How important is a good CEO to stock investors like you?
are about to find out. The troubled toymaker announced today the hiring of a top
executive with a reputation for fixing broken businesses.
Mattel's savior-to-be is Robert A. Eckert, until yesterday president and CEO of
, the largest packaged food company in North America and a division of Philip Morris.
Anyone vaguely familiar with Mattel knows that Eckert has his work not just cut out for him but carved, filleted, julienned out for him. This company has been badly run in recent years by former CEO Jill E. Barad. She failed to maintain Mattel's traditional dominance in the slow-growing toy market over No. 2
. Even worse, she botched Mattel's move into the faster-growing market in computer-based games and entertainment for kids.
Mattel in late 1998 bought the
, maker of computer software games like
The Oregon Trail
, for $3.8 billion just as those games were losing popularity to Internet-based entertainment. Wall Street analysts estimate that Mattel, which is trying to unload the Learning Co., will be lucky to get $800 million for this pig-in-a-poke.
It's no wonder that Mattel's share price has fallen about 80% since peaking in March 1998 at 46 a share; it bottomed at 8 15/16 and then rose along with many other consumer goods stocks since mid-March.
Eckert's signing boosted the stock 1 1/2, or 13.3%, to 12 3/4 today, as you might expect. Any CEO is better than none. (The company did have an interim CEO.)
But Eckert is not just any CEO, according to three professional investors familiar with him and his performance at Kraft. He is good.
"I have met Eckert and been extremely impressed by him," says Tom Russo, a partner at the investment firm
Gardner Russo & Gardner
in Lancaster, Pa., which owns shares in Philip Morris and Hasbro but doesn't own Mattel. "The people I have spoken with at Kraft who worked with him say that he is extremely energetic, extremely bright, listens extraordinarily well and is not afraid to make decisions."
Another large investor in consumer stocks (also not a Mattel holder) says, "I happen to know Eckert. His name surfaced before as a fast-tracker at Kraft, an up-and-coming guy, clearly one of their top players."
They Say He's Good. He'd Better Be.
Eckert made his name at Kraft in the "Cheese Wars." Shortly after Philip Morris bought Kraft, it faced a price war in the cheese business. Philip Morris attempted to hike the prices for the Kraft line of cheeses only to see its market share shrink. Eckert was the one who made the decision to cut prices to regain dominance of the cheese market.
"If that move had been a mistake, he would likely have been fired," says one of the investors.
The hope is that Eckert can do for Barbie dolls what he did for Kraft cheese. Barbie, Mattel's top money-maker, is a very good business with high-profit margins. It costs between $1 to $3 to make the plastic figures and they sell for many multiples of that. (In the collector's market for such stuff, adults pay as much as $100 per Barbie!)
So, it seems logical to think that the application of professional management to the toy business should return Mattel to profitability. (The company lost money in the most recent quarter.)
"Under him, Kraft's operating results have been spectacular," says Russo. "He achieved domestic operating profit margins of over 18%, up from 13.7% five years ago. And Kraft margins continue to be the best in the North American food business. He doesn't have ailing cheese but he has other ailing products."
Russo says that Eckert's training at Kraft, which he calls "a machine with powerful brands," will serve him well at Mattel. "He is disciplined, which is not something Mattel has normally had in top management, and he has managed the relationships with the large retailers that Mattel also relies on."
Eckert already knows many of the big retailers, like
, that Mattel sells through because they are the same distribution channels Kraft relied on.
Toys are not cheese, however. Cheese sells year-round. Toys are seasonal. Cheese consumption is not typically fad-driven. Toys are. (Anyone bought a
action figure for the kids recently?) Cheese is manufactured domestically in Kraft-owned plants. Mattel relies far more on outsourcing from overseas. In short, the toy business is complex in its own way and whatever Eckert's talents, he is a cheese guy by experience.
What must he do to prosper at Mattel? Two things, say these investors:
- First, figure out how badly broken Mattel is. That remains unclear. This is not a company that has a good handle on where all the problems are buried -- note its recent tendency to announce bad news to Wall Street.
Second, he must develop a strategy to grow the business. Kids play with action figures and dolls for fewer years than they used to. That means moving into Web-based and computer-driven games. The Learning Co. was a badly executed attempt to move beyond traditional toys. Eckert will have to execute that strategy more competently.
Warren Buffett has said that when a good manager meets a bad business, the manager normally fails. We will see in this case what happens when a good manager meets a good -- but broken -- business. It is too soon to know with any confidence how well Eckert and his new shareholders will do.