Spin master toys case study solution

Case Study Analysis 2

Case Instructions, Guidelines & Preparation

Remember, the case is graded per the rubric. The BoD would want your recommendations with the proper support. Any analysis details should be covered in the appendices. Do not go to the Internet to find, for example, a SWOT or external analysis and use it for your case. Do your own research and develop your own strategic analysis.

In doing your case you will need multiple references besides the Mattel case. Use current business websites to find out about recent developments. The case analysis should be done from the perspective of today’s date. The case was written several years ago and, while it provides much information that is still relevant, other facts have changed since the case on the BSG site was written. For your outside references, do not use websites that develop term papers or do strategy analysis on cases and publish them. This could lead to charges of plagiarism and the associated consequences.

The case study analysis allows you to apply your knowledge to the real world. Your goal is to identify the major problem confronting the subject company and provide a strategic solution for the problem. You will need to collect data and interpret it. You must also isolate the critical issues that the company faces. Remember that in the words of Lord Kelvin, "anything that cannot be expressed in numbers represents knowledge that is of a poor and uncertain kind."

After identifying the critical issues you can generate alternatives to address the company's competitive situation. Evaluating these alternatives allows an organization to select one course of action. With a course of action defined the strategic manager can then provide a plan for implementation this is what you are to do on the case study. Always refer to the rubric for the critical points to cover.

The format for the case study should be as follows.

Cover page,
One-page, single spaced Executive Summary for the case as noted below. This is a summary of your analysis in the appendices and, therefore, must be done after you finish the appendices. This one-page report must use headings and subheadings indicated in the following format to identify the critical issues. Begin with your understanding of the situation in a problem statement. Follow this with a concise presentation of your analysis and the alternatives you see. Recommend one course of action and support that recommendation with facts and other information, such as competitor’s moves. The last item presents a plan for implementation –a sentence or two is sufficient.
Seven appendices, including: Appendix 1 with a few bullet points encapsulating your understanding of the problem(s) facing the company with more detail than what is in the executive summary; Appendix 2 identifying at least one opportunity or threat in each of the five STEEP areas of the macro environment (please include a table as shown in Wurthmann (2020) Table I); Appendix 3 stating whether each of the Porter’s Five forces (bargaining power of buyers & suppliers, threat of new entry and substitutes, and rivalry among competitors) is strong, moderate, or weak and why (please include a table as shown in Wurthmann (2020) Table II, showing an analysis of at least one factor determining the strength/weakness of each of the five forces); Appendix 4 including the financial analysis as described below; Appendix 5 identifying at least 3 strengths and 3 weakness in Mattel (please include a table as shown in Wurthmann (2020) Table III) ; Appendix 6 identifying at least one different alternative strand of a strategy for Mattel at each of the four intersections, i.e. the strength/opportunity, strength/threat, weakness/opportunity, and weakness/threat intersections (please include a table as shown in Wurthmann (2020) Table IV); and Appendix 7 identifying which one of the four alternatives from appendix 6 you are recommending for Mattel and a brief explanation for why this is your chosen alternative (please discuss how the recommendation fits with Mattel’s strategy diamond, following the guidance provided in the penultimate section of Wurthmann (2020) on strategy formulation).
You are to use standard APA citations to identify the sources of the information in the appendices. You can also include any relevant tables, charts, graphs, etc. Please be concise. Remember, in management you must get your thoughts across quickly if you expect your work to be read. Long reports generally wind up in a stack awaiting reading at some future date (which never comes).

Executive Summary Format (1 page in length):

The Executive Summary is a concise overview of the analysis in the appendices. The Executive Summary should be written from the perspective of an outside consultant, writing to the Board of Directors of the firm. It notes the essential points of the analysis and must have the following sections:

Problem Statement: State the main problem facing the firm (or industry) in one, succinct sentence (summarize Appendix 1).
Analysis: Summarize the main findings of your analysis (summarize Appendices 2-5). You may use bullet points, bold, italics – any means to convey and highlight the key factors you have determined based on your analysis. Don’t simply repeat items from Appendices 2-5. Instead, summarize the major issues.
Alternatives: State briefly (a bullet point each) 4 alternative courses of action that could be implemented. Here you can simply repeat the alternatives from Appendix 6, but omit the strength/opportunity, strength/threat, weakness/opportunity, or weakness/threat that the strategic alternative addresses.
Recommendation: Choose one course of action and support your choice. Here you should summarize the key points of Appendix 7.
Implementation: Briefly (1 or 2 sentences are sufficient) present how the plan would be implemented. This tests the viability of the choice. For example, your plan would demonstrate that the company has the people, financial resources and time to implement your recommendation.
Additional Formatting information for Executive Summary:

Single-space
One inch all margins
Use bullet points, lists, or other means to convey information briefly. Further explanation can be found in the Appendices.
Use headings and subheadings to organize the material in an easy to read and understandable manner that highlights the essential points of your analysis.
Do not include a summary or overview of the firm in your report. The Board of Directors are knowledgeable and need no background presented.
Remember that cases are graded per the rubric. The Case Study rubric can be found here or in the in the Course Instruction Tab and should be added at the end of your submission.

Case Study Preparation

The preparation of the case in this course is different than the cases you have written in the past. It will require substantial investigation into the case company’s strategies, competitive positions and actions, problems being faced, the company financials, ratios and trends. The case study is about a real company's current position in the industry, the external competitive environment, the current strategies being used, and recommendations for strategies the company should use going forward. The case should identify a problem faced by the company, using the strategic management tools highlighted in the text and a quantitative analysis. You then generate realistic solutions, evaluate and select one, and then provide recommendations and the timeline to implement your recommendations. Remember that you are working to understand the company's current strategy and future direction that offers a solution to the problem of meeting the company’s shareholder requirements. Again, remember that you are fulfilling the requirements of the rubric for the case.

By analogy, in the BSG you have a set of prescribed goals to attain and a set of reports issued weekly to assist you in understanding how your company is doing relative to the competition and giving you an opportunity to revise your operational plans for the next period. However, in the case you have to look at a company’s performance over the past few years and understand how the performance is changing and identify underlying problems. You are to identify trends in performance, problem areas, and how the company is performing using all of the tools that you have learned throughout your MBA program. Remember that you are working to meet or exceed the shareholder expectations.

