Mattel Inc (MAT) 2004 Q1 法說會逐字稿

Good day and welcome, everyone to the Mattel Incorporated first quarter 2004 earnings results conference call.

Today's call is being recorded.

With us today from the company is the Vice President of Investor Relations, Miss Diane Douglas.

Please go ahead, ma'am.

Thank you, operator.

Good morning and welcome to Mattel's first quarter earnings conference call.

I'm Diane Douglas, Senior Vice President of External Affairs and joining me today are Bob Eckert, Chairman and Chief Executive Officer and Kevin Farr, Chief Financial Officer.

Earlier this morning, we issued a press release, which detailed our results for the first quarter.

On the call this morning, you will hear brief remarks from Bob, Kevin will provide a review of the financial results and then we will be happy to take your questions.

Before we begin the formal remarks, let me note that certain statements made today may include forward-looking statements about management's expectations, strategic objectives, anticipated financial performance and other similar matters.

Such forward-looking statements will include statements regarding sales growth goals across brands and markets, including initiatives in the fashion doll category, electronic learning category and in the U.S. market, profitability and cash flow, cost controls, capital deployment, the availability of certain products, our long-term debt to capital goal, strategic initiatives, including initiatives regarding productivity, margin improvement and value enhancement as well as the near-term cost of such initiatives, advertising spending and sales of marketable securities.

There may be additional forward-looking statements in response to questions or otherwise.

We intend for these additional forward-looking statements to be covered by this cautionary statement.

A variety of factors, many of which are beyond our control, affect the operations, performance, business strategy and results of Mattel and could cause actual results to differ materially from those projected in such forward-looking statements.

Some of these factors are described in our 2003 report on Form 10-K, filed with the SEC and Mattel's other filings made with the SEC from time to time as well as in Mattel's other public statements.

Mattel does not update forward-looking statements and expressly disclaims any obligation to do so.

Information required by Regulation G regarding non-GAAP financial measures is available on the Investor and Media section of our corporate Web site, Mattel.com, under the subheading "Financial Information and Earnings Releases".

Now, I'd like to introduce Bob Eckert.

Thank you, Diane and good morning, everyone.

The first quarter of the year was not a good quarter and while I'm not pleased with our performance, I'm not surprised.

However, since we don't provide guidance or make preannouncements, I know that some of you may be surprised.

I've said it for several years now that we won't deliver every quarter in line with your expectations or ours, nor will we make business decisions based on 90-day periods.

Let me assure you we're focused on improving our long-term prospects and we recognize there will be costs involved and it will take time.

Recently I penned my annual letter to shareholders, which as you know, centers on one word or theme for the year.

This year's message is lead.

As I said in the letter, there are leaders and there are followers.

Leaders inspire, they overcome challenges, they're visionary.

Leaders redefine boundaries, they take risks and set the pace.

As the world's largest toy company with the most powerful brands in the industry, Mattel strives to do all of these things to motivate, to push the envelope, to triumph over challenges and to be visionary.

In order to be a true leader, we must focus on regaining positive momentum in the business, especially in the U.S.

We intend to accomplish that by focusing on two main areas this year: Turning around our fashion doll business and making further inroads in the electronic learning category.

In addition to making investments to strengthen our brands and bolster the top line, we're also seeing cost increases in areas like transportation.

That means we have to be acutely focused on managing expenditures which we are.

The centralization of our procurement activities and installation of state-of-the-art information technology will help to mitigate higher product and logistics costs.

Being a leader also means making difficult decisions.

As part of managing our costs, we've continued to reduce excess manufacturing capacity, streamline back office functions and last month we reduced headcount in some areas within our corporate offices.

As I said on our last conference call, while we're focused on the long-term, it's clearly not business as usual at Mattel, even in the short-term.

As an organization, we're committed to reinvigorating the top line while simultaneously controlling costs and over the long-term, we continue to believe that this company will generate exceptional profitability and cash flow which we intend to deploy effectively.

Thank you and now I'd like to turn the call over to Kevin for a financial review of the quarter.

Thank you, Bob and good morning, everyone.

My remarks regarding the first quarter financial performance will be organized in the following manner: Revenues by geography, core category and brand, key drivers of the P&L, cash flow and balance sheet at March 31, 2004.

To facilitate my review of the financial performance for the first quarter, I recommend that you refer to the exhibits of the press release.

I'll begin with the discussion of worldwide gross sales shown on Exhibit Two.

Worldwide gross sales for the first quarter were up 5%, including a benefit of 5 percentage points from changes in currency exchange rates.

As a reminder, the Company changed the way it classified certain closeout sales within its statement of operations beginning in October, 2003.

This change resulted in additional benefit of about 1.8 percentage points to sales growth during the first quarter of 2004 when compared to the prior year.

For analytical purposes, closeout sales by business unit on a quarterly and annual basis is available on our Web site.

