Who’s Brave Enough to Run Mattel?

It should be one of the premier jobs in American business: Leading an industry giant with $5.5 billion in annual sales and products so well known that their names are often among babies’ first words.

But three months after former Chief Executive Jill Barad left a battered and bleeding Mattel Inc., the job is still open because leading the nation’s biggest toy company is anything but fun and games.

Mattel’s next chief executive faces rebuilding a company that has lost almost 70% of its market value in the last seven months, mostly because of a disastrous acquisition. The new leader also must deal with infuriated investors, depleted management ranks and a volatile industry with historically low returns.

“I don’t think the industry they’re coming from is as important as their ability to manage a business in need of change,” said toy industry analyst Sean McGowan of Gerard Klauer Mattison.

Mattel executives will say only that their search for a new leader is ongoing. The El Segundo-based company’s annual shareholders meeting is set for the second week of June, and though the company has not promised to name a new chief executive by then, an announcement may be imminent.

“There’s no question that we’ve had departures,” said Mattel spokesman Glenn Bozarth. “But all of our departments are being actively managed, and it will be up to the new CEO to determine what additional positions will be needed.”

The bulk of the company’s woes stem from its 1999 purchase of software maker Learning Co., whose game titles include “Myst” and “Carmen Sandiego.” The $3.5-billion deal was part of Barad’s bid to broaden Mattel’s reach in the entertainment and high-tech businesses. But a fast-shrinking CD-ROM market and internal problems with the company combined to sink Learning Co.’s fortunes. Mattel lost more than $200 million on the venture, which caused its stock to plunge 61% over the last year. It closed Friday at $10.75, down 44 cents on the New York Stock Exchange.

Mattel now is trying to sell Learning Co., but the underlying problem remains: Children are growing out of basic toys and into electronics at increasingly earlier ages, but Mattel’s toys have not kept pace with that trend.

In addition, Mattel must continually reinvent aging brands such as Barbie to succeed in the hits-driven toy business. The company’s core brands--Barbie, Fisher-Price, Hot Wheels--are poised for a good year as the result of a hip new Jewel Girl Barbie and a host of interactive baby toys.

But some industry veterans say the most serious question facing the new leader is more basic than high tech: Do Barbie, toy cars and Fisher-Price have much room for growth? In all three areas, the answer could depend on a more complicated program, marrying Mattel’s product lines to the technological future of toys.

“Mattel has a lot of strong brands and products, but what’s in the pipe?” asked Michael Zucker, spokesman for the American Federation of State, County and Municipal Employees, a union whose members own 15.5 million Mattel shares. “What’s next that they’re doing or developing now that’s going to replace some of the products that they have? It’s unclear what direction this company is going.”

What is clear, Zucker said, is that the company cannot stand still.

Some Mattel executives are betting that the company’s problems can be solved with a redoubled effort on basic, core brands. Rather than blindly entering the digital world, some at the company believe Mattel would be better served by a licensing agreement with proven high-tech players, who can better bring Barbie and her friends into the electronic age.

That plan has its risks. Last year, domestic sales were essentially flat, and sales outside the United States fell 6%. Slowness in Barbie, Cabbage Patch Kids and Sesame Street products translated into a 3% sales decrease for Mattel’s infant-preschool and girls divisions.

Just two of the company’s divisions reported sales growth in 1999: Hot Wheels and Matchbox cars rose 6%, and on the strength of “Toy Story 2” licensed toys, Mattel’s entertainment group also performed well, rising 11%.

When Barad led Barbie, it was a different story. Even her harshest critics acknowledge Barad’s mastery of Mattel’s most powerful brand, using new dolls and styles to boost once middling sales to a $2-billion global brand by the mid-1990s.

Mattel figured that the next logical way to expand Barbie was to aggressively sell the doll abroad and build on collectors’ excitement at home. But the market changed and those propositions proved difficult.

The international business, which has long been a tough sell for the traditionally regional toy industry, was even tougher than Mattel thought, analysts said. At the same time, collectors wavered in their support of the all-important Barbie doll, criticizing the quality and design of some 1990s models, and girls abandoned the dolls to their little sisters.