The perspective for your analysis should be directed to the company’s Board of Directors (BoD). Remember that the BoD is familiar with the company’s history, its management structure and the strategies deployed in the past. Recycling old history about the formation of the company, its previous management, etc. will not be looked upon favorably by the BOD (or your instructor). Remember that your case study must be brought up to date with the most current 10K report or financial information. Get at the critical issues and report on them. Remember that in business, situations do not come with a set of questions. The questions sometimes have to be generated and then researched to find solutions to those questions. Success in the case is important to your final grade in that the case constitutes 20% of your course grade.

Module-Level Objectives:

MLO 3. Distinguish and assess the concepts of corporate social responsibility, corporate citizenship, and environmental sustainability. CLO 2, CLO 3

MLO 4. Analyze, assess, and combine whether and why businesses should have a social responsibility strategy, display good corporate citizenship, and adopt environmentally sustainable business practices. CLO 3, CLO 4, CLO 5, CLO 6

Additional information about Mattel Individual Case

The Mattel case is an individual, not a team, case. The case will build on previous work in the course so your report will include:

Analyzing the external environment (Chapter 3)
Analyzing the internal environment (Chapter 4) and a few more considerations from the later chapters and related readings.
More comprehensive examination of the financial situation of the company (Chapter 4)
Consideration of other strategy choices (Chapters 5 & 6), or competing internationally (Chapter 7) or adding a diversification strategy (Chapter 8).
With your knowledge of these later chapters, your strategic recommendation for Mattel can be more sophisticated than the basic five generic business strategies (Chapter 5). Be sure to also use the material in Chapters 6 -8 to develop strategic solutions that can involve global expansion, mergers and acquisitions, alliances, backward or forward integration.

For the financial analysis:

Present one or more ratios to represent each of the four areas of financial analysis:

Profitability (more than Gross Profit Margin)

Liquidity

Leverage (what I call Risk)

Activity (what I call Efficiency)

Then, present a minimum ½ page discussion of the company’s financial situation, using ratios to evaluate the company’s profitability, liquidity, leverage and activity.

Of course, most of these ratios are meaningless by themselves; they only have meaning as a comparison. You must therefore compare the Mattel ratios to one or more of three choices:

Where the company is now versus where it has been over time (last 2-5 years), or
The industry averages for the ratios, or
A significant rival’s ratios
The ratios and financial information should be placed in Appendix 4. The financial analysis should be a significant part of your internal analysis – and some of your financial findings could appear in Appendix 5 as strengths or weaknesses of Mattel.

You are a consultant hired by the executive leadership of Mattel. Based on your analysis, you recommend to the company’s leadership what they should do strategically. Then, support your strategic recommendation. Why is it the best solution to the significant problem you have identified? Your recommendation in Appendix 7 (as well as each of the four strategic alternatives in Appendix 6) should have as foundation at least 1-2 internal factors and at least 1 -2 external factors. You can mix and match - what strengths should Mattel use to take advantage of an opportunity; or what opportunity should they take to solve one of its weaknesses. What strengths could the company use to mitigate a threat; or what weaknesses must the company address so they do not fall victim to the threats facing the industry?

Yes - this is a SWOT analysis, but it is based on the correct application of other tools and interpretations of real world data. And the true payoff of SWOT analysis is learning enough to develop a strong strategic approach to gaining competitive advantage.

Please see the files for instructions regarding Case Studies in this class. Remember: your analysis is based on where the company and the industry are now!

The Mattel case study from the BSG site is a good start. But you must also use outside, related material; please access relevant material through the NSU library.

Mattel Incorporated in 2018: Can Ynon Kreiz Save the Toys?

Randall D. Harris Texas A&M University—Corpus Christi

“Ynon is a good guy, but he doesn’t know toys and will fail like Margo did,” read Ynon Kreiz, Chairman and Chief Executive Officer (CEO) of Mattel, Incorporated.1 It was April 26, 2018, and it was Ynon Kreiz’s first day on the job as Mattel CEO. Mattel, maker of Barbie dolls and Hot Wheels cars, had just received a letter offering to merge Mattel with privately held MGA Entertainment, run by CEO Isaac Larian. In his offer letter, Mr. Larian did not put a specific value or terms on his offer, but had proposed that the two companies merge based upon the value of MGA Entertainment and its brands, which included the Little Tykes line of preschool toys. Larian also argued that he, not Kreiz, should be the executive to lead the turnaround of Mattel.2

Kreiz had been named Chairman and CEO of Mattel on April 19, 2018, and was succeeding Margo Georgiadis in the job. Ms. Georgiadis, hired away from Alphabet Inc.’s Google division, had been appointed as Mattel CEO in February 2017. Unfortunately, Georgiadis had been unable to reverse a sharp drop in Mattel’s revenues, earnings, and stock price.3 The slide in Mattel’s fortunes had been sharp- ened by the bankruptcy of the retailer Toys “R” Us in 2017, a key customer for Mattel’s products. Kreiz was now the fourth CEO for Mattel in four years.

Sitting in his new office at Mattel headquarters in El Segundo, California, Ynon Kreiz knew that he had numerous problems with which to contend as the incoming CEO of Mattel. Where to begin? In his hands on his first day was an unsolicited offer to merge with MGA Entertainment. Mattel had also been in involved in off and on merger negotiations with Hasbro, another close toy industry competitor.

Central to all of these discussions was a painful reality—children around the world were growing up faster and were increasingly drawn to online content, movies, smartphones, and video games. Competition for store space, sales, and market share in the toy industry was intense. Making matters worse, Mattel’s traditional sales channel, physical retail stores, were increasingly under strain and consolidating. The bankruptcy of Toys “R” Us was symptomatic of this retail consolidation. Online retail competition, nota- bly Amazon.com, was increasingly making inroads into the sales of traditional bricks-and-mortar retail- ers. Mattel had also stumbled in their competition with Hasbro, their closest competitor in the toy industry.

