Toy Repair Man

Robert Eckert, chief executive of Mattel Inc., is not a flashy dresser. He drives himself to work, flies commercial airlines and eats lunch in the company cafeteria, chatting with other employees as he fills his tray.

Eckert has brought that same Midwestern earnestness to his efforts to level the listing Mattel ship. In his first 11 months at the El Segundo toy maker, he has slimmed down the company, bolstered thin management ranks, accorded his deputies new powers and reigned in lofty expectations, shifting the company’s focus away from high-tech aspirations and back to the real world of toy making.

At the same time, the 46-year-old who spent his entire career at suburban-Chicago-based Kraft Foods Inc. wooed back investors, who have sent Mattel’s stock up more than 60% in the last year.

“He has a very good grasp of fundamental business skills, and we think that’s what the doctor ordered at Mattel,” said Ralph V. Whitworth, a Mattel board member and managing member of Relational Investors.

So far, Eckert has served as something akin to a lead paramedic for Mattel, moving quickly to identify injuries, staunch bleeding and begin various treatments.

The next steps will be less obvious, as Eckert is asked to outline a long-term health strategy for the mature company in an industry that is constantly under pressure.

“The steps Eckert has taken are the steps the board expected any of their good candidates would have taken,” said Sean McGowan, a longtime toy industry analyst. “What nobody knows yet is whether the company will get to the next level. What comes after the repair?”

Eckert isn’t saying, exactly. He would prefer to under-promise and over-deliver, but he means it when he talks about slow and steady growth. Unrealistic expectations for sales gains, he says, cause companies to lose their way.

That is what happened when former Chief Executive Jill E. Barad, promising fabulous returns, spent $3.5 billion to acquire computer software maker Learning Co.

The division ended up costing Barad her job and the company more than $300 million. In 1999, because of the problems at the software division, Mattel posted its first annual loss in more than a decade.

So when Eckert arrived, he faced two big problems: Learning Co. and the slower sales that prompted the deal in the first place.

In trying to solve those problems, Eckert offered a glimpse of his vision for the company: a return to basics.

Focusing on Overseas Markets

At Kraft, Eckert was known as a marketing whiz and turnaround expert, responsible for reinventing time-honored products, introducing fat-free cold cuts and Lunchables packages.

At Mattel, Eckert has maintained that focusing on the company’s strong core businesses could boost sales for brands such as Fisher-Price, Matchbox, Hot Wheels and Barbie--especially overseas.

Eckert has worked to maximize global sales by streamlining the division’s operations and consolidating decision-making in El Segundo. International sales, which have fallen for each of the last three years, make up about 30% of Mattel’s revenue--$1 billion in Western Europe alone.

“Something like 92% of the world’s kids are not in Western Europe or the United States, so we need to grow in emerging markets the way the company grew domestically in the 1940s and ‘50s,” Eckert said. “We need to do a better job. It’s not going to happen overnight, but we’re going to keep pushing that like we’re pushing the domestic business.”

Overall, Eckert sees total earnings growing 10% to 15% annually--even with revenue gains just slightly above the industry average of 2% to 3%--if coupled with aggressive cost controls.

In September, Eckert announced plans to pare manufacturing and other administrative costs; cut 10% of the work force, or about 350 jobs; and reduce Mattel’s quarterly dividend to 5 cents a share from 9 cents.

The back-to-basics approach also means Mattel will not try to buy or build its own games division, Eckert said, but rather will license Mattel’s valuable trademarks.

Eckert announced the first such partnerships in February. Torrance-based Knowledge Adventure, a division of Vivendi Universal Publishing, and Calabasas Hills-based THQ Inc. will create online content for different Mattel brands.

“What we need to do today is outperform the toy industry, not change the company,” Eckert said. “Every time we try to do something else, we haven’t done well.

“You know, we owned the circus once; that didn’t work for us,” he continued. “We’ve ventured off into electronic games before. That didn’t do well. We owned the software company; that didn’t do well. I’ve got it three times, I’ve seen it and we’re not going to give it a fourth time.”

Although the board announced its desire to sell Learning Co. before Eckert was appointed, Eckert said he had the option to stop the sale. But after a review, Eckert said, he concurred with the decision to cut the division loose.

That turned out to be easier said than done. The best deal Eckert could find was essentially to give the company away to privately held Gores Technology Group in exchange for future payments should Learning Co. ever make substantial profit.

Still, with a price tag of zero, it took six months for the deal to go through, all the while costing Mattel as much as $1 million a day.

Eckert said Mattel didn’t wait too long--”I’ll tell you what, it took me longer to sell my house than it did the Learning Co.,” he said--and added he would make the same decisions again.

“I thought we struck a pretty good deal for our shareholders. We got what we could get today and if there’s more in this tomorrow, all right, then we’ll get more tomorrow,” Eckert said. “If we hadn’t done it that way and the company improved, shareholders would say, ‘Well, jeez, how come we sold it so fast, Bob?’ ”

Some critics contend that Eckert was too quick to swear off building Mattel’s own software division. What’s more, some say, the Learning Co. fiasco may have closed off a lucrative opportunity.

