Palmeri It's looking like another blue Christmas at toy giant Mattel. On Oct. 10, it announced a restructuring that combines its Upstate New York-based Fisher-Price preschool division with its Girls & Boys/Entertainment units based at headquarters in El Segundo, Calif. In the process, Mattel (MAT) Chairman and Chief Executive Robert Eckert replaced 17-year company veteran Matthew Bousquette with Fisher-Price head Neil Friedman, who will move to California to head a unit called Mattel Brands, which will combine the three businesses. A press release said Bousquette was leaving Mattel to pursue other endeavors. He couldn't be reached for comment.

The news comes amidst another year of disappointing results at the world's largest toymaker. For the first half of 2005, Mattel reported a loss of $87 million on sales of $1.7 billion. Analysts expect it to report earnings of 62 cents per share on Oct. 17, up just a penny from last year. But Oppenheimer & Co. analyst Linda Bolton Weiser says Mattel's earnings could come even lower than her 61-cent estimate due to ongoing troubles at its flagship Barbie line.

The whole toy industry has been under assault lately. Market researcher NPD Group estimates that sales of traditional toys were down 5% in the first eight months of 2005, as children and parents continue to purchase more electronic gadgets such as video games, cell phones, and computers. In fact, some industry insiders believe Apple Computer's (AAPL) iPod could be the best selling "toy" this Christmas (see BW Online, 8/23/05, "Make Believe Goes Cutting Edge").

BRATZ TRUMP FLAVAS. To compound the industry's woes, toymakers have been wrestling with higher energy prices, which inflate the cost of their raw materials and cut into consumer spending. Harris Nesbitt toy-industry analyst Sean McGowan reports that the industry's top retailer, Wal-Mart (WMT), has already begun canceling orders for toys that aren't selling. He predicts significant earnings disappointments at other toy companies in coming months.

Still, many of Mattel's wounds have been self-inflicted. The company was slow to respond to Bratz, a line of street-savvy dolls aimed at slightly older girls and manufactured by privately held toymaker MGA Entertainment. In the past, Mattel replied rapidly and with full force to Barbie challengers such as Hasbro's (HAS) Jem and Maxie dolls, introducing new Barbie characters and swamping the airwaves with promotions. This time, Mattel missed the mark by countering Bratz with Flavas, a line of edgy, urban dolls with clunky jewelry and graffiti on the packaging that scared away mothers and left kids cold.

Many of Mattel's other recent lines have also had a distinctly me-too flavor. Last year, it launched Juice Box, a portable video player very similar to Hasbro's successful VideoNow device, which came out the previous year. Juice Box failed to connect with kids, and the players and cartridges are currently selling at a steep discount on online toy sites, when they can be found at all.

BARBIE'S SLUMP. Under Friedman, though, the Fisher-Price unit reversed the trend and demonstrated a rare bit of growth. Over the past five years, Fisher-Price had one of the industry's best-selling toys with its various singing-dancing Elmo dolls. This year, it's likely to have a big hit again with Tumble Time Tigger, a cartwheeling version of the popular Walt Disney (DIS) character.

Friedman also launched his division's biggest ad blitz ever for the PowerTouch line of electronic learning systems two years ago. The campaign helped stymie the astonishing growth of competitor LeapFrog Enterprises (LF).

It remains to be seen whether Friedman can help revive Barbie sales, which were down 4% worldwide in the second quarter of this year. His predecessor, Bousquette, had himself come to power in a shakeup two years ago, which saw Girls Division head Adrienne Fontanella shown the playhouse door.

The buck will eventually stop at Chief Exec Eckert, who joined Mattel in 2000. A Kraft Foods (KFT) veteran who replaced the controversial Jill Barad, Eckert is credited with pulling Mattel out of a tailspin by ditching its money-losing PC games division and cutting costs, largely through consolidation of redundant operations and better management of its manufacturing. Ultimately, though, it will take clever new toys to get Mattel shareholders celebrating at Christmastime again. Palmeri is a correspondent in BusinessWeek's Los Angeles bureau


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