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

All right. Great. Thank you, everyone, for taking the time to join us this morning. My name is Stephen Laszczyk. I'm the Lead Entertainment Analyst here at Goldman. We're excited to welcome back to the retail conference this year Ynon Kreiz and Paul Ruh, the CEO and CFO of Mattel. Thank you both for being with us today.

Thank you, Stephen, for inviting us. Always good to be here.

Great. Maybe to start this off, Ynon and Paul, would love to just maybe start with theme coming out of last quarter's earnings, where you said consumer demand remained healthy. That top line growth has continued into the third quarter. Would love just with maybe another 5 or 6 weeks more of data behind you to get your latest sense of what you're seeing today in terms of consumer demand and retail ordering patterns.

Sure. So let's take big-picture view of the toy industry as a whole, which is having a very strong year. The toy industry as a whole is growing double digit. And in fact, this is broad-based. The primary drivers are games, trading cards, action figures, vehicles and building sets. And as a whole, the industry is growing strongly. And in fact, according to Circana, which tracks 17 different general merchandise retail categories, toys is by far the largest driver. And even when you take out credit cards, which benefited from the World Cup, toys as a category remains a very strong driver. We've talked about it before, toys is a growth industry. The industry has grown in 23 out of the last 25 years. And it has -- it plays into a fundamental human behavior. It's a strategic category for retailers, and we expect the toy industry to remain healthy and continue to grow. And that growth, by the way, is driven both by units and price, so far year-to-date. Within this environment, we are also seeing growth and momentum in our business, in consumer demand, which is positive quarter-to-date. We are seeing growth across categories, driven primarily for Mattel, by vehicles and action figures and in some areas that are importantly becoming a key part of our portfolio, including building sets and Mattel Brick Shop. And we are very confident about continued growth and expect to achieve our full-year guidance in this environment.

Great overview. I want to dive into a lot of those key themes a bit more. But maybe, Ynon, you mentioned the annual guide last quarter, you reaffirmed the full year guidance. And within that, there was some moving pieces. Would love if you could maybe just take a look back on the year and talk a little bit about what you've seen as the biggest drivers, both positive and negative in terms of how this year has played out

Sure. Happy to take about how the cadence the year we've evolved. So overall, as we say, we are reiterating guidance. We are confident in what we are seeing in the balance of the year. There are some puts and takes, as you well said. And it's more a matter of how things will evolve between Q3 and Q4 rather than how the full year will look like. If I go down the P&L, if I start with the top line, we have a wonderful array of activations for the balance of the year. So that will certainly be a driver. On the other side, given the shift in retailer ordering patterns that we observed last year, now they're largely stabilized. But that will shift sales more towards the fourth quarter. So what you will see is more of a backloaded towards Q4 sales momentum, but it's also substantiated with the activations that we're seeing, with the movie slate that we're seeing. So all of that gives us confidence that over the second half of the year, we will be pretty good in the cars with the top line. So if I go down the P&L, when it comes to gross margin, there's some puts and takes as well. We have definitely seen -- on the headwind side, we have seen higher inflation. That's a reality, given the Middle East conflict. We've seen higher inflation in commodities, in packaging materials, in labor, in shipping costs. But we also have things going our way, and we have some tailwinds as well. One of them is favorable ForEx inflation. And also the tariff assumptions that we planned as we went into the year, are materializing to be slightly lower. So all of that puts and takes, gives us comments that we will be within the guidance range of the 50% -- approximately 50% that we talked about. And then going down further into the P&L, we continue to manage our expenses very judiciously. As you heard us talk in the last earnings release, we are managing the digital advertising spend prudently to make sure that it matches the launch of our digital games and that we are maximizing the return on our investment. So as you can hear, it's -- we're progressing well. There's some shifts between Q3 and Q4. There's tailwinds and headwinds. But overall, we're confident in the guidance that we just talked about.

That's helpful, Paul. Maybe just to put a finer point on that. So it sounds like the guide for approximately 50% gross margin this year, puts and takes. But on that, [indiscernible] into that range. And then would love just any cadence commentary on SG&A and advertising expense in the back half?

Yes. So in terms of the gross margin, as I said, still targeting approximately 50% for the full year. In terms of cadence, it's worth remembering a couple of things. Number one, we're seeing higher inflation. But remember, as we go into the fourth quarter -- last year, we had approximately 50 basis points of higher promotional spend. We do not expect that to happen anymore this year. given a couple of things. Number one is the innovation that we're seeing, the product slate, the movie slate that we're seeing. But equally important, we do not see the highly promotional environment materializing this year any longer. The industry has come in with a proper level of inventory, both the retail inventory also our inventory are at the appropriate level. So we see less pressure to drive a more normalized in promotional environment. So that's on the gross margin side. On the SG&A side, on the advertising side, as part of our brand-centric model, we have shifted from going -- from doing item-based advertising to a much more brand-building thematic advertising. So that will be spread out more evenly throughout the year. As a result, we will be seeing in Q3, advertising as a percent of sales higher than we traditionally see compared to a Q4 that is going to be lower than we traditionally see as a percent of sales. So we're managing the business very judiciously quarter-over-quarter. We're taking the puts and takes, but it's more about how the cadence will transpire between Q3 and Q4. And overall, given the momentum that we see in the industry, given our products and advertising slate that we see, we're very confident in delivering the full year numbers.