Gross sales in the U.S. declined 1% while international gross sales increased 15% including a benefit of 12 percentage points for changes in currency exchange rates.

On a regional basis, sales for the first quarter in Europe were up 8%, including a 14 percentage point benefit from changes in currency exchange rates.

Sales in Europe in the first quarter were negatively impacted by higher year-end retail inventory levels that were a result of last year's relatively weak holiday season.

Sales in Latin America were up 59%, including a 5 percentage point benefit from changes in currency exchange rates compared to a sales decline of 32% in the first quarter of 2003.

The increase in this region was driven primarily by sales growth in Mexico, reflecting a shift in retail buying patterns and increased sales in Venezuela as a result of improved economic conditions.

Asia Pacific was up 38% including a 15 percentage point benefit from changes in currency exchange rates.

And sales in Canada were up 18%, including an 11 percentage point benefit from changes in currency exchange rates.

I will now review our core categories and brands.

Mattel Brands.

For the quarter, worldwide sales for Mattel Brands were flat, including a 6 percentage point benefit from changes in currency exchange rates.

Domestic sales were down 11% and international sales were up 13%, including a 13 percentage point benefit from changes in currency exchange rates.

Worldwide Barbie sales were down 6%, including a 6 percentage point benefit from changes in currency exchange rates for the first quarter.

Barbie sales internationally were up 4%, including a 12 percentage point benefit from changes in the currency exchange rates and Barbie sales in the U.S. declined 15% when compared to the first quarter of 2003.

The Barbie's World of Strategies that we described for you earlier this year is only just begun to appear at retail and represents a relatively small percentage of the total Barbie product at retail.

As we continue to pursue our Worlds Of strategy, a higher concentration of product developed around stories and contents will be available beginning in the fall product line and continuing into 2005.

Worldwide sales of Other Girls Brands were down 1%, including a 6 percentage point benefit from changes in currency exchange rates reflecting strong sales of Polly Pocket!, more than offset by the declines in sales of Diva Starz and What's Her Face!.

Worldwide sales for the Wheels business were up 1%, including a 4 percentage point benefit from changes in currency exchange rates.

Strong growth in international sales were offset by declines of 8% in the U.S.

Worldwide sales in the entertainment business were up 16% versus the prior year, including a 6 percentage point benefit from currency exchange rates.

The increase in sales primarily reflects growth in Justice League and Batman.

Fisher-Price Brands.

Through the quarter, worldwide sales for Fisher-Price Brands were up 13%, including a 3 percentage point benefit from changes in currency exchange rates.

The results reflected strong growth in core Fisher-Price and Fisher-Price Friends Brands, partially offset by declines in the sales of Power Wheels.

Domestic sales of Fisher-Price Brands were up 10% and international sales were up 20%, including a 12 percentage point benefit from changes in currency exchange rates.

Worldwide sales at core Fisher-Price were up 18%, including a 4 percentage point benefit from changes in currency exchange rates reflecting strong growth in sales in the U.S. driven by continued gains in the learning category as well as internationally.

American Girl Brands.

Sales of American Girl Brands were up 17% compared to an 8% decline in sales in the first quarter of 2003.

The increase in sales reflects continued strength in American Girl Today, Bitty Baby and the recently-launched Hopscotch Hill School Brands.

The growth was primarily generated by the new American Girl Place retail store in New York while a catalog and Internet channels continued to deliver solid results.

Before I begin the review of the P&L, let me remind you that the first quarter of 2003 included charges of $11.6 million associated with the company's financial realignment plan, which was completed in the fourth quarter of 2003.

From time to time, the company expects to invest in initiatives intended to enhance productivity and improve margins and while the company will continue to provide information regarding the cost of these initiatives, it will no longer provide the pro forma impact on results.

Now, let's review the P&L, which is shown on Exhibit One.

Gross margin was 45% for the first quarter of 2004 which decreased 440 basis points versus the first quarter of last year.

Sales of lower margin product, including the impact of mix and value enhancement initiatives accounted for about two-thirds of the decline while external cost pressures accounted for the other one-third.

As we communicated last year, the gross margins for the first quarter of 2003 included a substantial nonrecurring benefit related to raw material costs, transportation prices and product mix.

We plan to continue to invest in value-enhancing initiatives as we did in the first quarter and we are actively pursuing actions to offset or minimize the cost of these initiatives.

Advertising expense was $87.4 million or 11.2% of net sales, down 10 basis points versus the prior year.

We will continue to fine-tune our advertising spend throughout the year.

However, consistent with our plans to invest in the business to drive long-term performance, we currently expect advertising spending levels to be fairly consistent with the prior year.

Selling, general and administrative expenses were $251.6 million or 32.2% of net sales for the quarter, up $28.7 million or 230 basis points compared with last year's first quarter.

The higher SG&A reflects investment and continuous improvement activities, including a $10.8 million charge for severance as a result of headcount reductions at certain domestic and international locations.

