Business Overview and History

Mattel, Inc. (NASDAQ:MAT) is a leading global toy and family entertainment company with an iconic brand portfolio that includes Barbie, Hot Wheels, Fisher-Price, and many others. Over the past decade, the company has undergone a remarkable transformation, evolving from a traditional toy manufacturer to a multi-faceted entertainment and IP powerhouse.

Mattel was founded in 1945 by Harold "Matt" Matson and Elliot Handler in California. The company initially started as a manufacturer of picture frames but quickly pivoted to designing and producing toys. Mattel's first big hit was the "Uke-A-Doodle" ukulele in 1947, followed by the introduction of the "Burp Gun" in 1950, which became a popular toy during the Korean War.

In 1959, Mattel introduced the Barbie doll, which quickly became the company's flagship product and one of the most iconic toys of all time. Barbie's overwhelming success helped propel Mattel to become a leading global toy manufacturer throughout the 1960s and 1970s. During this period, Mattel also acquired several other brands, including Hot Wheels, Fisher-Price, and Tyco Toys.

However, Mattel faced significant challenges in the 1980s and 1990s. The company experienced accounting scandals, managerial turmoil, and declining sales as consumer tastes shifted. In the late 1990s, Mattel was forced to take a $500 million charge due to overstocking and poor inventory management. This led to the ouster of the company's CEO and a major restructuring effort.

Under new leadership in the 2000s, Mattel focused on revitalizing its core brands, such as Barbie and Hot Wheels, as well as diversifying its product portfolio. The company made strategic acquisitions, including the American Girl line of dolls and accessories in 1998. Mattel also expanded its entertainment and digital initiatives, partnering with major media companies to develop content and games based on its intellectual property.

Despite ongoing challenges, such as the 2007 recall of over 21 million Chinese-made toys due to safety concerns, Mattel has managed to regain its footing as one of the world's largest and most recognized toy companies. The company continues to innovate and adapt to changing consumer preferences, while also leveraging its iconic brands to drive growth in new channels and markets.

Financial Performance and Ratios

Mattel's financial performance has shown mixed results in recent years. In the most recent fiscal year (2023), the company reported net sales of $5.44 billion, with a net income of $214.35 million. Operating cash flow for 2023 was $869.79 million, while free cash flow was $709.49 million.

For the most recent quarter (Q3 2024), Mattel reported:

• Revenue: $1.843 billion (a 4% decrease compared to Q3 2023)
• Net Income: $372.376 million (a 154% increase year-over-year)
• Operating Cash Flow: $155.822 million
• Free Cash Flow: $64.332 million

The decrease in revenue was primarily due to a decline in Dolls sales, which was partially offset by strong performance in Vehicles. The significant increase in net income was driven by gross margin expansion of 210 basis points to 53.1%.

Key financial ratios for Mattel include:

• Gross Margin: 53.1% in Q3 2024 (up from 51.0% in Q3 2023)
• Debt-to-Equity Ratio: 1.04
• Current Ratio: 2.45 as of September 30, 2024
• Quick Ratio: 1.88 as of September 30, 2024

Liquidity

Mattel's balance sheet remains strong, with $723.53 million in cash and cash equivalents as of September 30, 2024. The company has a $1.4 billion revolving credit facility, which it entered into in July 2024, replacing its prior $1.4 billion facility. The new facility matures in July 2029. As of the end of Q3 2024, Mattel had no outstanding borrowings under this facility.

Product Segments and Performance

Mattel operates in the following product segments:

1. Dolls: This segment includes brands like Barbie, American Girl, Disney Princess and Disney Frozen, Monster High, and Polly Pocket. Dolls gross billings decreased 14% in Q3 2024, primarily due to lower billings of Barbie, which had benefited from the Barbie movie in the prior year, and lower billings of Trolls products.

2. Infant, Toddler, and Preschool: This segment includes Fisher-Price and other brands. Gross billings decreased 3% in Q3 2024, due to lower billings of Baby Gear and Power Wheels products.

3. Vehicles: This segment includes Hot Wheels, Matchbox, and Cars brands. Vehicles gross billings increased 12% in Q3 2024, primarily due to higher billings of Hot Wheels products.

