Mattel, Inc. (MAT) Earnings Call Transcript & Summary

Excellent. Well, speaking of market share gains, I want to touch on 1 specific outperformer in your portfolio, which is Barbie. Of course, everyone's, hopefully, very well familiar with that product. It's done extraordinarily well since 2017, capping off a strong Q3 of 29% year-over-year growth, sounds almost unbelievable. But 2 questions for you on the Barbie front, one sort of higher level. Have you been able to gain share in what I presume is a very crowded and competitive doll market with such an established brand? And secondarily, are you concerned at all that the enormous strength you've seen this year might face a pullback or a comping effect next year as entertainment properties come back from the likes of Disney and others.

As you said, Barbie has done exceptionally well and continues to resonate with consumers. It's driven by a combination of great product, design-led innovation, cultural relevance and very effective and active demand creation. Barbie gross sales were up 30% in constant currency with POS more than -- POS being up more than 50%, which speaks to the strength and ongoing momentum of the franchise. According to NPD, in the U.S., Barbie was the #1 toy property for 12 out of 13 weeks in the quarter and finished the period as the #1 global toy property overall, not just in dolls. So clearly, it's working both in absolute and relative terms. As a category leader in the large, high-growth dolls category with a leading content and digital engagement platform for girls, we see significant franchise power and opportunity to further -- for further expansion and growth of Barbie. When it comes to Barbie, the question is, how high is high? We're not providing guidance beyond 2020 at this time, but we can say that we are very confident about the momentum of Barbie. And with our resources and capabilities, we believe Barbie is in a very good position to continue to grow. But what is important to say is that the story is not just about Barbie. As good as Barbie is, and we couldn't be more proud of Barbie, this is really a proxy for how we think about Mattel as a whole. Because the same capabilities that drive Barbie is what we're applying across the portfolio, the same strategy, the same approach, the same discipline, in many cases, the same people are what is driving the rest of the portfolio. And while Barbie is ahead of the game and clearly doing extremely well, we are now applying many of the same resources, capabilities and approach to all other parts of the portfolio. And that's why you see growth, not just in Barbie, but across the dolls portfolio, which, in the third quarter, grew by 24%. You saw growth in the vehicles category. You saw growth in games. You saw a significant improvement in our Infant/Toddler/Preschool category, American Girl. So you're seeing that capability coming through. And you need to think of Barbie as a proxy for Mattel in terms of our capabilities and ability to execute well.

I think that's a really great point, actually. Is there an example you could give of specific learning from Barbie's success that has been applied successfully across the portfolio?

You're starting to see it in different parts. As I said, first of all, the proof is in the numbers that are resonating or working well with product resonating across the world. But the story of Barbie, if you go back to that for a second, is about creating a franchise that resonates with consumer. In the case of Barbie, it was about evolving body, ethnicity, storytelling and really reframing the conversation around Barbie being a purposeful play product. And this goes back to how we think about all of our products because we are now very clear about our mission and about our purpose to empower the next generation to explore the wonder of childhood and reach their full potential with a very clear mission to create innovative products and experiences that inspire, entertain and develop children through play. By saying that, what we mean is that our product, our toys, what we sell, have a purpose beyond just being a toy. We are offering product that we believe improve children's life, show them different capabilities and are able to inspire, entertain and develop them through purposeful play. And this is something that we're now implementing across all of our portfolio. Clearly, it comes with very effective execution on design, on supply chain, on commercial, on demand creation. But in focusing on quality, quality first and creating product that resonate with consumers because of their purposeful play, we're able to really capture the imagination and connect better with consumers and, of course, then translate it to a strong commercial success.

Excellent. I appreciate that additional color. Maybe we can move to Infant/Toddler/Preschool, which is about 25% of your total revenue. This is a category that's -- I guess, you could say, experienced a little bit more difficulty in recent years as it's been in turnaround mode. Can you maybe help us understand what are some of the specific challenges that this category within your company has faced and might continue to face going forward? And you talked about each of your segments sort of getting to a high-performing level. Do you believe that this is a segment that's capable of growing mid-single digits or more?

We are very encouraged by the global POS growth in our entire Infant/Toddler/Preschool category for 2 consecutive quarters. This is something we haven't experienced in a long time. Our Infant/Toddler/Preschool category growth was driven by Fisher-Price core, which is by far the largest segment of the category, which also delivered 2 consecutive quarters of positive global POS growth -- global POS growth. This growth was driven by new innovation in a very compelling marketing campaign that, again, resonate with consumers. The Fisher-Price brand is known virtually by every new parent. It's more than 90 years old, has very high awareness and a trusted relationship with parents. So Mattel, led by Fisher-Price, is still the #1 leader in the Infant/Toddler/Preschool category, and we continue to be a valued brand by parents and a trusted partner for them in child development. We're not providing guidance beyond 2020 at this time, but we believe the brand, the franchise, has potential. It has long-term opportunities, and we remain confident in the plan and in the progress we are seeing.