Kreiz had taken the reins of the company with a mandate from investors to streamline Mattel operations, improve the company’s focus on tech- nology and entertainment, and to deliver a recovery in Mattel’s struggling stock price. From a peak of $47.82 per share in 2013, Mattel was now trading between $12 and $18 per share. The company had reported a $1 billion loss in 2017. Sales, deeply affected by the bankruptcy of Toys “R” Us, were down 10 percent from 2016 to 2017. With all of these challenges for the struggling company, the pressing question was this: Could Ynon Kreiz stop the slide at Mattel? Further, what should Kreiz and Mattel do next?

COMPANY HISTORY Mattel was founded by Ruth and Elliott Handler out of a garage in Southern California in 1945.4 Their first

CASE 19

Copyright ©2018 by Randall D. Harris. All rights reserved.

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two products were picture frames and dollhouse furni- ture crafted from scraps of picture frame. Their first hit toy was the “Uke-A-Doodle,” a toy ukulele, released in 1947. Mattel was formally incorporated in 1948 with their headquarters based in Los Angeles, California.5

In 1955, Mattel began advertising their toys on a popular television show, the Mickey Mouse Club, which revolutionized the way in which toys were mar- keted to children. Mattel released a number of new toys on the television show. In 1959, Ruth Handler created an innovative design for a new type of doll, and named it after her own daughter, Barbara. The introduction of the Barbie doll became a smash hit and propelled Mattel to the top of the toy industry. Mattel would go on to sell over one billion Barbie dolls, making Barbie the largest selling and most profitable toy in Mattel’s toy lineup. The Barbie doll was followed in 1960 with the Chatty Cathy, a talking doll that would change the toy industry and lead to many imitators.

Hot Wheels die-cast vehicles were rolled out in 1968. Hot Wheels toys influenced the lives of sev- eral generations of children, leading the company to estimate that at least 41 million children had grown up alongside the Hot Wheels brand. After a long and successful career with Mattel, Ruth and Elliott Handler left Mattel in 1975.

Mattel was an early entrant into the electronic games market, introducing an electronic handheld game in 1977. Initial success with the handheld game led to the IntelliVision home video entertainment sys- tem and a spin-off corporation, Mattel Electronics. This early venture into electronics did not last, how- ever, as declining sales and mounting losses forced Mattel into abandoning the electronics initiative. Mattel took a $394 million loss in 1983 and debated a bankruptcy filing. Mattel reevaluated their diversi- fication strategy as a result and closed or divested all non-toy related subsidiaries in the wake of the losses.

The He-Man and the Masters of the Universe line of action figures was the next best seller for the com- pany beginning in 1982. The company estimated sales of the He-Man line at $400 million in 1985.6 However, the success was short lived and sales dropped, con- tributing to a loss of $115 million in 1987. Mattel began a revived working relationship with the Disney Company in 1988. This combination revived Mattel, leading to hit products based on Disney characters like Mickey Mouse and characters from the top-grossing Disney animated movie Toy Story.

Mattel purchased Fisher-Price in 1993, merged with Tyco Toys in 1997, and acquired the parent company for the American Girl Brand in 1998. The company also acquired the Learning Company, a U.S. based educational software company, in the fall of 1998. The Learning Company, a merger financed with Mattel stock, was acquired for $3.5 billion.7 One of the Learning Company’s more popular software offerings was the “Where in the World is Carmen Sandiego?” series.

Losses from the Learning Company acquisi- tion were almost immediate. In addition to inflated sales forecasts for the unit, Mattel had bought the Learning Company just as children were switching from games and learning toys on CD-ROM to down- loading them from the Internet. Unfortunately, the Learning Company was delivering their products primarily on CD-ROM at that time.8 In addition to the ouster of then CEO Jill Barad, Mattel booked a $430 million loss in 2000.

New CEO Robert Eckert moved swiftly in 2000 to restructure Mattel. He dumped the Learning Company along with other software-related assets and began a restructuring plan for the company, with the goal of achieving $200 million in immediate cost savings. Eckert also reduced the company’s dividend and cut about 10 percent of the workforce.9 Although painful, the company had better luck that year with licensing agreements. In 2000, Mattel retained the master licensing rights to market and sell Harry Potter toys, collectibles and games, and also agreed with Disney to market Disney Princess dolls.

As part of CEO Eckert’s restructuring efforts, the company announced in April 2001 that Mattel would close its last U.S. manufacturing site and move the operations to Mexico.10 This plant closure was part of the continuing cost-cutting efforts at the com- pany, and closed Mattel’s final U.S. plant in Murray, Kentucky. The plant had been operational since 1973 and employed 980 manufacturing and distribution workers. Mattel had been an early adopter of over- seas manufacturing, and had been making toys in Mexico for 25 years and in Asia for 30 years at the time of this final U.S. plant closure.11

By 2007, approximately 65 percent of Mattel’s toys were made in China. This included five wholly owned Mattel factories as well as numerous contrac- tor and subcontractor facilities. Mattel had also devel- oped, over time, a reputation for quality and safety in their manufacturing practices.12 Nevertheless, in May

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worse, sales during the fourth quarter of 2016 failed to meet expectations, and Mattel had to cut prices to salvage the all-important holiday season.19

In the wake of the holiday 2016 debacle, Margo Georgiadis was named CEO of Mattel in February of 2017. From February 2017 to April 2018, Mattel’s stock price dropped by 50 percent, and Ms. Georgiadis was unable to reverse the continued slide in Mattel’s sales and earnings.20 In November of 2017, Hasbro made a takeover offer for Mattel, an offer that Mattel’s board rejected.21 Ms. Georgiadis then left Mattel abruptly in April 2018. Former stu- dio executive Ynon Kreiz, a member of Mattel’s board of directors since June of 2017, was named the incoming CEO. Kreiz began his tenure as CEO of Mattel on April 26, 2018.