The actions resulted in net reductions of about 180 positions in the U.S. or about 4% of headquarter location personnel and 80 international positions.

The remaining increase in SG&A was evenly distributed among overhead costs associated with the new American Girl Place in New York, like rent and store personnel, ongoing cost pressures in the areas such as employee cost insurance, and the impact of changes in currency exchange rates, primarily the euro.

For the quarter, operating income was $12.7 million, down 76% versus last year.

As a percentage of net sales, operating income declined 540 basis points versus the prior year to 1.6%.

The decline reflected investments in our core businesses and continued external cost pressures.

Interest expense was $15.2 million for the quarter, compared with $17.4 million in the first quarter of 2003.

Compared to last year, this year's interest expense reflects the benefit of lower long-term debt outstanding, partially offset by higher average short-term borrowings.

Other nonoperating items in the first quarter included gains from the sale of [BANDEIS] stock of $9.5 million.

The Company expects to sell additional securities from time to time.

As of March 31, 2004, the Company had approximately $43 million in unrealized gains on the balance sheet associated with marketable securities.

So, to summarize the P&L for the quarter, we reported net income of $9 million or 2 cents a share versus last year's first quarter of $32.8 million or 7 cents per share, driven primarily by declining gross margin and increased SG&A.

Now, turning to the cash flow and balance sheet shown on Exhibit Three.

Cash used for operations in the first quarter was approximately $373 million, $108 million improvement versus the first quarter of 2003.

Cash used for investing activities were approximately $31 million, including capital expenditures of $36 million.

Cash from financing activities and other was approximately $39 million, including the repurchase of 500,000 shares for $9.3 million at an average cost of $18.53 per share.

Cash on hand at the end of the first quarter was $788 million, up $20 million from a year ago.

Our receivables at $546.9 million were 63 days of sales outstanding decreased by 1 day versus last year.

Excluding the year-to-year change in factoring, which was $113 million, up $8 million versus the prior year, receivables were up $24 million with day sales outstanding improving by 1 day.

Inventories at $402.6 million were up $7.8 million or 2% versus last year's first quarter and represented 85 days of supply which is three days higher than last year.

Our total balance sheet debt decreased by $129.5 million and our debt net of cash improved by $149.1 million from first quarter 2003.

Our debt to total capital ratio was 24% at the end of the quarter compared with 29% at the same time last year.

In February, we said we expected 2004 to be challenging and it has proven to be thus far.

We are committed to rebuilding growth across all of our brands and in all of our markets.

But this will take time and will require continued investment in the near-term to insure success over the long-term.

That concludes my review of the financial results.

Now we'd like to open the call to questions.

Operator?

Thank you, sir.

Today's question and answer session will be conducted electronically.

If you would like ask a question today, please press the star key followed by the digit one on your touch-tone telephone.

If you're using a speaker phone, please be sure to turn off your mute function in order for your signal to reach our equipment.

Once again, if you'd like to ask a question today, please press the star key followed by the digit one.

We go first to Jill Krutick with Smith Barney.

Thank you very much.

Good morning.

Bob, I was hoping you could spend a little time talking about how some of the new Barbie dolls have been received by the market, albeit very early stages and how quickly we should start to see the benefits of the full line?

Secondly, on the gross margin, I know you're working hard to offset some of the cost pressures but maybe you could give us a sense of how far you are in that process?

I know it's one that you've been working on for many years.

And if you will anticipate that will be successful for the balance of the year?

Thank you.

Hi, Jill.

Let me start with your question on Barbie and then Kevin, I think, can give you an answer on gross margins.

Let me start by saying that if you look at our internal POS or even the NPD panel data, it's generally consistent with our 15% U.S. sales decline in Barbie.

Generally speaking, the Barbie Worlds Of are doing fine, but other than My Scene, which continues to grow at double digits at retail, it's way too early to draw conclusions.

Today, there is probably less than a third of our product line available in this Worlds Of strategy.

Things like Cali Girl and Fairy Topia and the Princesses line.

Maybe that builds to two-thirds this fall, including things like Prices and Pauper but realistically I think it's 2005 before we can draw definitive conclusions about the effectiveness of a new strategy.

I think I should also remind you that our experience suggests that there's a retailer lag in terms of devoting shelf space and merchandising support behind a brand.

That is I think we're going to have to demonstrate growth in POS before we get the shelf space and merchandising support we want and my experience suggests that's what happens.

A brand does well and it takes time for retailers to catch up in terms of devoting more resources to that brand than when it's in a period of decline like we are today, it's taking some time for them to contract their plans and I think that will play out.

So, again, realistically, I think we'll make a lot of progress this year, bit it's probably 2005 before we can draw the ultimate conclusion of the success.

Okay, on gross margin, Jill, you know, gross margin is under pressure as we deal with competitive landscape and the rising cost environment.

And I think as I said on the call, you know, about two-thirds of the 440 basis point year-to-year decline in gross margins attribute to the sale of lower margin product and the other third is declines attributable to external cost pressures, related primarily to transportation costs.

