Barbie Gets Another Distribution Channel as Mattel Tests Holiday Close-Out Stores

Today, as children eagerly dive into their Christmas gifts, toy maker Mattel Inc. will be dealing with the leftovers.

This holiday season, Mattel opened 11 temporary toy stores across California -- they will close Friday -- to sell a backlog of slow-moving products, discontinued goods and items with imperfections.

The idea, it seems, is for the company to try to earn a little more money than it would by selling this B-list merchandise to close-out specialists such as KB Toys Inc.’s liquidator division and Big Lots Stores Inc.

Mattel’s makeshift retail stores carry Barbie dolls from seasons past, Matchbox cars in slightly dented packaging and Harry Potter dolls at a fraction of their original price.

For some shoppers, these close-outs were a holiday score.

Barbies are “50% cheaper here than they are at Toys R Us,” said Veronica Amaya, who trolled the aisles of Mattel’s outlet in a former Circuit City location in Hawthorne. “I’m happy to get some good deals.”

But not everything was a bargain. Mattel sold this year’s popular E-L-M-O talking Elmo doll for $22.39 -- $5 more than Wal-Mart Stores Inc. charged. And this season’s I-Message Girls Barbie was on the shelves for $24.99, a price that matched other retailers’.

Finding a buyer for close-out items is a headache for most toy makers.

Many companies, including Mattel, already boast year-round consumer outlets at their distribution centers and headquarters. Some also operate stores for special high-end lines. These include Mattel’s American Girl collection, expensive dolls that come with their own personal histories.

But no other major toy maker runs its own seasonal outlet stores, analysts said.

Sean McGowan, who follows Mattel for investment bank Harris Nesbitt in New York, said the sales effort could be a sign that the company faced a bigger backlog of Barbie dolls and other toys than discounters could absorb.

Or, he added, Mattel could simply be looking to squeeze some extra profit out of toys that had started to collect a little dust.

“There are a lot of customers that are not going to traditional toy stores for shopping,” McGowan said. This allows Mattel to “skim some of that traffic for their own benefit.”

For their part, Mattel executives say it’s an experiment.

“It was just a matter of finding a good way to sell some of the close-out product lines,” said Jules Andres, a spokeswoman for the El Segundo company. “We are not completely sure it’s going to be a strategy” that lasts.

Mattel won’t know how profitable these stores are until after they close.

The company no longer breaks out how much revenue is generated by its close-out business, although in the third quarter of 2003 -- the most recent figures available -- it accounted for $12.8 million. That was less than 1% of total sales.

These days, analysts say, Mattel can use even the slightest boost. Those surveyed by Thomson First Call expect Mattel to report a 7% drop in earnings for the fiscal year ended Dec. 4.

Although many of Mattel’s new products are moving well -- the hard-to-find Tyco Terrain Twister radio-controlled vehicle, among them -- sales of its huge Barbie line are still down after a costly repositioning of the blond icon. In the third quarter, worldwide sales of Barbie dropped 13%.

Meanwhile, Mattel’s Hot Wheels and Matchbox toys also lost momentum as the company’s overall revenue fell 2%.

That’s why Mattel’s stock has been flat this year. It closed at $19.14 on Thursday, up 19 cents, on the New York Stock Exchange.

One problem for Mattel, as well as for its rivals, is that there are fewer and fewer places to sell toys. Since 2003, the industry has lost more than 600 retail stores, according to Harris Nesbitt.

Hundreds more traditional toy stores are expected to close in 2005, as KB restructures after filing for Chapter 11 bankruptcy protection this year and Toys R Us Inc. considers a sale of all or some of its 680 namesake stores.

Shoppers at the temporary stores say they are elated to find Mattel products below regular retail prices.

Susana Abcara, who shopped at a Mattel store in El Segundo, was surprised to find a James Bond 007 doll with its own Barbie Bond girl for $20. It usually retails for more than twice that much.

Michelle Coleman, a Los Angeles administrative supervisor and regular visitor at Mattel’s year-round outlet stores, made several visits to the El Segundo location to stock up on dolls for her daughters.

“I was here yesterday,” Coleman said, “and got a whole bunch of stuff,” including a $30 Princess Alexa doll. It normally goes for about $50.

Although lowering prices like this can sometimes hurt a company’s reputation, experts say that Mattel doesn’t run much of a risk of that.

“You would never want to see a Barbie at $2.99” at another liquidator, said Jim Silver, publisher of Toy Wishes magazine. But because Mattel is using its own stores, “it doesn’t hurt the value of the brand” as much.