VISION, MISSION, AND STRATeGIC GOALS Mattel Inc. had no formal mission or vision statement. The company stated that the Mattel Incorporated family of companies was “a worldwide leader in the design, manufacture, and marketing of toys and family products.”22 The company also emphasized the power of play, stating that play was essential for creating future generations of thinkers, makers, and doers. Mattel had been named one of the world’s most ethical companies by Ethnisphere Magazine in 2013, and was also ranked Number 2 on Corporate Responsibility Magazine’s “100 Best Corporate Citizens” list.23

In her report to Mattel shareholders in early 2018, CEO Margo Georgiadis had outlined five stra- tegic pillars to transform the company and return it to growth:

1. Building Mattel’s core brands into connected 360-degree play systems and experiences,

2. Accelerating emerging markets growth with digi- tal first solutions,

3. Focusing and strengthening the company’s inno- vation pipeline,

4. Reshaping the company’s operations, and 5. Reigniting Mattel’s culture and team.24

Ms. Georgiadis noted a number of changes in Mattel’s executive ranks in her report, including the appointment of Ynon Kreiz to Mattel’s Board of Directors in June 2017. Georgiadis also noted that

to June 2007, Mattel discovered toys manufactured with lead-tainted paint during routine safety checks at a number of contractor facilities in China. The subse- quent investigation into the tainted toys led to a crisis for Mattel, with a large public outcry, regulatory scru- tiny and the recall of over 19 million Mattel-branded toys.13 While a major setback for the company, Mattel was noted for handling the recalls swiftly and effec- tively.14 Mattel also moved swiftly to diversify their manufacturing facilities to other countries in order to avoid supply disruptions and other risks.

Mattel gradually recovered from the lead paint crisis, and revenue growth for the company resumed in 2010. Then, in 2012, sales of Barbie dolls began to drop.15 Gross sales for the Barbie doll line exceeded $1.2 billion in 2012, and the drop in Barbie sales was balanced by strong sales in other Mattel toy lines, particularly the Disney Princess doll line. The release of the Disney movie “Frozen” provided a sharp boost to Mattel’s Disney line of dolls and related products in 2013, and this somewhat countered the slump in the core Barbie brand. Net sales for Mattel Inc. over- all peaked in 2013 at $6.48 billion, despite the Barbie sales slump.

By the third quarter of 2014, however, sales of the Barbie brand had dropped 21 percent from the previ- ous year.16 What was wrong with Barbie? Analysts acknowledged that Barbie was still one of the top doll brands in the world, but noted that girls were increasingly drawn to other, more innovative dolls and games that ran on tablets, computers, and smart- phones.17 Further, while Barbie’s core demographic used to be between the ages of 3 and 9, the market for Barbie now appeared to be between the ages of 3 and 6. Children were maturing faster than ever in the 21st century. There had also been longstanding complaints about a lack of diversity in the Barbie doll line, particularly given the changing demographics of the U.S. child population.18

Other Mattel lines then began to join the Barbie sales slump, including the popular American Girl brand, Hot Wheels, and Fisher Price infant toys. Overall net sales for Mattel dropped by $400 million in 2014. In January 2015, Mattel CEO Bryan Stockton was replaced by Christopher Sinclair, a longstand- ing director on Mattel’s board of directors. In 2016, Disney moved their license to the Princess line of dolls, including their blockbuster “Frozen” toys, to Mattel rival Hasbro. The loss of the Disney license had a negative impact on Mattel. Making matters

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CASe 19 Mattel Incorporated in 2018: Can Ynon Kreiz Save the Toys? C-219

Manufacturing for the company was conducted through both company-owned facilities and by con- tract through third-party manufacturers. Mattel had company-owned manufacturing facilities in Canada, China, Indonesia, Malaysia, Mexico, and Thailand. Manufacture of core products for the company was generally conducted by company-owned facilities in order to improve flexibility and to lower manufactur- ing costs.28 Non-core toy products were produced by third-party contract manufacturers. Mattel also purchased some toys from unrelated companies for resale through Mattel sales channels.

Creativity and innovation was a critical issue for companies like Mattel in the toy industry. Mattel invested heavily in refreshing, redesigning, and extending their existing toy lines, as well as develop- ing brand new toy product lines for their company. Product design and development was conducted in house by a group of professional toy designers and engineers. In 2017, the company spent approximately $225 million on product design and development.

Mattel’s toy business was highly seasonal. Sales built into the fourth quarter of the year and end of year holidays. A significant portion of purchasing by Mattel’s customers occurred during the third and fourth quarters of the year.29 It was critical that Mattel manufacture enough of the right toys in advance of the fourth quarter to meet this surge in demand. Conversely, not manufacturing unpopular toys was also important to avoid stocking unpopular items. It was difficult for the company to match supply and demand with significant lead times for production early in the year. This seasonality in demand also meant increased need by Mattel for working capital earlier in the year in order to meet the anticipated surge in production to meet year-end demand for toys.

MATTeL PRODUCTS Mattel’s brands and products were organized into four main categories: (1) Mattel Girls and Boys Brands, (2) Fisher-Price Brands, (3) American Girl Brands, and (4) Construction and Arts & Crafts Brands. Each category had a multitude of products as part of their portfolio:

1. Mattel Girls & Boys Brands. This category included the Barbie doll and related accessories, Monster High, DC Super Hero Girls, Enchantimals, and Polly Pocket brand lines. Wheeled toy lines

the organizational structure of Mattel had been flat- tened and simplified to accelerate decision making within the company.

Ms. Georgiadis introduced incoming CEO Kreiz on Mattel’s April 26, 2018 call with analysts. On the call, CEO Kreiz said:

We have a lot to do to reach our objectives. But I’m very confident that we have the right plan and the right team in place . . . . We are already making strong progress against our strategic pillars. My immediate focus (for Mattel) includes the following priorities: implementing our Structural Simplification to restore profitability, stabilizing revenue, reinvigorating our concept to drive creativity, which I believe is essential to our success; and strengthening our collaboration with our partners.25

Incoming CEO Kreiz also articulated his longer- range vision for Mattel during the call with analysts:

The big picture opportunity is to transform Mattel to an IT (information technology) driven high-performing toy company, that is more efficient, more profitable, and has a higher growth trajectory. We have very strong assets, including some of the world’s best and greatest toy brands. We have a very good team and a very good strategy that I feel very good about. So our focus now is to deliver on our transformation plan and maximize value for the company and for our shareholders. This is not going to be easy. There’s no denying that we faced significant challenges over the last few years and there are still headwinds in cer- tain key areas of the business. But I feel confident about where we sit and what we have to do to take it on.26

COMPANY OPeRATIONS Mattel Inc. had their worldwide headquarters in El Segundo, California, just south of the Los Angeles International Airport (LAX). As of December 2017, the company employed 28,000 people on a world- wide basis. The corporate headquarters consisted of two main buildings in El Segundo, with additional leased buildings in the immediate area for company operations. Mattel also had another major facility in East Aurora, New York, that was used for North American operations and support.