And we are actively pursuing initiatives to offset or minimize the impact of these higher costs.

So, as we worked on in 2003, we worked on a consolidation of manufacturing operations in Mexico, we're going to see those benefits in 2004, but we continue to work on initiatives to generate savings such as global procurement as well as looking at additional opportunities in manufacturing and sourcing in places like the Far East and Eastern Europe.

So, we'll continue to work on those efforts to fully or partially mitigate the impact of, you know, of cost increases.

And our goal is to optimize results in the near-term while continuing to do the right thing to our business in the long-term.

Thank you.

Thanks, Jill.

We go next to Sean McGowan with Harris Nesbitt Gerard.

Thank you.

I'm going to decline to ask for mine with fries, Bob, just given all the rumors that were going around yesterday.

A couple of questions.

One, Kevin, when you're talking about value-enhancing initiatives, is that more than just another word for price reduction?

And could you be more specific on that?

And second, could you give us a little more detail on the share buy back program?

Thank you.

On the value-enhancing initiatives, that's not just price reductions, it's additional content in the box, it's additional stuff in the box, Sean.

Let me start Sean by clarifying what's going on in all the stuff that you read about these days.

I have no plans to leave Mattel.

We have a lot of work to do here and for those of you who have been around me for a while, you know I'm not a quitter in midstream and you also know my family is very important to me and my family is very happy here in Los Angeles.

So, I appreciate all the things that people write about, but I'm not going anywhere.

Now let me spend a minute on the share repurchase program.

Over the last three years, we've generated $2.75 billion in cash and we have, in addition to investing in capital to run the business, like tooling and our IT and even American Girl Place in New York, we've reduced debt by $800 million, we've paid dividends of over $200 million, we've spent about $250 million repurchasing shares and we've increased our cash position by $900 million.

As you know, we're executing our capital deployment within a board-approved framework where we've articulated how much cash we want to have at the beginning of the year, roughly $800 million to $1 billion.

We've talked about our debt to total capital ratio goal of 25%.

Our Cap Ex will probably run about 180 to $200 million a year.

And we'll use the remaining free cash flow with discipline and opportunistically, whether it's acquisitions or dividends or share repurchases.

Our strategy is to buy shares opportunistically.

For obvious reasons, we're not going to disclose our executional perimeters but given the strength of our balance sheet, we're in a position to capitalize on opportunities in the near-term and we expect to buy stock this year.

Our goal is to build long-term shareholder value.

Thank you.

We go next to Linda Bolton-Weiser with Oppenheimer.

Thank you.

Could you maybe comment on some of the external factors that are, I guess, sort of beyond your control?

And the actions you might take to maintain your performance?

Specifically if Toys "R" Us were to close some U.S. toy stores, is there anything you can do to manage that situation?

And secondly, if the Chinese yuan were to devalue, can you talk about what that might do to your costs?

And how you might control that?

Well, let me start by talking about Toys "R" Us, Linda.

They're a valued customer.

We want them to do well, we're very supportive of what they're doing.

As I've said in the past, as stores come and go in this business, there is a dislocation in terms of inventories, particularly if someone closes a substantial number of stores, but at end of the day, consumers are going to buy toys one way or another and they'll move to different places.

But if there's an inventory dislocation, yes, it will affect us and everybody else in the toy business in the short-term.

And with respect to external cost pressures like the cost of commodities and the cost of oil as well as employee benefits, you know, the other things that could impact us that we don't control is obviously interest rates and exchange rates.

But we are working on things that we do control.

We have invested in our long-term IT strategy and we continue to look for opportunities to streamline our back office functions and working on shared service center concepts both in the U.S. and North America, which we've completed.

We're working on Europe in 2003 and we expect to complete that in 2004 and we're going to look at Latin America in 2005.

We continue to work in global procurement.

We continue to work on optimizing manufacturing and sourcing operations.

So, those are some of the areas that we continue to work at with regard to external costs to mitigate external cost pressures.

Obviously the devaluation of the yuan would impact us as well as, I think, the entire consumer products industry.

And, you know that would be an issue so we'd be looking at sourcing strategies accordingly on the Chinese manufacturing.

Would you consider sourcing from another country?

Yeah, I think over the long-term we would consider sourcing in another country.

Obviously in the short-term that would impact us from a cost perspective as well as it would impact all consumer product companies.

As you know, Linda, 70, 80% for the toy industry come out of China.

Okay.

Thanks a lot.

We go next to Dean Gianoukos at J.P. Morgan.

Hi, just a few questions.

First, can you comment on, I think you mentioned it on Barbie, but you're selling versus sell through for the quarter?

Second, can you talk about I don't know if you will quantify it or give us a sense of how big the benefit for Mexico was on the gross margin?

And then if you could give us the FX effect on the bottom line?

And are you seeing any Barbie pressure in Europe, given the change in distribution for Bratz?

