Many investors probably have fond childhood memories of toys like Hot Wheels and Matchbox cars, Barbies, and the earliest handheld video football games. All of these, and many others, were made by Mattel (NASDAQ: MAT), one of the world’s best-known toy companies. But how is Mattel doing in the more competitive toy and game market of the 21st century?
Very well, actually. The California-based company has expanded into new areas both in terms of products and international markets, and has been able to either defeat or absorb several of its key rivals. The company is well-represented at every level of the toys and games sector, whether the market is the smallest children (Fisher-Price, Thomas the Train), bigger kids (Barbie, American Girl, Matchbox cars) or teenagers and even adults (many of the top video games).
For example, Mattel recently announced that it will acquire MEGA Brands for $460 million. The acquisition advances Mattel’s global growth strategy of building upon its world-class portfolio of brands by expanding into two of the fastest-growing toy categories.
MEGA Brands is the No. 2 player in the $4-billion construction building sets category with its MEGA Bloks brand as well as a competitor in the $2-billion arts & crafts category.
The construction building market is of course dominated by Denmark’s Lego Corp., which has an enormous market share. But with Mattel’s financial resources and global marketing infrastructure, MEGA Bloks could challenge that dominance.
“A key pillar of our global growth strategy is the strategic acquisition of brands that will both benefit from our scale and help extend our reach into new and growing categories,” said Bryan G. Stockton, Mattel Chairman and CEO. “The construction play pattern is popular, universal and has had one of the fastest growth rates over the past three years. We look forward to helping MEGA Brands accelerate its global growth, providing more choices for more children and their families.”
MEGA Brands has many of the best-known brand names in toys and video games, such as Call of Duty, Power Rangers, Hello Kitty, SpongeBob SquarePants and others. The acquisition will give Mattel the opportunity to broaden its relationship with its entertainment partners.
The deal also creates the opportunity to grow the MEGA Brands sizable arts & crafts business, with brands including Rose Art and Board Dudes. Arts & crafts activities are highly popular among children of all age groups.
MEGA Brands had estimated net sales for fiscal 2013 of $405 million. It ranks among the top 15 toy companies globally in terms of sales, according to statistics published in 2013. Mattel plans to maintain MEGA Brands’ expertise in manufacturing and plans to maintain the MEGA Brands headquarters in Montreal and will seek to tap into MEGA Brands’ proven skills in design and development in the construction and arts & crafts categories.
Many of the leading toys today are tied-in with the latest movies and television shows. Mattel has longstanding relationships with many Hollywood studios, particularly Disney. Many of Disney’s princess-related dolls and other toys have been manufactured by Mattel, as have the toys connected with Disney’s Planes movie of last year.
Mattel reported 2013 fourth quarter and full year financial results a few weeks ago. For the fourth quarter, the company reported net income of $369.2 million, or $1.07 per share, compared to last year’s fourth quarter net income of $306.5 million, or $0.87 per share. For the year, Mattel reported net income of $903.9 million, or $2.58 per share, compared to last year’s net income of $776.5 million, or $2.22 per share.
Toy sales during the 2013 holiday season were a small improvement over the last few seasons, although some had hoped that the improving economy would spur revenues even more. In the context of a fairly flat market, Mattel’s revenues and profits have held up nicely.
Mattel has also been expanding internationally. Europe has many well-established toy and game companies of its own and has traditionally been a tough market to break into. But Mattel has been getting more of its sales from growth areas like India, South Asia and Latin America, areas where incomes are rising and there are lots of young people.
Brand loyalty can be harder to maintain when marketing to children, since new crops of consumers are always coming along (although, as noted, the childhood memories of parents and even grandparents can be a factor). But Mattel has maintained its market shares through all kinds of economic environments. Hot Wheels, Matchbox and Tyco are all familiar brands to those who were kids in the 1960s and 1970s, and all are still generating revenue for Mattel today. Barbie may be the most iconic doll ever made, and Fisher Price has been trusted by mothers for generations.
Mattel had suffered a setback when a U.S. district court ruled in favor of MGA Entertainment on a trademark infringement claim. But the Ninth Circuit Court of Appeals agreed with Mattel that the verdict and damages on MGA’s claims must be reversed, and directed the District Court to dismiss the claims. The Ninth Circuit’s decision vacated the District Court’s judgment awarding MGA approximately $172 million, consisting primarily of compensatory and punitive damages.
Mattel’s stock price declined sharply at the beginning of February due to unrealistic expectations about earnings, but has since begun an upswing. The price-earnings ratio is still only 15, so there’s still time to board this train.
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