Perfect. Moving on, if we could, to the challenger category, as you describe it, which includes action figures, building sets and games. Now according to your last quarter, and I think even the quarter before that, you revealed some tremendous success with the Plush category and The Child, of course, Baby Yoda from Mandalorian. And of course, Games have been very strong. From a modeling perspective, this category feels a bit idiosyncratic at times. You have some hits and then you have some tough comps. Is there -- in your mind, do you think of this category as one that can consistently grow over time? Or would it be more a function of the specific license attached to a given toy? And are there organic brands you plan on further developing to help consistently grow this category?

Yes. So we believe all of our challenging categories can grow over time, and they each have the potential to be a strategic growth driver for us going forward. We also see opportunities to expand into more white space as we have done with our Plush category launch this year. As you mentioned, our Plush category continued to showed strength in the third quarter with the launch of Star Wars: The Child. In the U.S., our 11-inch Plush was the #1 selling item in the entire Plush category in the third quarter and year-to-date per NPD. As a matter of fact, it was the #1 product in the category since launch and really a global hit. It was the largest presale for Mattel in our history. We had to halt sales for a while to be able to make up some of the -- for some of the demand. We also saw significant growth in our Games category driven by UNO. It was the seventh consecutive quarter of year-over-year growth for our Games category. POS was up double-digit in the third quarter. UNO continued to perform exceptionally well, remaining the #1 item in the entire Games and Puzzles category in the U.S. year-to-date and in the third quarter, according to NPD. We're also seeing improved POS in our Construction category as we gain more distribution for MEGA. In Action Figures, Jurassic World was up in the third quarter and year-to-date in spite of being 2 years after the release of the movie, as it continues to establish itself as an evergreen property. We expect to see stronger entertainment slate next year. As it stands right now, there are new movies, and some of these have got pushed to next year, that are slated to launch next year. And also, we're very excited about Masters of the Universe, which recently launched its collector line, doing amazingly well. It's -- with the bestseller item being Battle Cat. And we're now starting to sell the Castle Grayskull, very excited about that and getting ready for 2021 full launch of more product, broad offering, and a lot of momentum in -- behind this brand. But as a whole, you can see that the challenger category -- or challenger categories for Mattel, each have real opportunity and each can become a growth driver for us.

Excellent. I just want to pause here for a second and remind everyone, if you do want to ask a question, please e-mail me directly. I see a couple in the queue. I promise I will get to some of those. So just moving on, on the top line. Toys, historically, have been heavily influenced by content. Of course, and that's a big part of your strategy going forward. You do some TV production today. And you have, as you noted, a fairly active slate of movies in the works. Do you feel -- like, one of the larger peers in the category, obviously, sort of doubled down on entertainment. But do you feel like the business, the entertainment business for your company could be -- could move the needle, in some, respects from a profit perspective alone? Or do you view it primarily as a means to better monetize your IP through toys, so to speak.

We are very excited by our IP strategy and believe that our approach is what suits best our growth aspirations. It all comes down to the fact that we own one of the strongest catalogs of children and family entertainment franchises in the world. And our franchise management strategy creates a holistic and connected approach to Mattel's IP portfolio and works hand in hand with our toy business. With that said, the mandate is to capture value in other verticals intrinsically, out of these verticals. These verticals are directly adjacent to the toy industry, but the mandate is to create and capture value from those verticals on an independent basis, not by driving toy sales alone. Of course, the toy side of the business will greatly benefit from the halo effect as you grow your franchises in new and exciting areas such as film, television, gaming, outdoor events, music and consumer product and merchandise. But the point is that, where in the past, we used to make content to sell more toys; today, the opportunity is to expand the business outside of the toy aisle. Nothing wrong in being successful and grow our toy business. We're very focused on that. We're not moving away from that strategy, the strategy of being a high-performing toy company. But the opportunity is to capture, in success, meaningful value from commercializing our product in highly accretive business verticals that are, in some cases, are even larger than the toy industry. With that said, we are employing a capital-light model. We are not looking to buy a studio or launch a studio. We constructed a virtual studio model that is capital-light and built on partnerships, designed around working together with some of the best filmmakers out there and in collaboration with major studios, that look to tap into the brands that we own. And the game today, when -- in a world of unlimited distribution, the proliferation of streaming platforms and ubiquitous ways to reach consumers, it is all about big brands that rise above the noise level and being able to get ahead of the game through known and trusted franchises that people know and, in many cases, feel -- already have very high emotional connection with. This is where our library and catalog come to play. Our currency is the IP that we own, the franchise that we have in our catalog. And that's how we were able to get so much momentum with -- as I mentioned earlier, 10 movies already announced, in partnership with some of the best filmmakers in the world that could not be more excited to partner with us and reimagine our brands and franchises in other ways. So this is working very well. We also made meaningful progress on the television side, with numerous projects already underway. Recently, we announced 104 episodes that we greenlit, that we launched on Netflix, as well as 2 specials, together with a movie project that we're developing with Marc Forster around Thomas The Train. So a lot of opportunities, the very varied portfolio, a very -- a holistic approach that will work both as a stand-alone part of the strategy in terms of capturing value specifically within these verticals, but also driving our toy business through the halo effect that we expect to achieve.