I am sorry I'm asking a lot.

If you can't answer them all, I understand.

And what do you think your shelf space is this year relative to last year?

And then finally, on the margin side, should we look for, I know you don't make forecasts, but can you give us any kind of sense if we should look for similar margin degradation going forward?

Thanks.

Hi, Dean, it's Bob.

I will start on a few questions and then turn it over to Kevin and I apologize in advance if I don't remember them all.

I think you started with, you know, what do we see at retail and how does the NPD panel look or those sorts of things.

Remember, it's an online panel now so the NPD data is a little less precise than it used to be.

Particularly if you get down to the category level, it's a little rocky.

Through February, as you know, NPD data suggests that the category is down in the mid-single digit range.

We're down in the low double-digit range through the first two months and the trend is generally consistent with our internal point of sale data from some of the large customers.

If you triangulate the NPD data with our internal POS with the shipments, it's all generally telling us the same thing, which is we have a lot of work to do still to strengthen our brands and build the top line.

All that said, our calculation of retail inventories which is based on we know what we ship in and at point of sale we know what sells through, shows continued declines across all customers and generally across all brands.

As it relates to Barbie in Europe, our European business, when you go on a constant currency basis, was down 6% in the first quarter and it's really I think the first quarter in probably two or three years where we experienced any sort of decline.

Generally speaking, I attribute that to the fact that Christmas was not as big as retailers expected in Europe in the fourth quarter.

As you recall here in the U.S., the Christmas selling season at retail was not going particularly well through November and December and it really wasn't until the very end of December, maybe around the 21st of December and then Christmas Eve and then the week after Christmas, that things finally picked up and retailers had a good Christmas here in the U.S.

For reasons that I can't explain, that really didn't play out in Europe.

Over the last three or four years, the holiday season in Europe has been relatively strong compared to the U.S. in the toy business.

And this past year for whatever reason it wasn't as strong.

So, we shipped in merchandise and as did others, I'm sure, and the sell through wasn't as strong as we liked and therefore we began this year with relatively high levels of retail inventories.

Now, if you look at the NPD data in Europe, it suggests that the category is growing, we're growing nicely, we're gaining market share but I'm sure that's just through the first couple of months of the year and there's obviously some markdown merchandise in there and the like as we cleaned up those inventories.

Okay, Dean.

I think you had a question on foreign exchange?

And I think in the first quarter, foreign exchange had a 500 basis point benefit on sales, primarily due to the strengthening of the euro.

Pricing adjustments made that remain competitive give Europe given the strength of the euro against the dollar, partially offset the positive impact of currency exchange on gross margin.

And we did have a net positive impact on EPS, which was approximately about 1 penny.

With regard to gross margins, the closing of the Mexican facilities or consolidation of those facilities in 2003 did have a benefit to margin, but we don't disclose that level of detail and I think, you know, looking forward, you know, the gross margins under pressure as we deal with competitive landscape and the rising cost environment.

As you know, we don't make projections, but some of these investments we're making to grow the top line are at the expense of gross margins, but we're actively pursuing initiatives to offset or minimize the impact of these higher costs.

And I think finally Dean, you asked about shelf space.

We don't get into specifics about that because it does vary by business unit and by customer and even within customers now, they're becoming much more sophisticated and have a whole variety of different shelf set.

So, it's much more difficult than it used to be to aggregate it and make an average statement.

But overall, I think shelf space has been impacted by store closures at K-Mart and KB and FAO in the last year and that's likely going to impact overall space in 2004.

And as I mentioned when I answered Jill's question about Barbie, based on our experience, retailers tend to lag trends rather than lead them.

In fact, I know many of you made store checks also in January.

When I went out this year, post-holidays, for the first time in a couple of years I saw a pretty good level of retail inventories on some of the products that over the past year or two have been doing really well in the marketplace.

So, I think that's indicative of the people may have caught up quite a bit on some of the products.

But even though we think these Worlds Of is an example in Barbie's are showing promise, I think until we see some overwhelming support from consumers for these new products, retailers are unlikely to make aggressive bets on our new line.

So, that's really our challenge for this year is to seed the strategy, to get it working, to get consumers to buy the product, then the rest will take care of itself.

Okay.

Great.

Thanks a lot.

Did we get them all, Dean?

We go next to John Taylor with Arcadia Investment Corporation.

Hi, I've got a number of questions, as well.

Focusing on Barbie again, I think you mentioned that overall it looks like your sell through, I guess I'm going to get at the sort of overhang issue at the end of the year that you're touching on here.

Were there any brands that were particularly impacted by that?

That's the first question.

Any Mattel Brands?

Number two, does it look like the sell through momentum on Barbie is positive based on what you're seeing in your point of sale or has is gone negative as well in Europe?

I don't know if you've got that or not.