4. Action Figures, Building Sets, Games, and Other: This segment includes brands such as Masters of the Universe, MEGA, UNO, Jurassic World, Minecraft, WWE, and Star Wars. Gross billings increased 2% in Q3 2024, with an 8% increase in Games products partially offset by lower billings of Other products and Building Sets products.

Geographic Performance

Mattel operates globally, with sales in North America, EMEA, Latin America, and Asia Pacific. In Q3 2024:

• North America net sales were $1.11 billion, down 3% year-over-year.
• International net sales were $735.62 million, down 5% as reported and 2% in constant currency.

The declines were primarily due to lower Dolls sales, which was partially offset by strength in Vehicles.

Transformation and Growth Strategies

Under the leadership of Ynon Kreiz, Mattel has undergone a significant transformation, focusing on two key strategies: growing its core IP-driven toy business and expanding its entertainment offerings.

In the toy business, Mattel has revitalized its iconic brands, such as Barbie, Hot Wheels, and Fisher-Price, investing in innovation, product development, and targeted marketing campaigns. The company has also focused on expanding its presence in emerging markets and capturing market share in key categories.

Parallel to its toy business, Mattel has aggressively pursued an entertainment strategy, leveraging its vast portfolio of intellectual property (IP) to create content, consumer products, and digital experiences. The company has partnered with major studios and streaming platforms to develop movies, TV shows, and digital content based on its brands, such as the successful Barbie movie in 2023.

Mattel has also made strategic investments in digital gaming, launching its joint venture Mattel163 with NetEase, which has already exceeded $200 million in gross billings in 2024. The company is also exploring opportunities in emerging technologies, such as non-fungible tokens (NFTs) and cryptocurrency, to further expand its entertainment ecosystem.

Outlook and Guidance

For the full year 2024, Mattel expects net sales to be comparable to slightly down in constant currency, with growth anticipated in the fourth quarter. The company maintains its guidance for adjusted EBITDA in the range of $975 million to $1.025 billion and adjusted EPS growth in the double-digits, between $1.35 and $1.45.

Mattel's management team has expressed confidence in the company's ability to navigate the current macroeconomic environment, citing the resilience of the toy industry, the strength of its brand portfolio, and the ongoing execution of its growth strategies.

Industry Trends

The toy industry has shown resilience, with the overall market declining only modestly in 2024 so far. Mattel expects the industry to return to growth in the coming years, driven by favorable demographics and the importance of toys in consumers' lives. Mattel is well-positioned to capitalize on these trends with its portfolio of iconic brands and focus on innovation, entertainment, and brand-building.

Risks and Challenges

While Mattel has made significant strides in its transformation, the company faces several risks and challenges that investors should be aware of:

1. Competitive Landscape: Mattel operates in a highly competitive toy industry, vying for market share with industry giants like Hasbro, as well as emerging players and online-focused toy companies.

2. Macroeconomic Conditions: The company's performance is susceptible to fluctuations in consumer spending, global supply chain disruptions, and other macroeconomic factors that could impact demand for its products.

3. Reliance on Key Brands: Mattel's success is heavily dependent on the performance of its core brands, such as Barbie and Hot Wheels. Any decline in the popularity or appeal of these brands could significantly impact the company's financial results.

4. Regulatory and Legal Risks: Mattel, like other toy manufacturers, is subject to various regulatory and legal requirements, including product safety standards, licensing agreements, and intellectual property disputes.

5. Execution of Transformation Strategy: Mattel's ability to successfully execute its transformation and growth strategies, including the expansion of its entertainment offerings, will be crucial to its long-term success.

Conclusion

Mattel's transformation over the past decade has been nothing short of remarkable. The company has successfully pivoted from a traditional toy manufacturer to a multi-faceted entertainment and IP powerhouse, leveraging its iconic brand portfolio to drive growth and create value for shareholders.

While the company faces some challenges, including a competitive landscape and macroeconomic uncertainties, Mattel's strong balance sheet, diversified revenue streams, and strategic focus on innovation and entertainment expansion position it well for continued success in the years ahead. The company's recent financial performance, particularly in terms of profitability and cash flow generation, demonstrates the effectiveness of its strategies and the resilience of its business model in a challenging market environment.