Mattel’s American Girl operations were based in Middleton, Wisconsin, with a headquarters facility, a warehouse, and distribution facilities in the immediate Middleton, Wisconsin area. Mattel also had retail and related office space in 20 additional cities around the United States, and 40 countries around the world.27 Mattel sold their products in 150 nations.

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MATTeL CUSTOMeRS Mattel sold their products throughout the world. Mattel toys and related products were sold directly to discount retailers, freestanding toy stores, depart- ment stores, chain stores, and wholesalers. Mattel also had several small retail stores near to their corporate headquarters and distribution centers. American Girl products were sold directly to con- sumers through their own retail stores and also to retailers. Mattel also sold some of their products online through company subsidiaries.

In 2017, three customers of Mattel accounted for 37 percent of company sales. These three cus- tomers were Wal-Mart, Toys “R” Us, and Target. Exhibit 1 presents a sales breakdown of Mattel’s Major Customers for 2015 through 2017. The bank- ruptcy of Toys “R” Us had already damaged Mattel sales, and the pending plan to close some or all of the Toys “R” Us locations in the United States was anticipated to further damage Mattel sales in 2018.

KeY eXeCUTIVeS Ynon Kreiz was new the Chairman and CEO of Mattel. Kreiz, 53, was born and raised in Israel. He earned a BA in Economics and Management in 1991 from Tel Aviv University. After moving to Los Angeles, Kreiz earned an MBA from UCLA in 1993.

In 1996, Kreiz moved to London to launch Fox Kids Europe, a Pay-TV children’s television network. He served as Chairman and CEO of Fox Kids Europe from 1997 to 2002. Fox Kids Europe was acquired by the Walt Disney Company in 2001.

After a stint at a venture capital firm, Kreiz served as Chairman and CEO of Endemol from 2008 to 2011. Endemol was a European-based global television and digital production company. Then in 2013, Kreiz became Chairman and CEO of Maker Studios in Los Angeles. Maker Studios produced

included Hot Wheels, Matchbox, and CARS. Additional brand lines were DC Comics, WWE Wrestling, Minecraft, Toy Story, and additional games and puzzles.

2. Fisher-Price Brands. The core Fisher-Price brands included Fisher-Price, Little People, BabyGear, Laugh & Learn, and Imaginext. Additional brand lines included Thomas & Friends, Shimmer & Shine, Mickey Mouse Clubhouse, and Power Wheels.

3. American Girl Brands. American Girl brands and products included American Girl, Truly Me, Girl of the Year, BeForever, Bitty Baby, and WellieWishers.

4. Construction and Arts & Crafts Brands. These brand lines included MEGA BLOKS and RoseArt.30

MATTeL MARKeTING Marketing toys to children and their parents was an advertising intensive activity. Mattel spent heavily on marketing and promotional activities. Marketing activity was seasonal, with a peak during the fourth quarter of the year. Mattel advertised through TV and radio commercials, magazines, and newspa- pers. Promotional activity for the company included in-store displays, major events focusing on Mattel branded products, and marketing tie-ins with various consumer products companies. During 2017, Mattel spent $642.3 million, or 13.2 percent of company net sales, on advertising and promotion.

Of particular importance to Mattel was the rise of social media and the Internet as a marketing and promotional channel. Children and their parents were increasingly accessing information about toys on social media websites. Mattel had carefully devel- oped their Facebook presence, and had cultivated 14 million followers for their Barbie page. Mattel also had a strong presence on YouTube for Barbie, with 3.8 million subscribers.

EXHIBIT 1 Mattel Incorporated Major Customers (U.S. dollars in thousands)

Major Customer 2015 2016 2017

Wal-Mart $ 1,000,000 $ 1,100,000 $ 1,000,000

Toys “R” Us $ 600,000 $ 600,000 $ 400,000

Target $ 500,000 $ 400,000 $ 400,000

Source: Mattel Form 10-K 12/31/2017.

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CASe 19 Mattel Incorporated in 2018: Can Ynon Kreiz Save the Toys? C-221

EXHIBIT 2 Mattel, Inc. Leadership in 2018

Name Brief Biography

Ynon Kreiz Chairman and Chief Executive Officer Age: 53 Tenure: 0 years

Ynon Kreiz, has served as Chairman of Mattel Inc. since May 17, 2018, as its Chief Executive Officer since April 26, 2018. Mr. Kreiz holds a BA in Economics and Management from Tel Aviv University and an MBA from UCLA’s Anderson School of Management.

Richard Dickson President and Chief Operating Officer Age: 50 Tenure: 4 years

Richard Dickson, has been the President and Chief Operating Officer of Mattel, Inc. since April 2, 2015. Mr. Dickson started his career and spent nearly a decade with Bloomingdale’s, a leading U.S. fashion retailer.

Michael Eilola Executive Vice President, Chief Supply Chain Officer Age: 56 Tenure: 0 years

Michael J. Eilola, has been Executive Vice President and Chief Supply Chain Officer of Mattel, Inc. since January 2018. Prior to joining Mattel, Inc., Mr. Eilola held executive positions with Honeywell International Inc.

Nancy Elder Chief Communications Officer Tenure: 1 year

Nancy Elder has been Chief Communications Officer of Mattel since September 2017. From 2014 to 2017, she served as Chief Communications Officer of JetBlue Airways.

Joseph Euteneuer Chief Financial Officer Age: 61 Tenure: 1 year

Joe Euteneuer has been the Chief Financial Officer of Mattel Inc. since September 25, 2017. Mr. Euteneuer holds a Bachelor’s degree from Arizona State University and is a certified public accountant.