And I just want to add one important point is that, as you remember, last year, there was a meaningful impact of the change in retail order patterns, from direct import to domestic shipping. This headwind was a reason why we had so much needed to do promotions, especially in Q4, and disrupted most of the year. This has now stabilized, and we don't expect that to return. And this is a key change in terms of headwind and impact on gross margin and other factors that that were the headwind last year. This is no longer the case for this year, and it would be particularly important in the second half of the year and more so in the fourth quarter. And that's the cadence Paul was talking about where most of the improvement you will see in the fourth quarter in terms of gross margin and sales to reach the 50% gross margin number. This is important to say. And again, that's -- this improvement already started in Q2 this year, and you'll continue to see that playing to our benefit for the rest of the year.

Helpful. Paul, maybe touching on potentially another benefit that could come into purview this year, tariff refunds. We've seen some of your peers starting to receive tariff refunds. Could you maybe give us an update on what the latest tariff refunds for Mattel? And then maybe more broadly, we've heard some retailers investing back into price. Assuming you receive additional tariff refund, how might you put that money to work?

Yes. Just as the rest of the industry, as you will say, we are participating actively in the tariff refund process. So to date, we have received approximately $90 million of IEEPA tariff refunds. We are evaluating closely what we do with the refunds. We will definitely prioritize brand-building activities. That is our first priority, and we will do that. We will determine, and we will share with everyone more in the Q3 earnings how we will be utilizing those and what the impact will be to the P&L. But so far, we're tracking well. We're receiving the refunds and we are coming up with very precise plans to build -- continue to be the brands for 2027 and beyond.

Helpful. Maybe zooming out now, Ynon, taking a look across your power brands, Hot Wheels is on track to deliver in the ninth consecutive year of consecutive growth. I know you've done a lot of work to expand that brand into collectibles and the content beyond just the core toys business. What do you think the main drivers looking ahead here are future growth for Hot Wheels, the drivers and levers worth calling out?

Hot Wheels has been an incredible success story that is not slowing down. The -- what we've done so well around Hot Wheels is taking a play pattern, continue to expand it and turn the Hot Wheels to become much more about car culture and lifestyle. The brand is driven by incredible innovation in products. We continue to broaden the aperture across play patterns, more audience demographic, extending from young kids all the way to adult fans and collectors. And we do that across a very broad range of price points from $1.49 for Hot Wheels basically car all the way to $700 for a collector set. And as we said, we expanded into content, digital games, consumer products and merchandise, location-based entertainment, traveling shows and exhibitions. And it's becoming stronger and broader and having more and more control impact. We also continue to expand the play pattern into other categories. So from vehicles, we're now participating in building sets, and this is Mattel Brick Shop, which is itself becoming runaway hit for the company. Still early days, but getting stronger and stronger, and we expect that to be a meaningful contributor and growth driver for Mattel. Hot Wheels has been our largest brand since 2024. It's on track to exceed $2 billion of sales at very healthy margin. And we couldn't be more confident about the momentum and the fact that it will continue to grow for years to come. The important takeaway from Hot Wheels is not just the success of this particular brand, but it's how we are applying our strategy, our brand-centric strategy and the Mattel playbook to take a strong brand, make it even more relevant in culture and continue to expand it beyond the traditional toy aisle. And that's the opportunity. There's plenty of headroom to grow, and we're excited to take it to next year and beyond.

Could you maybe touch a little bit more on some of those key learnings from Hot Wheels and if you apply it to some other brands in portfolio where you think there's a parallel opportunity there?

So when we talk about our brand-centric strategy, it's about two aspects. One is how do you think holistically about the brand ecosystem to create a playbook that expands the brand beyond the toy aisle. And this is where -- this is about the Mattel flywheel where we begin our journey in toys, success in toys drive success in entertainment and success in entertainment, which is about content, digital games, consumer products and merchandise, drives even more success in toys. And that flywheel will continues to grow and expand. The second aspect is about fandom. We don't just sell to items of a shelf. We manage brands and we built on the very strong emotional connection that people have with our brands. That emotional connection is fundamental to what we do because it allows us to continue to expand the play patterns, the engagement and create multiple touch points for fans to engage and interact with our brands. So between creating a full franchise ecosystem on one side and building fandom on the other is how you continue to strengthen the brand management capabilities and expertise that we have and ultimately drive much more growth for the company, both in top line and in profit.