Excellent. Well, I know cost is a big part of the story here, at least was in the past. As you noted, you've cut about $1 billion of cost or 20% relative to your 2017 baseline, which is pretty remarkable by any means. But one thing I wanted to touch on today was you talked about your gross margin, getting that back up into the high 40% range. It seems like you're pretty much there relative to guidance for this year. So I'm wondering, you talked about future savings going forward with capital-light. But at this point, are we getting close to declaring victory? Or is there a lot more room here to go?

So we will always look to continue to improve our margin and remaining very disciplined in our cost management and making sure that we run the company efficiently. This is what we mean by saying a high-performing toy company. Our ongoing progress on capital-light is expected to deliver additional savings, additional gross margin improvement, beyond what we've done to date. This is an ongoing project that will continue to bring in more benefits as well as additional efficiencies that we expect to drive by running the company, running the company better, just running the company better. We haven't given guidance beyond this year. But as you noted, we did say that we expect to restore our historical levels of performance, including gross margin. The momentum that we're seeing in gross margin is very strong. Having achieved 9 consecutive quarters of improving gross margin is clearly a strong message to where we're heading and how we think our profitability metrics. This is driven by -- not really -- not by 1 initiative. This is a holistic approach that drove this efficiency 1,000 -- almost 1,000 basis points ahead of where we were in the third quarter and continued to drive third quarter last year and continuing to drive additional benefits. So we're not declaring victory. We're very encouraged by the progress we are making, but we continue to focus on driving more value, more benefit, better performance as we continue to evolve the company.

Great. Well, I do -- I promised those listening I would get to some questions. A couple were sort of along the same line, so I'll take some liberties to paraphrase here, but they have to do with your direct-to-consumer strategy, which you've talked about in the past, and you've indicated that we should all expect more detail on that to come. But I guess, part of the underlying aspect of the question is, why specifically focus on direct-to-consumer? Is this -- what about direct-to-consumer as an opportunity is so compelling relative to continuing to rely primarily on your successful relationships with retail partners?

Now we don't see this as a trade-off in any way. We could not be more encouraged and feel that we're in a very good position in working with our retailers. We see them as partners. We're now, as you have probably noted, we give more clear -- better visibility on the scale of our network, which, at this point, is at more than 450,000 doors globally. So this is a key part of our strategy, and we're not compromising that in any way. We see B2C as an incremental growth opportunity to leverage the strength of our brands and the fact that people connect with our product. We're seeing the interest and demand in people coming our way and look to engage and interface and interact with our consumers. We're seeing the success of American Girl, our direct-to-consumers there -- direct-to-consumer business there, which doubled in the third quarter and represents, at this point, 50% of sales. So there is a complementary opportunity that we believe will be additive, will be -- will not compromise, will not cannibalize anything that we do on the traditional business, but give us an opportunity to actually create incremental -- drive incremental business and strengthen relationship with very passionate fans out there that are looking for closer engagement with the home of some of the favorite brands.

Great. And I'll sneak one more in here, maybe a good one to end on. It sort of relates to the unpredictable nature of the toy industry. And maybe tying back to Barbie a little bit. How do you consistently deliver success in an industry that historically has been defined by fads and trends? Is that something you can institutionalize?

This is where being a large platform in the toy industry helps and works to our advantage. We are not reliant on one brand or one category, or for that matter, on third-party rights. We own the -- our -- the majority of our -- of the IP that we work with. These brands are very diverse. We work in multiple categories. And by the virtue of being -- having a portfolio approach, we believe we are in a very good position relative to the rest of the industry. In absolute terms, as a company, we constantly look to innovate and push the envelope, drive ourselves, reimagine ways to connect with consumers and continue to focus on making great product that resonate and drives demand. We're also very mindful of, as you said, some of the things that historically have challenged the toy industry. And we believe, through the actions we are taking, the portfolio approach, expanding to other businesses that are adjacent to the toy industry where we can find meaningful value in success, all bode well for our growth trajectory. I'm not taking away any of the potential volatilities maybe in the short term with COVID or the long term that we might not be aware of today. But our job, and we've done that very well, is to design an organization that is flexible, that can respond to different dynamics and market changes and is resilient, especially in challenging times. What we're seeing now is a great way to think about Mattel, the new Mattel, in terms of performance, in terms of execution, in terms of capabilities and in terms of results. And we're very confident about our way forward. We believe we have the right assets, the right capabilities and the right people to drive growth and continue to execute our strategy very successfully.

Excellent. Well, we've gone a little bit over. Ynon, I want to say thank you so much for being here. It's been incredibly informative and sharing the Mattel story. And hope you're safe and sound, and look forward to catching up again in not too long.

Thank you, Dave. Thank you very much for this. I enjoyed this. Thank you.

You bet.