And then the shelf space question, not looking at aggregate shelf space, but looking in sort a typical store of say your top handful of customers in the U.S., I'm wondering when you perceive the low watermark to have been hit, you know, in terms of year-on-year comparisons, maybe that's one way to get at that.

And then a whole separate question on advertising.

You talked about a bunch of external factors.

What's going on in the early buy market for TV for the fall?

And is that likely to have any impact?

Thanks.

Okay, J.T., this is Bob.

I'll start with your question on retail overhang.

Let me clarify.

I think you have it right but just when you started asking the question I was concerned I might have miscommunicated.

That overhang issue that I talked about at retail is concentrated in Europe.

We did not see any overhang in the U.S.

We had very clean sell through in the United States.

We go to our other large countries like Australia, Mexico and Canada, we had very strong sell through.

So, this overhang was concentrated in Europe and it tended to be across-the-board, not any one or two specific items.

In general, our Barbie business continues to do better overseas than it has in the U.S. and we continue to do pretty well in Europe.

I know folks are anxious about new competitive threats in Europe and some of these competitors have actually been there for several years and it's really not new to us.

And if anything, we're starting to see some, again, it's very early, but some encouraging trends out of Europe.

But please remember, you know, January and February in this business just aren't that important.

As it relates to the U.S., we are seeing some growth at POS in the new Worlds Of product lines, like Cali Girl, like Fairy Topia, like the Princesses.

That growth is not enough to offset the declines in those non-Worlds Of the old Barbie strategy.

And I think that will continue to play out for some time.

Our best guess is that about two-thirds of the product line will be converted to the new strategy this year.

You know, that's our best estimate but I think it's pretty solid.

And if it continues to perform like the early things, we'll have better POS by the end of the year.

All of that said, remember, it's spring training, it's very early spring training but we have seen some encouraging signs of growth in things like Cali Girl, Fairy Topia and the Princesses line.

Bob, could I follow-up on that real quick?

In the U.S. specifically, I think there's a perception that there's a shelf space shift going on amongst the majors that are healthy between major brands in the fashion doll category.

And I'm just curious, you know, do you think that's happened?

And at what point do we kind of reach the low watermark or the foundation we can build on to go into '05?

That's kind of what I'm getting at.

Let me try, J.T. and my sense is this, there is a lag effect at retail.

And so it does vary by customer and even within store type within customers and as I mentioned, there is more store types, more formats, more sophisticated planograms than there used to be at retail.

Generally speaking, I would say that over the last year there has been a shift in shelf space away from our fashion dolls and towards competitors.

But as I also mentioned, not scientific, but I know you go to a lot of stores, when I went out to stores in January, I saw a clean sell through of our products and plenty of inventory of competitors' products.

So, my hope is that the shelf space we're seeing today is the low watermark.

If we start building POS, if the two-thirds of the product line that's in the Worlds Of does well this fall, I think retailers a year from now should start making that bet as opposed to the other bet, but as much as anything else, J.T., it's my speculation at this point.

Until we prove ourselves in the marketplace with POS, that's all it is.

Is that helpful?

Yeah.

That's kind of what I'm getting at.

And then how about on the advertising front?

Yes, on the advertising front, J.T., so far we're not seeing a significant change in media pricing year-on-year for the early TV market.

Okay.

Thank you.

Once again, if you'd like to ask a question today, please press the star key followed by the digit one.

We go next to Tony Gikas with Piper Jaffray.

Good morning, guys.

Hi, Tony.

Good morning.

A couple of questions for you.

You talked in the press release a little bit about investing in programs and initiatives to drive future, you know, top line growth.

If there's anything more there you can elaborate on in terms of perhaps marketing programs, et cetera, would love to hear that.

Second, how impactful could the Harry Potter product line be to the June quarter?

Third question, with some potential Toys "R" Us store closures around the corner here, Wal-Mart is likely to take, you know, some of that market share.

Does that concern you given that you're already a little overweight with Wal-Mart at this juncture?

And then going back to your last question, this would be my fourth question, how impactful can, you know, those overshipments from your competitors towards, you know, the tail end of last year, be with the retailers?

In other words, how good are the retailers' memories going to be when we get to the holidays this year?

Are they going to be more cautious taking product from those competitors?

Does that provide an opportunity for you?

Let me start with the last question.

I don't know.

That's a good question for retailers.

Obviously when I talk to them I have a point of view on that, but I'm sure my competitors talk to them with a different point of view.

So we'll have to see how that plays out.

As it relates to investing in top line growth, there's a couple of areas worth looking at.

Probably most importantly and what is showing up on the gross margin line is, I just encourage folks to go look at the product today versus what it was like over the last year or two.

When you look at things, I was showing someone yesterday in my office, the Cali Girl product, which is, it's a $5 doll at retail.

But if you look at that doll compared to last year's Rio doll, which was the swimsuit doll and I think the year before it might have been Palm Beach Barbie, if you just look at the content in there, she now has earrings, she now has other things, it's just, you know, what we call value enhancements or more things in the box.

