August 17, 2009 HAPPIER HOLIDAYS AHEAD FOR MATTEL THROUGH NEW DOORS, TOYS AND HOME ENTERTAINMENT By David Franklin, [email protected] 415.364.3780 OUR STARTING THESIS AND APPROACH FOR THE MATTEL PROJECT This week, Blueshift Research initiated research on Mattel Inc. (MAT). The original thesis questions whether Mattel can strengthen its brand while maintaining toy sellers’ support and under the guidance of the new general Barbie franchise manager, who is leading the doll line through a makeover. This study employed Blueshift’s pattern mining approach to establish contacts within five independent silos to assess the likelihood for sales growth. The silos: 1) store clerks and managers, 2) toy industry experts, 3) secondary sources, 4) competitors and 5) consumers. We interviewed 15 primary sources and reviewed more than seven secondary sources. SUMMARY OF FINDINGS Five of six retailers interviewed expect overall holiday toy sales to exceed last year’s levels. Two retailers said Mattel will benefit from new and creative Barbie end-cap displays, a Hot Wheels: Battle Force 5 TV series tie-in agreement and Avatar action figures scheduled to be released in October. Toy experts were split on their expectations for overall toy sales for the 2H09. One forecast flat sales, while the other expects a year-to-year increase. An industrywide price hike of 5% to 6% will help propel sales ahead of last year. Mattel implemented a modest price increase on its spring line of toys and a mid- to high single-digit hike on June 1. Wal-Mart Stores Inc. (WMT) is cutting shelf space for toys and crafts. Experts expect this to benefit Mattel as smaller competitors’ product lines will be reduced. Sears Holding Co. (SHLD), Borders Group Inc. (BGP), Barnes & Noble Inc. (BKS) and Spencer Gifts LLC are adding or expanding their toy offerings this holiday season, which potentially could add 2,560 new or expanded toy departments and lead to sales growth for the industry. Toy Store Managers and Clerks: Five of the six retailers interviewed expect 2009 toy sales to surpass 2008 sales. Barbie, Hot Wheels, Fisher-Price and board games are expected to be strong performers. Pre-release (October) marketing of Mattel’s new Avatar action figures and Hot Wheels: Battle Force 5 vehicles is generating some interest. Marketing of Barbie through a creative isle end-cap also has drawn attention. • A manager in a West Coast Toys “R” Us Inc. store said overall sales have been trending up for the past two months and expects toy sales to be ahead of last year. He described Mattel as an excellent company with cutting-edge design, whose toy lines generate excitement for his customers and his staff. He commented on a Barbie end-cap display that is really drawing a lot of attention. o “Barbie is a remarkable selling product. Mattel keeps it current and always offers something interesting and timely. The African-American Barbie with actual African-American features is an excellent product, and we are selling a lot of them.” o “Fisher-Price is an excellent brand. Customers ask for the products, and the company always has interesting products that are well made and well packaged for display and sale.” o “Mattel has a very creative Barbie end-cap display that is generating a lot of interest from consumers and staff.” • A toy department manager at an East Coast Wal-Mart expects 2H09 sales to be better than 2H08. She said Mattel board games and Hot Wheels were selling very well right now. The manager thinks more people are staying home because of the economy and are looking for ways to entertain themselves. She has had 321 Pacific Ave., San Francisco, CA 94111 [email protected] August 17, 2009 customers asking about the Avatar products that Mattel expects to introduce in October. She said advance release interest is a very good sign. o “Mattel should make a killing this Christmas. People are starting to buy for the holidays now. Lots of board games are being sold.” o “Mattel has excellent quality, and for as long as I’ve been selling toys they have had excellent quality.” • A manager of a store that is part of a five-store specialty chain said her sales have been steady year to year and are expected to be better during 2H09 compared with 2H08. They carry some of the Barbie products and Mattel board games, which have been consistently solid performers. Mattel quality is good, and customers seem to be pleased with the Mattel products they stock. o “This store is in an affluent ZIP code, so our customers have continued to spend money. We anticipate having a solid holiday sales season, and we should see sales numbers that top last year’s but not by much because of the economy.” o “You can’t really be a toy store without Mattel products and especially Barbie.” o “I had heard that some of the Mattel products had problems, but Barbie has always been a steady seller for this store.” • A clerk in an independent toy store said Mattel was an excellent brand of toys. She said parents know the brand but usually only because of Barbie and Hot Wheels. The store had a large inventory of toys on the floor in preparation of a good holiday season and in anticipation of improved sales year to year. o “We expect the holiday season to be better than last year as far as sales go. There is no way that parents will not spend on their kids two years in a row.” o “Barbie, Hot Wheels and board games are the best sellers of the Mattel product line for us.” • A Wal-Mart toy department manager on the East Coast said the economy has hindered sales, prompting the store to proceed cautiously with holiday inventory. She said Mattel is a good company, but she did not really see much difference between the major players. She said if one comes out with something new, the others come out with the same thing. o “I don’t know what to expect from the holiday sales this year. The economy has negatively impacted our sales, and last Christmas we had to discount to get things moving. I am seeing some improvement, but I’m concerned about sales moving forward.” o “Barbie is always popular and sells very well, and the Disney Princess dolls have been popular as well.” o “Mattel is a good toy company for us; all their products sell well.” o “After we see what is popular, we will prepare our orders for the holiday season. We will start to closely monitor sales for the next few weeks and then decide what and how much to stock.” • A specialty toy store manager in San Francisco said sales are starting to increase compared with the first half of the year and expects an improved holiday season year to year. She said Mattel products are excellent sellers for toy stores. Her store does not carry any products from the Mattel line because they did not fit with the store’s philosophy of educational and natural products. o “Sales have been steady for us compared to last year, and I expect the holiday to be a little better than last year.” o “Barbie is still a good seller, especially when they incorporate a movie tie-in.” Toy Experts: The two experts interviewed differed on their prediction for 2H09 sales. One expects toy sales to improve year to year. The other source expects sales to be flat, which he views as a success given the current economy. Industrywide price increases are considered a positive for 2009 sales, and pent-up consumer demand is expected to influence 4Q09 sales. Wal-Mart’s plan to cut its toy offerings should 321 Pacific Ave., San Francisco, CA 94111 [email protected] August 17, 2009 benefit Mattel as major toy company product lines will be maintained while smaller toy companies will be eliminated. With toy inventories currently low, one source expects seasonal ordering to begin soon. • The treasurer for the American Specialty Toy Retailing Association’s board of directors and owner of a five- store chain said sales are improving because of industrywide price increases of 5% to 6%. She also expects sales to exceed last year’s levels because of pent-up consumer demand. Toys and board games from Mattel are good sellers for this source. She said the toy industry was thought to be recession-proof but it suffered in 2008 and early 2009. o “What you’re losing in transactions, you’re gaining in dollars per transaction. If the average transaction is up 5% to 6%, it helps offset declines.” o “I think there’s going to be a lot of pent-up desire to spend by the time we hit fourth quarter. Barring a catastrophe, people will want to indulge themselves; they’ll want to live again. They’re going to find the cash or credit to make that happen. People are fed up with the deprivation mentality.” o “I think the recovery indicators began about April 1. There were signs of a recovery in consumer attitude and consumer spending. People came out and spent.” • An editor for a toy trade publication and Web site said toy industry sales for 2009 will be flat year to year. He said Wal-Mart’s plan to reduce toy space is not likely to hurt Mattel and actually could help sales as the chain is expected to maintain the top 10 toy companies. Toy department expansion in Sears, Borders, Spencer Gifts and Barnes & Noble also bodes well for Mattel and other toy companies.