“The circumstances around which the company got into and out of the interactive software business have made it almost impossible for them to credibly go that direction again,” toy analyst McGowan said.

But if the terms of the Learning Co. transfer were less than ideal, investors don’t seem to mind.

In a recent report, analyst Jill Krutick of Salomon Smith Barney congratulated Mattel and Hasbro Inc. on better-than-expected results for the fourth quarter of 2000.

Both companies, Krutick said, are working to restructure--Hasbro by reducing its dependence on licensed products after the ill-fated “Phantom Menace” toy line, Mattel by streamlining business and reducing debt.

In a note to clients, Krutick said she favors Mattel because “Mattel’s turnaround may be swifter and more clearly defined.”

Last fall, Mattel’s largest shareholder, Harris Associates, acquired more than 7.4 million shares, bringing the portfolio’s total holdings to almost 21.4 million shares.

“One of the best things Eckert has done is to refuse to set unattainable goals,” said William Nygren, portfolio manager for two of Harris’ Oakmark funds. “You don’t need to re-create this company every couple years. We love those franchises--Barbie and Hot Wheels--they don’t need to be transformed; they need to be nurtured.”

Eckert also has a personal reason to be pleased with Mattel’s recent performance.

At his first shareholders meeting last summer, Eckert explained that by taking a significant portion of his pay in stock grants, he would be aligning his interests with those of shareholders.

But not many shareholders enjoyed Eckert’s position of getting in on the stock near its all-time low.

With salary, bonuses and stock grants, Eckert earned more than $12 million in 2000, for his first seven months on the job--not including a $5.5-million loan that will be forgiven if he stays with the company through 2004.

Relational Investors’ Whitworth directed the purchases of 2 million Mattel shares last fall, bringing San Diego-based Relational’s total holdings to more than 6.4 million shares.

“I’m positive Bob Eckert is focused on all the issues that face the industry,” Whitworth said. “I certainly wouldn’t pigeonhole him as a one-dimensional cost cutter. He’s a very dynamic guy who is focused on the future of this company.”

In fact, Eckert proved himself capable of more than just the obligatory fixes.

He filled long-vacant management positions and accorded more power to the company’s top three brand executives, putting them in charge of their divisions’ overseas efforts.

Those leaders were also well rewarded by the company for staying on past Barad’s departure, with raises and bonuses worth more than half a million dollars each, not including stock grants.

Eckert also steered other, bolder moves, such as deciding along with Matt Bousquette, president of the entertainment division, not to renew toy licensing rights for Walt Disney Co.’s newer films. The classic Disney properties, for which Mattel maintains the rights, are solid performers. But the more recent films, especially those that came after the retail dynamo “The Lion King,” have failed to translate into strong product sales for Mattel.

Trimming Exhibit at the Toy Fair

And in a move as symbolic as it was thrifty, Eckert also dramatically scaled back what was once Mattel’s ultimate vanity showcase: several floors of a separate building at the annual American International Toy Fair in New York. The Mattel building boasted elaborate moving displays, room after room of every imaginable new product and scores of models hired to dress like Barbie or demonstrate how a toy works.

By the time the Toy Fair occurs in February most retailers already have placed holiday orders, so the event has for several years been more of a media opportunity than a buyer showcase. But in what Nygren called a “historical accident of big displays,” the event continued to be staged as though the presentations might make or break a toy.

Not so anymore for Mattel.

This year, Mattel used a suite in the Toy Building--usually the home for much smaller companies--to offer a small display of key toys, showcasing its new Harry Potter line, a draw-on doll called “What’s Her Face” and a new video of “The Nutcracker” starring none other than Barbie.

Competitor Hasbro, meanwhile, reconstructed its usual grand multistory space--complete with a media event featuring the real “Battle Bots” to promote a scaled-down toy that will be offered this year by the company’s Tiger Electronics.

“In the short term, Eckert has wisely chosen to focus on the company’s efforts within the basic toy industry, where the company has some opportunities,” McGowan said. “What I am concerned about is that once those near-term opportunities are added and repairs are made, Eckert is going to run into the same thing Hasbro ran into and the same thing Jill Barad ran into: There is not enough growth in the toy industry for companies with double-digit market share to make enough gains to satisfy growth investors.”

Eckert and his boosters say Mattel would be better off making good toys and increasing market share than trying to satisfy overeager investors whose demands are not consistent with the slower-growth toy industry.

“You don’t have to look too far in the distant past to see what happens if your management team becomes distracted by the mirage of some easy growth,” Whitworth said. “That’s the challenge going forward, not falling into that trap regardless of what the press or certain buy-side analysts might want.”

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Mattel at a Glance

Sales (in billions)

4th quarter 2000: $1.58 billion

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Net income (in millions)

4th quarter 2000: $71.1 million

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Stock price

Monthly closes and latest

Thursday: $16.87, down 4 cents

Source: Bloomberg News