That's worked out very well over time for our Polly Pocket! brand, which continues to do well.

It's worked out well for some of our competitors and it's time for to us get smart with Barbie and make sure that we're offering a good value for consumers.

That shows up in the gross margin line.

We're also continuing to work on advertising.

Now, as I said at the end of the call, the last call, we will fine tune our advertising spend this year and we haven't finalized our fall plans as it relates to advertising investment, but my general sense is we will continue to be investing in advertising and direct consumer programs to make sure the brand is healthy.

That could be a short-term hit but over the long-term we think that's very important.

Let me move for a minute now, I think you mentioned Harry Potter and let me use that opportunity to talk about entertainment properties in general because I know that's important to you.

Harry Potter movie 3 comes out, I believe in early June.

It will be less impactful than movies 1 and 2 because it's a spring movie instead of the fall and because of the fact that it's movie 3.

There hasn't been much action yet on Harry Potter either in terms of our shipments or at retail and I'm not sure it's going to be a really big deal.

I go back a couple of years, I believe we shipped about $160 million of Harry Potter product two years ago in the first fall movie.

I think that dropped to 130 or $140 million in 2002 with the second movie and I don't think movie 3 will generate anything near those kinds of sales levels.

I think last year we probably did 15 to $20 million of Harry Potter without any movie.

Yu-Gi-Oh! continues to do pretty well.

Our shipments are down here in the U.S., high single digit range.

They are up nicely internationally as it expands.

Worldwide shipments are up just a little bit.

Our POS is holding up pretty well in Yu-Gi-Oh!.

It's actually up a little bit right now, the duel disc launcher, which is a new product this year has done quite well.

There's a late summer movie coming on Yu-Gi-Oh!.

I think it's August.

So I don't think Yu-Gi-Oh! will fall off the cliff, but I think by the end of this year, we'll probably conclude that its best days are behind it.

On the other hand, Sponge Bob for us has peaked.

It's begun to wane at retail.

We're not shipping much Sponge Bob.

We should get a good point of sale pop at retail from a November movie, but I think that one's had its best days.

Winks as a property, as you know, we're working on in our girls business.

The television show has been launched in both Italy and France where it's done very well and it premieres here in the U.S. in June, I believe.

And then we have Shaman King and Mega Man in the fall and we have seen, I think Kevin may have mentioned in his remarks, a pretty good support and pickup and consumer response to Batman and Justice League.

And then the last question was the Toys "R" Us closures and your, you know, market position with Wal-Mart?

Well, we love all of your customers including our large customers.

We have a good relationship with Wal-Mart.

They are a good customer.

They are a tough and demanding customer but our objective is to partner with major retailers and to you know, to a large degree our strategy is to fish where the fish are.

And consumers make their decisions on where to shop, we really don't.

We want to be sure we have good representation in stores where consumers go to shop.

That said, we're also supportive of other customers and large customers and we're working very hard to help them differentiate themselves from their competition.

Okay.

Thanks.

We go next to Felicia Kantor with Lehman Brothers.

Hi, guys.

Staying on the subject of your customers, in your K you reported that each Wal-Mart, Toys "R" Us and Target declined as a percentage of sales, implying that other retailers picked up some percentage.

So I was wondering who those might be and if that's helping offset some of the pressure?

And then just getting to your product line, do you have, I know it's very early, but do you have a plan "B" if the objectives that you listed, you know, ultimately through the Worlds that aren't met?

And then I'm wondering, you know, among the creative folks at Mattel, you know, have you made any changes there?

And then finally just getting to SG&A, and I know you don't give forecasts, but, you know, reducing SG&A as a percentage of sales has been an ongoing goal since the beginning and we haven't really seen it decline and I'm wondering what your comments are there?

Let me start with retail in general.

The toy business and our business is quite concentrated in the top retailers.

That trend has continued and it is true that we do try and sell toys to other retailers.

We've had some success in the food and drug channel.

We're having some early success in some other retailers, but if you look at our overall strategy at retail it's probably best summarized by saying we want to fish where the fish are and consumers are going to decide where we want to shop, we just want to make sure our toys are available in those stores, whether they be at the top two or three retailers or the bottom 50 or 75 retailers.

And with regard to SG&A, Felicia, you know, with the financial realignment plan, other initiatives are generating savings for the company, the savings are being offset And just a review in the first quarter again, we incurred a severance charge of $10.8 million as a result of headcount reductions at certain domestic and international locations and we expect to continue the experience the negative impact of currency exchange, overhead costs that we don't control with regard to employee cost pressures and insurance as well as we made investments in growth with respect to opening a new American Girl store and that impacted us in SG&A due to rent and store personnel.

I just want to say it's our expectation that these costs will continue to, pressures will continue throughout the year, but we're working on areas for continuous improvement to reduce costs.

Things like -- Go ahead.

If you back out those external pressures and then, you know, things that aren't so external, like the additional overhead costs, would you say that your, you know, just base case all else being equal, SG&A as a percentage of sales has been declining?