The path into a more modern toy era is laden with questions about how Mattel positions itself and its products. As manufacturers and traditional retailers increasingly move beyond the Internet-only companies in Web traffic and sales, Mattel might make better use of electronic versions of Barbie and her friends online.

“Mattel has great brands, but it is behind in electronic product development, software, as well as their Web-based sales,” Zucker said. “They need to make some decisions about this.”

That could involve anything from a children’s portal--with Elmo or Barbie as a Web guide--to developing an online partnership with retailers to better push products online.

Mattel also has been criticized by financial analysts for its paltry e-commerce efforts. Many manufacturers have struggled with online selling, forced into a decision about whether to compete with their retailers for the same direct-to-customer market.

Mattel compromised by selling special or collector products not available in stores. But analysts said that weighed down Mattel with a mostly ineffective and disjointed e-commerce Web site, hosting different links for different Mattel brands, promoting names like Barbie and Sesame Street rather than the corporate name.

Mattel’s international business also needs smoothing out, analysts and investors said. Last year, the segment produced 28% of Mattel’s sales.

Overseas, Mattel has been hampered by high inventories, choppy distribution, excessive warehouse space and pricing problems with products such as Barbie, which became too expensive when the dollar soared.

The falling euro hasn’t helped, analysts said. Neither have European retailers, who began following their American counterparts in forcing inventory woes onto the manufacturers.

Increasingly, international sellers are demanding small and frequent shipments so they don’t find themselves stuck with too many toys.

“The toy industry has not been a growth industry,” said Merrill Lynch analyst Hayley Kissel, shortly after Mattel last year forecast slowing sales overseas. “International was the Holy Grail, but it has its pitfalls and it’s not as easy as people thought.”

Analysts and others are calling for reducing overseas warehouse space, improving distribution and a slow and steady march toward individual markets.

One advantage that Barad’s replacement probably will have is the blessing of new board member Ralph Whitworth, whose Relational Investors firm owns 4.2 million shares, or about 1%, of Mattel stock.

La Jolla-based Relational is known for buying stakes in under-performing companies and using board changes and proxy fights to turn them around. Whitworth and his partner in Relational, David Batchelder, first joined forces as lieutenants of corporate raider and Texas oilman T. Boone Pickens in the 1980s.

Among Relational’s turnaround efforts are Waste Management Inc., Sirius Satellite Radio Inc., Tektronix Inc. and Costa Mesa-based Apria Healthcare Group Inc.

At Apria, where Whitworth serves as chairman, top managers lasted three months after Relational bought a major stake. Most of Apria’s pre-Whitworth board was gone a few months later.

Apria shares are up 20% since Whitworth joined the company’s board.

Those familiar with Relational said the partners are not likely to wait long before demanding even more from Mattel and its new leader.

Whitworth, who declined to comment for this story, joined Mattel’s board after directors refused to meet with Zucker’s group of union representatives about the company’s declining fortunes.

The company’s big shareholders are counting on Whitworth to bring in a seasoned executive to turn the company around. The dearth of gossip about who that person will be is evidence to many on Wall Street that Mattel’s board is considering people outside the toy industry, most likely from large entertainment or consumer products companies.

“There’s clearly value in the brands, the Fisher-Price, the Barbie, the Winnie the Pooh,” said Erik Gustafson, senior portfolio manager with Stein Roe & Farnham Inc. in Chicago, who lost $25 million investing in Mattel. “They just need somebody to run them correctly, and the market will see that somebody does.”

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Mattel’s Rise and Fall

The last year and a half was filled with turmoil for the company that owns such well-known brands as Barbie, Fisher-Price and Hot Wheels. Among other events, the ill-fated purchase of Learning Co. led to the company’s first losses in a decade and the ouster of Chief Executive Jill Barad less than a year later. Mattel’s stock has fallen steadily since 1998. Here’s a look at the stock’s rise and fall, with some key events noted. Monthly closes and latest:

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Sources: Mattel’s 1999 annual report, Bloomberg News, Times research

Researched by NONA YATES/Los Angeles Times

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In 1999, Hot Wheels was the top-selling toy in the U.S. in terms of units but not dollars.

The original Barbie, which debuted in 1959. The doll is Mattel’s most powerful brand.