Mattel Looks to Barbie to Empower Earnings Growth

The toymaker seeks to bounce back from inventory woes and a sliding stock price.
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Will

Barbie's

latest makeover bring improvements at

Mattel

(MAT) - Get Report

that are more than skin-deep?

The latest print ads for Barbie, now on display in New York and set to roll out across the country in April, focus less on the doll's wardrobe and more on girl power. The ads feature girls holding sports equipment alongside empowering slogans like "Be Anything" and "Dream With Your Eyes Wide Open."

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.

No one is better qualified to give Barbie a kick in her perfect plastic butt than Jill Barad, Mattel's chairwoman and CEO. As a product manager in the 1980s, Barad spearheaded a Barbie revamp with the Day to Night Barbie. "That's when Barbie broke out of her prom-bound fantasy," says Chris Byrne, toy consultant and contributing editor at

The Toy Book

. The latest campaign includes a "five-hanky

TV commercial" that "shows they've really got their finger on who little girls are today," Byrne says.

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)

-- 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." Kissel rates Mattel an intermediate-term accumulate and long-term buy. (Merrill is advising software maker

The Learning Company

(TLC) - Get Report

in its pending merger with Mattel.)

"I'm not sure we've seen the full-year impact of the new discipline at Toys R Us," adds John Taylor, an analyst with

Arcadia Investment

. Taylor, whose firm hasn't performed underwriting for Mattel, downgraded Mattel's rating to market perform in December.

In January, Toys R Us said it had cut inventories by more than $450 million and that those reductions "will give us the ability to re-energize our customer offering in terms of product assortment, competitive value and a more customer-friendly in-store shopping experience." No one from the company was available to comment on current inventory levels.

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.