Sven Gerjets Chief Technology Officer Tenure: 1 year

Sven Gerjets has been Chief Technology Officer of Mattel since July 2017. From January 2017 to July 2017, he served as Chief Product Officer of n.io Innovation. Mr. Gerjets was the Chief Information Officer of Time Warner Cable, Inc., from October 2015 to June 2016.

Robert Normile Executive Vice President, Chief Legal Officer, Secretary Age: 58 Tenure: 19 years

Robert Normile has served as Executive Vice President, Chief Legal Officer and Secretary of Mattel, Inc. since February 2011. Mr. Normile was previously associated with the law firms of Latham & Watkins LLP and Sullivan & Cromwell LLP.

Amanda Thompson Executive Vice President, Chief People Officer Age: 42 Tenure: 1 year

Amanda J. Thompson, has been Executive Vice President and Chief People Officer of Mattel, Inc. since September 2017. From 2012 to 2017, Ms. Thompson served as Chief People Officer of TOMS Shoes. Ms. Thompson held several executive and leadership roles at Starbucks Coffee Company from 2006 to 2012.

Source: Mattel, Inc.

short-form videos for YouTube and other platforms. Maker was sold to the Walt Disney Company in 2014. Kreiz stepped down as CEO of Maker Studios in January 2016. Kreiz then joined Mattel’s board in 2017 and became Mattel CEO in April 2018.

CEO Kreiz was joined by Richard Dickson as Mattel’s President and Chief Operating Officer (COO). Dickson, 50, had been President and COO since April 2015. Mr. Dickson had exten- sive retail experience, including almost a decade at

Bloomingdale’s. Mattel’s Chief Legal Officer, Robert Normile, was the longest serving executive at Mattel. Normile had been Chief Legal Officer at Mattel since February 2011, and had an extensive legal background.

All of the remaining members of Kreiz’s top management team, including Chief Financial Officer Joseph Euteneuer, had served one year or less in their current roles. Exhibit 2 provides a brief sum- mary of Mattel’s top leadership team in 2018.

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EXHIBIT 3 Mattel, Inc. Consolidated Income Statements 2013–2017 (amounts in thousands of U.S. dollars, except per share, employee and stockholder data)

2017 2016 2015 2014 2013

Net Sales $ 4,881,951 $ 5,456,650 $ 5,702,613 $ 6,023,819 $ 6,484,892

Cost of sales 3,061,122 2,902,259 2,896,255 3,022,797 3,006,009

Gross profit (loss) 1,820,829 2,554,391 2,806,358 3,001,022 3,478,883

Advertising & promotion expenses

642,286 634,947 717,852 733,243 750,205

Other selling & administrative expenses

1,521,366 1,400,211 1,547,584 1,614,065 1,560,575

Operating income (loss) (342,823) 519,233 540,922 653,714 1,168,103

Interest expense 10,5214 95,118 85,270 79,271 78,505

Interest income 7,777 9,144 7,230 7,382 5,555

Other non-operating income (expense), net

(64,727) (23,517) 1,033 5,085 3,975

Income (loss) before income taxes

(504,987) 409,742 463,915 586,910 1,099,128

Total deferred income tax provision (benefit)

436,802 1,236 4,133 8,142 19,632

Provision (benefit) for income taxes

548,849 91,720 94,499 88,036 195,184

Net income (loss) (1,053,836) 318,022 369,416 498,874 903,944

Less net income allocable to participating restricted stock units

– 1,377 3,179 4,028 8,335

Net income (loss) applicable to common shares

$ (1,053,836) $ 316,645 $ 366,237 $ 494,846 $ 895,609

Weighted average shares outstanding –basic

343,564 341,480 339,172 339,016 343,394

Weighted average shares outstanding –diluted

343,564 344,233 339,748 340,768 347,459

Year end shares outstanding 343,800 342,400 339,700 338,100 339,300

Net income (loss) per share – basic

($3.07) $0.93 $1.08 $1.46 $2.61

Net income (loss) per share – diluted

($3.07) $0.92 $1.08 $1.45 $2.58

Dividends declared per common share

$0.91 $1.52 $1.52 $1.52 $1.44

Total number of employees 28,000 32,000 31,000 31,000 29,000

Number of common stockholders

27,000 28,000 29,000 30,000 31,000

Source: Mergent Online.

FINANCIAL STATUS Net sales for Mattel decreased from $6.48 billion in 2013 to $4.88 billion in 2017. Variable expenses remained relatively stable during the 2013 to 2017

time period, resulting in a sharp drop in gross profit as well. The company reported a negative operating income and a $1 billion net loss in 2017. Mattel’s consolidated income statements for 2013 through 2017 are presented in Exhibit 3.

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CASe 19 Mattel Incorporated in 2018: Can Ynon Kreiz Save the Toys? C-223

EXHIBIT 4 Mattel, Inc. Consolidated Balance Sheets 2016–2017 (amounts in thousands of U.S. dollars)

ASSETS 2017 2016

Cash & equivalents $ 1,079,221 $ 869,531

Accounts receivable, net 1,128,610 1,115,217

Inventories 600,704 613,798

Prepaid expenses & other current assets 303,053 341,518

Total current assets 3,111,588 2,940,064

Property, plant & equipment, gross 2,740,997 2,645,539

Less: accumulated depreciation 1,955,712 1,871,574

Property, plant & equipment, net 785,285 773,965

Goodwill 1,396,669 138,7628

Deferred income taxes 76,750 508,363

Total assets $ 6,238,503 $ 6,493,794

LIABILITIES

Accounts payable $ 5,721,66 $ 664,857

Accrued royalties 111,669 107,077

Other accrued liabilities 420,054 350,248

Accrued liabilities 792,139 628,826

Income taxes payable 9,498 19,722

Total current liabilities 1,623,803 1,505,573

Long-term debt 2,873,119 2,134,271

Benefit plan liabilities 168,539 192,466

Total noncurrent liabilities 3,357,245 2,580,439

Total liabilities 4,981,048 4,086,012

Equity

Common stock 441,369 441,369

Additional paid-in capital 1,808,391 1,790,832

Treasury stock at cost 2,389,877 2,426,749

Retained earnings (accumulated deficit) 2,179,358 3,545,359

Total stockholders’ equity (deficit) 1,257,455 2,407,782

Total liabilities and stockholders’ equity $ 6,238,503 $ 6,493,794

Source: Mergent Online.

