Brought to you by ToyDirectory.com
and Briefing .com
Updated: 13-Dec-99
StreetBeat: Mattel Inc.
This edition of StreetBeat looks at Mattel, a company that designs,
manufactures, markets and distributes a variety of toy products on a worldwide basis.
Mattel's well-known brands include Barbie, Fisher-Price, Hot Wheels and American Girl.
These all sound like highly desirable Holiday gifts, so why is Mattel's stock looking like
a lump of coal in your stocking? Joining us to discuss the issues facing this company are
Sean McGowan, Director of Research at Gerard Klauer Mattison, and Tony Gikas, Senior
Research Analyst at U.S. Bancorp Piper Jaffray.
Q&A
Briefing.com: A recent Wall Street Journal article purported
that Mattel's Internet strategy was basically in disarray. What are your observations
about Mattel's Internet approach?
Sean McGowan: Mattel's (MAT) Internet effort was being headed by one
of the executives from TLC (The Learning Company). With him gone, there has naturally been
a delay. In addition to that, Mattel has struggled all year with the question of how to
reconcile the desire to sell products directly to consumers, while also keeping retailers
happy. The combined sales of all toys from e-tailers this year will be a small fraction of
what Mattel sells to Wal-Mart every quarter, so Mattel has to be careful with how they
proceed, and caution is advisable.
Tony Gika: We see two parts to why Mattel's (MAT) Internet strategy
has been derailed. The first is that Mattel must work out how to sell merchandise directly
to consumers through its own Website without alienating their major retailers, such as
Toys R Us (TOY), Target (DH), and Wal-Mart (WMT). As it stands right now, online sales
represent a small fraction of Mattel's total sales, and Mattel must protect its retail
relationships. Until they have an agreement with retailers such as Toys R us and Wal-Mart,
it is only appropriate that they put that part of their Internet strategy on hold. We
agree with Mattel on decision to not move forward with its e-tailing strategy.
The second issue is that top management at The Learning Company,
Michael Perik and Kevin O'Leary, were really the ones heading up Mattel's online
initiatives. Their departure is unfortunate and is an upset to Mattel's Internet strategy.
A departure from management in the wake of a dramatic earnings shortfall at The Learning
Company unit is not surprising.
Briefing.com: Mattel's stock has fallen on hard times this
year, and Hasbro (HAS) recently announced layoffs resulting from weaker-than-expected
sales. Why are the nation's top two toy makers experiencing weakness in what should be
their most profitable quarter?
Sean McGowan: Hasbro is, in fact, experiencing record sales and
profits. They have some of the best-selling toys (Pokemon and Furby), and are one of the
leading providers of interactive software. In addition, their board game business (which
is their most profitable segment) is surprisingly strong. So the announcements of layoffs
are NOT a sign of weakness, but rather what the company needs to do in order to continue
to grow profits in the future. As for Mattel, the TLC acquisition was supposed to offset
weakness in Barbie and other products, and with that division coming up short, the company
is left even more exposed to the shift in consumer behavior. Toy Story should help, but
the fact remains that kids are increasingly gravitating toward electronic products and
away from traditional toys.
Tony Gika: We would say these issues are Mattel specific, rather
than industry wide, and wouldn't want to bring Hasbro into the conversation. Hasbro has
unfortunately, been dragged down by Mattel's problems.
At Mattel, they are having difficulties with a few product lines
underperforming including the $3 ½ billion acquisition of The Learning Company, which
they fully expected to contribute to earnings this year. In addition, Management has had
optimistic goals for the company's earnings during the last 15 months which they have not
followed through on. As a result, an expensive acquisition and lower than expected
earnings have caused lower investor confidence.
Briefing.com: Can you comment on the difficulties Mattel is
experiencing integrating The Learning Company? Is that a function of poor industry
fundamentals, poor management, or both?
Click here
to continue
Please note: Briefing.com is provided as an
information service only. Briefing.com does not make specific trading recommendations or
provide individualized investment advice. Readers should make investment decisions based
on thorough research and their own investment criteria. See Disclaimer.
