Mattel CEO’s Report Fails to Ease Investors’ Doubts
Mattel Inc. on Thursday gave Wall Street a fuller accounting of the damage inflicted by its new Learning Co. division, but it did little to buoy investor confidence in the troubled toy maker.
Beleaguered Chief Executive Jill Barad said the worst is behind both Learning Co. and Mattel, which announced Thursday that its third-quarter earnings slid 42% due to a larger-than-expected loss at Learning Co. Sales of Barbie and Fisher-Price preschool toys, two mainstays of the company’s product line, rose in the United States, Barad said.
But the domestic performance of traditional toys didn’t offset the Learning Co.’s damage. What’s more, lackluster international sales of Barbie, Fisher-Price and Hot Wheels dampened prospects for the holiday season.
Not including after-tax charges, the company reported earnings for the quarter ended Sept. 30 at $135.3 million or 32 cents per share, down from $233.8 million or 54 cents per share a year ago and far off the 61 cents analysts had expected Mattel to earn before its most recent troubles. Third-quarter sales were $1.83 billion, down from $1.88 billion in the same period last year.
Barad, in a conference call with analysts, said that the actual after-tax loss at Learning Co. was about $105 million in the quarter--a long way from the $50-million profit Mattel had expected from the division and slightly higher than the loss the company predicted two weeks ago.
Analysts said the results cast further doubt on how Barad has executed her strategy of diversifying Mattel beyond traditional toys at a time when the toy industry is rapidly changing. They further questioned her ability to integrate the pieces of Mattel’s recently acquired empire, which, besides Learning Co., include girls’ gaming company Purple Moon and Pleasant Co., maker of the popular American Girl dolls.
Poor international sales didn’t help the company, with Barbie--Mattel’s most powerful brand--down 7% abroad. Fisher-Price, which was up 22% domestically, fell 13% internationally. The Sesame Street line, which was up 16% at home as demand grew for Rock ‘n Roll Elmo, fell 21% abroad--a trend the company hoped to reverse now that international Elmo shipments have begun.
“I think they failed to address some of the outstanding issues on the conference call, so I don’t think the environment has been cleared up at all,” said Hayley Kissel, a leisure industry analyst with Merrill Lynch in New York. “I was fully prepared to hear about the problems at the Learning Co. and try to get a sense of when they would be resolved. I wasn’t prepared to hear that the core business is going to earn 20 cents less during the fourth quarter.”
Barad said weak earnings abroad are a result of overseas retailers doing this year what domestic retailers did last year: Tighten inventory and insist on shipments timed to expected sales. And in spite of the problems, Barad defended her Learning Co. acquisition, saying both the concept and the research were sound.
“We continue to be confident in the future of this company,” Barad told her phone audience. “What we now need to do is prove the potential of international [sales] and the Learning Co.”
Even as Mattel trumpeted its domestic gains, the company warned of lower profit for the fourth quarter and declined to offer estimated earnings for the first quarter of 2000, saying instead that they expected next year as a whole to be profitable. That did little to assuage investors who have watched the stock plunge 70% from a 10-year peak of $46.75 in March 1998 to just over $13.13 Thursday, down 19 cents on the New York Stock Exchange.
“What we heard was management just trying to set expectations so low, that ultimately they can be beat,” said Erik Gustafson, a senior portfolio manager at Stein Roe & Farnham Inc. in Chicago, which as of the last reporting period held 3.77 million Mattel shares. “It was a frustrating conference call because you saw Mattel cheerleading really lousy news. There was nothing really positive in the core message and it was said with an optimistic tone.”
At the Learning Co., the failure of a $60-million licensing deal was one important reason for the shortfall, Barad said. Unauthorized distributor and retailer returns also plagued the division, to the tune of $58 million--which Mattel still hopes to recoup, Barad said. Still another problem stemmed from problems with a major distributor for the software company, which forced the company to increase its bad-debt reserves to $56 million.
“The company has characterized many of these problems as issues they got behind them very quickly, which doesn’t make a whole lot of sense since the industry climate is problematic,” said Jill Krutick of Salomon Smith Barney in New York.
In purchasing Learning Co., Barad hoped to bring the traditional toy maker into the digital age. But unexpected losses at the software company have thrown Barad’s vision of a diversified Mattel into doubt.
Barad had tried to steer the company into hot educational and high-tech game areas, hoping to transform Mattel into a “global children’s products company” when she was faced with slow sales growth in basic toys. But with the plan in disarray, Mattel is at a crossroads, analysts say.
“It’s a question of restoring growth or backpedaling into right-sizing the business,” Krutick said. “On paper, the strategy always sounded great. The execution has not really worked out.”
“Management would not have any discussions with shareholders before this conference call,” Gustafson said. “It tells me that No. 1, they were blindsided; No. 2, they’ve spent the last two weeks scrambling to get their hands around the problems and No. 3, I’m not sure they have any real solutions.”
“We still believe there’s value in this franchise, and one way or another, that value will be realized,” Gustafson said.