The 2017 losses in net income resulted in a write- down in retained earnings on Mattel’s balance sheet in excess of $1.3 billion. In an effort to solidify their short-term debt position, Mattel entered into a credit agreement in December 2017 to provide seasonal financing for their company operations. This credit facility consisted of $1.3 billion in an asset-based lending facility and $294 million in a revolving credit

facility.31 Also in December 2017, Mattel issued $1.00 billion in 6.75 percent senior unsecured notes, due December 2020. The net result of these moves resulted in total debt for Mattel reaching $2.8 billion at year end 2017. The company’s consolidated bal- ance sheets for 2016 and 2017 are shown in Exhibit 4.

Cash flow from operations had been positive since 2014 but turned negative in 2017 along with the

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EXHIBIT 5 Mattel, Inc. Cash Flow Statements 2015–2017 (amounts in thousands of U.S. dollars)

For the Year Ended

December 31, 2017

December 31, 2016

December 31, 2015

Cash Flows from Operating Activities:

Net (loss) income ($1,053,836) $ 318,022 $ 369,416

Adjustments to reconcile net (loss) income to net cash flows from operating activities:

Depreciation 240,818 235,797 233,025

Amortization 33,949 26,543 32,402

Deferred income taxes (19,840) 1,236 4,133

Share-based compensation 67,119 53,950 56,691

Asset impairments 56,324 – –

Loss on discontinuation of Venezuelan operations 58,973 – –

Inventory obsolescence 127,592 31,455 33,305

Valuation allowance on U.S. deferred tax assets and U.S. tax reform

456,642 – –

Increase (decrease) from changes in assets and liabilities, net of acquired assets and liabilities:

Accounts receivable 13,626 (24,033) (136,259)

Inventories (91,644) (68,650) (107,567)

Prepaid expenses and other current assets 33,681 34,754 (36,865)

Accounts payable, accrued liabilities, and income taxes payable

98,044 9,006 248,047

Other, net (49,062) (23,571) 38,229

Net cash flows (used for) provided by operating activities (27,614) 594,509 734,557

Cash Flows from Investing Activities:

Purchases of tools, dies, and molds (128,940) (140,124) (142,363)

Purchases of other property, plant, and equipment (168,219) (122,069) (111,818)

Payments for acquisition, net of cash acquired – (33,154) –

Proceeds from (payments for) foreign currency forward exchange contracts

60,993 (6,103) (61,509)

Other, net 503 (10,460) 33,195

Net cash flows used for investing activities (235,663) (311,910) (282,495)

Cash Flows from Financing Activities:

Payments of short-term borrowings, net (1,611,586) (83,914) –

Proceeds from short-term borrowings, net 1,419,418 259,168 16,914

Payments of long-term borrowings – (300,000) –

losses in net income. Mattel continued to invest cash flows into the company as well, with net cash flows from investment activities reaching ($235 million) in 2017. Financing activities contributed all of the

positive cash flow for the company in 2017. Cash and equivalents at year-end 2017 were stable at approxi- mately $1 billion. Exhibit 5 presents Mattel’s consoli- dated cash flow statements for 2015 through 2017.

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Proceeds from long-term borrowings, net 988,622 350,000 –

Payment of dividends on common stock (311,973) (518,529) (515,073)

Proceeds from exercise of stock options 1,775 34,065 14,995

Other, net (27,806) (22,261) (17,058)

Net cash flows provided by (used for) financing activities 458,450 (281,471) (500,222)

Effect of Currency Exchange Rate Changes on Cash 14,517 (24,411) (30,676)

Increase (decrease) in Cash and Equivalents 209,690 (23,283) (78,836)

Cash and Equivalents at Beginning of Year 869,531 892,814 971,650

Cash and Equivalents at End of Year $ 1,079,221 $ 869,531 $ 892,814

Supplemental Cash Flow Information:

Cash paid during the year for:

Income taxes, gross $ 117,690 $ 113,022 $ 120,232

Interest 103,339 84,763 83,005

Source: Mattel, Inc. 2017 10-K.

EXHIBIT 6 Mattel Revenues by Major Brand Category, 2015–2017 (U.S. dollars in thousands)

Brand Category 2017 2016 2015

Mattel Girls & Boys Brands

$ 3,077,716 $ 3,194,100 $ 3,464,195

Fisher-Price Brands 1,677,223 1,888,146 1,852,219

American Girl Brands 451,481 570,770 571,957

Construction and Arts & Crafts Brands

269,543 377,570 351,747

Other 38,162 43,128 43,510

Gross Sales 5,514,125 6,073,714 6,283,628

Sales Adjustments (632,174) (617,064) (581,015)

Net Sales $ 4,881,951 $ 5,456,650 $ 5,702,613

Source: Mattel, Inc. 2017 10-K.

MATTeL ReVeNUeS BY CATeGORY AND ReGION The Mattel Girls and Boys brand category dropped from $3.46 billion in 2015 to $3.07 billion in 2017. The same trends could be seen across all other cate- gories: Fisher-Price Brands, American Girl Brands, Construction and Arts & Crafts category, and other miscellaneous sales. As of 2017, there wasn’t a sin- gle category at Mattel that had not been affected

by the sales downturn. Exhibit 6 provides Mattel’s revenues by major brand category for 2015 through 2017.

Geographically, the revenue downturn was most pronounced in the North American region. Sales in North America declined from $3.68 billion in 2015 to $3.01 billion in 2017. International, while declin- ing, was not declining as sharply. Total international sales declined from $2.60 billion in 2015 to $2.50 bil- lion in 2017. Sales in the Asia Pacific region actually

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EXHIBIT 7 Mattel Revenues by Geography, 2015–2017 (U.S. dollars in thousands)

Geographic Region 2017 2016 2015

North American Region $ 3,010,598 $ 3,626,099 $ 3,680,091

International Region

Europe 1,281,672 1,293,302 1,388,753

Latin America 675,286 636,535 711,041

Asia Pacific Region 546,569 517,778 503,743

Total International Region 2,503,527 2,447,615 2,603,537

Gross Sales 5,514,125 6,073,714 6,283,628

Sales Adjustments (632,174) (617,064) (581,015)

Net Sales $ 4,881,951 $ 5,456,650 $ 5,702,613

Source: Mattel, Inc. 2017 10-K.

increased from 2015 to 2017, an unusual bright spot for the company, and a possible harbinger for future growth. Overall, international sales appeared to be resilient to the current downturn in Mattel sales. Exhibit 7 provides Mattel’s revenues by geography for 2015 through 2017.

STOCK PeRFORMANCe Mattel’s stock price peaked at an all-time high of $47.82 on December 30, 2013. Sales and earnings for the company also peaked into 2013, and the compa- ny’s stock price closely tracked this spike in revenues and earnings. Exhibit 8 tracks Mattel Incorporated’s stock price performance from July 2013 through July 2018.

From this peak in December 2013, Mattel’s stock price had drifted lower in fits and starts. 2016 saw a brief rebound in the company’s fortunes, but a continual stream of weakening revenues and earn- ings had fed the weakening price action for the stock price as well. This would culminate with a major sell off in October of 2017 following the release of nega- tive third quarter 2017 earnings for the company.

In 2018, the company had been trading in $12 to $18 price range. Given this price range, the mar- ket capitalization of the company was approximately $5.40 billion. It was not possible to calculate a trail- ing price/earnings ratio for the company, given the negative earnings for the company in 2017. Dividends for the company had also been suspended.

U.S. TOY AND CRAFT SUPPLIeS WHOLeSALING INDUSTRY Mattel participated in the U.S. Toy and Craft Supplies Wholesaling Industry (Toy Industry). The toy industry consisted of U.S. based companies that were wholesalers of toys and craft supplies, as well as various miscellaneous items.32 Toys and craft sup- plies were purchased from both U.S. and interna- tional manufacturers and then sold to U.S. retailers, including discount department stores, big-box retail- ers, and independent specialty retail outlets.

While industry revenues were forecasted to reach $28.3 billion in 2018, the toy industry faced an increasingly difficult market environment in the United States. With only occasional reversals, reve- nue for the industry had fallen every year since 2013. Toy industry participants were squeezed on all sides. On the manufacturing side, large and mostly inter- national manufacturers were increasingly integrating vertically and bypassing the toy industry wholesal- ers to sell directly to large retail chains in the United States. On the retail side, there was increasing con- solidation of industry players, leaving only a few very large retailers with which to negotiate. These condi- tions, combined with decreasing demand for toys and falling prices, resulted in fierce competition for toy industry participants. Revenue for the toy indus- try was projected to fall by 0.8 percent in 2018.33

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CASe 19 Mattel Incorporated in 2018: Can Ynon Kreiz Save the Toys? C-227

EXHIBIT 8 Monthly Performance of Mattel, Inc.’s Stock Price, July 2013–July 2018

S to

ck P

ric e

P er

ce nt

C ha

ng e

(J ul

y 2

0 1

3 =

0 )

(a) Trend in Mattel Inc.’s Common Stock Price

(b) Performance of Mattel Inc.’s Stock Price versus the S&P 500 Index

Year

Year

14 15 16 17 18 10

15

20

25

30

35

40

45

50

14 15 16 17 18

+75% +60% +45%

+30% +15% +0% –15% –30% –45% –60% –75%

S&P 500

Mattel’s Stock Price

Products and Services The $28.3 billion U.S. toy industry was comprised of four major segments: (1) traditional toys, including children’s vehicles, (2) video games, (3) hobby and craft supplies, and (4) other items. Demand for toys was seasonal, with sales peaking in the fourth quarter of the years, and closely tied to consumer confidence and spending. However, while consumer confidence in the United States had been rising, consumers had also become increasingly frugal and thrifty, particu- larly with toy purchases. Consumers were tending to buy less expensive toys in order save money.34

Traditional toys made up 54.7 percent of indus- try revenue in 2018. This segment included action figures, dolls, sporting goods, building sets, board games, and plush toys for children. Demand for tradi- tional toys were under pressure in the United States. Children were increasingly demanding electronic toys and video games. Further, children appeared

to be outgrowing toys at a faster rate, particularly as they entered the 8 to 12 age range. Traditional toys continued to decline as percentage of industry rev- enue. Exhibit 9 illustrates the relative sizes of the toy industry product and service segments in 2018.

Demand for video games, as a result, contin- ued to grow into 2018. Major manufacturers such as Sony and Microsoft continued to introduce new gaming consoles, spurring new game introduction and passionate usage by teenagers. Demand for video games was also increasingly penetrating younger and younger age groups. Sales of video games represented 27.1 percent of industry sales in 2018, and was antici- pated to rise as a percentage of industry revenue.35

The hobby and craft supplies segment included items such as scrapbooking supplies, needlework kits, and craft kits. Demand in this segment had remained relatively stable, and was closely tied to consumer discretionary spending. Hobby and craft supplies represented 4.5 percent of industry revenue in 2018.

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EXHIBIT 9 U.S. Toy & Craft Supplies Wholesaling Industry: Product and Services Segmentation, 2018

54.70% 27.10%

13.70%

4.50%

Hobby & Craft

Video Games Other

Traditional Toys

Products & Services

Source: IBIS World.

The other category in the industry consisted of various other product categories not classified else- where. This included items such as playing cards, fireworks, and coloring books. Revenues in this seg- ment had remained fairly consistent at 13.7 percent of industry revenue.36

Major Markets The bulk of toy industry sales were conducted through major retailers in the United States. Market share of major retailers had increased, however, allowing them to source toys directly from manufacturers. Wholesale toy companies, as a result, faced a difficult and increasingly competitive environment for sales, with significant pricing pressure from retailers. This had pressured pricing on toys downward. Toy companies had also begun to focus their sales efforts on retailers and retail chains with less purchasing power (smaller retailers) and also had begun to focus more on direct sales of toys to consumers. Exhibit 10 illustrates a per- centage breakdown of the major market segments of the U.S. toy industry in 2018.

Discount department stores, such as Wal-Mart and Target, made up 29.2 percent of toy industry sales in 2018. These large retailers purchased toys in