I think it's been relatively flat if you back those out.

Okay.

Felicia, there are puts and takes.

And the two things on a going-forward basis, I think, will be most important this year are 4-X, we don't know where that comes out bit it shows up in the SG&A line if the dollar is weaker than year ago.

And American Girl Place, which I'm not sure everybody has captured as they do models.

We've invested in American Girl Place in New York.

We pay for utilities, we have rent.

We have people in the store.

But we had a very good quarter in American Girl Place this past quarter.

We anticipate having a very good year.

If you go back and look at our success in Chicago that investment has paid off handsomely and we have every indication from the early days of the New York store that it, too, will pay off handsomely, but as it goes through the P&L, we will see higher costs because it's a different business model in SG&A.

So, that will continue throughout the year.

We try and offset the other things, that's how we get to puts and takes.

There are things that go against us.

Salaries cost more.

Insurance costs more.

Those sorts of things and we try and offset that by tightening our belt whenever we can, including, unfortunately, headcount reductions recently in some of our headquarters locations.

We will continue that trend of tightening our belt whenever we can.

Go ahead, Felicia.

So, Bob, so is your goal of overhead as a percentage of sales in the 17 to 18% range, is that still intact?

Yeah.

We're not there, but again, I modeled well around consumer goods companies and if you look at an annual basis, not the first quarter, but on an annual basis, we've been running, for the most part, a bit over 20% of sales.

And that has been fairly consistent and yeah, there's reasons things aren't going well in this particular line or that every year.

But the well run consumer goods companies are below that and it is our objective to get down there and continue tightening things up.

Okay.

You had on creative people?

We haven't made really significant changes in the past quarter.

As you know, as it relates to our fashion doll business, in the past year, mostly in the past six months I would say, we have made some changes, starting with Matthew Bousquette, now leading the combined old boys and girls unit which happened about a year ago.

He's brought in Tim Kilpin, who's heading up design and marketing in our girls business.

And I think Tim joined us late last year and also Russel Aarons, she's a woman who many of you know who is now heading up Barbie marketing.

So, we have changed some of the leadership in our girls business but we have not made wholesale changes in the creative people.

Now, I know this is a tough question and maybe you avoided it, but the plan "B" question?

Well, yeah I think it's way too early to think about plan "B" when we're working full-time and full speed on plan "A".

We have a lot of confidence that this Worlds Of strategy is the right strategy.

It goes back to looking at what has done well even in Barbie's tough period.

That is the entertainment properties like Swan Lake or Rapunzel or Nutcracker as well as My Scene and even if you go back and model things like American Girl, this content driven strategy, we know appeals to girls.

And so we are busy executing that and Matt and his team really started mid last year with this new strategy.

They force fit some of the products we were working on for this year into that strategy.

It is very early but some of those force fits are doing well in the marketplace and I continue to be hopeful that the tragedy plays out as we expect as it becomes more and more important to us.

So, yes, if it doesn't work, are we going to give up?

No, we're not going to give up, we will do something else.

But I have a lot of confidence in the strategy, based on Barbie's experience, based on what we see in other products and I think we want that strategy to play out and be firmly seated in the marketplace before we move on to the next thing.

Okay, thank you.

Once again, if you'd like to ask a question today, please press the star key followed by the digit one.

We go next to Chip Ruhe with Kramer Rosenthal.

Hi.

I've one follow-up question on the gross margin.

The two-thirds mix, that's where this new investment is and I can understand some of it is adding content to the box and I want to ask a couple of questions on that.

How much of it is investment that's kind of a one-time changeover and, you know, is there anything stepped up, you said you had to force feed, were you running higher than a normal level when you talked about your investment?

And more importantly going forward, when you add content to the box and add more story to the box, does that just necessarily mean that the gross margins for the product versus the old product will be lower?

And how much of that pressure are we seeing in the gross margin?

Chip, this is Bob.

Let me start and then Kevin can amplify.

Starting with were our gross margins abnormally high, if you go back to a year ago in the first quarter, we are at a 49% gross margin and typically the first quarter is a relatively low gross margin period for us.

If you go back two years ago, I think we were at about 45% gross margin.

If you go back three years ago, I think we were at a 44 gross margin.

And even in last year's call, we pointed out there were some unique benefits in the first quarter last year that we didn't think were sustainable.

And they weren't.

The other point is value in the box is important or adding more content, if you will there is also a real mix shift when look at our products.

Fisher-Price did relatively well vis-a-vis Barbie this year and Fisher-Price is a lower margin business than the Barbie business and then even within product lines like Barbie, Cali Girl did very nicely and it's a $5 doll.

It's our lowest-priced Barbie and our high-priced products have not been working well.

So, there is a mix shift in addition to more content and what we call value in the box.

I think you covered it, Bob.

Okay, sorry! [ Laughter ]

That's okay.

Well, also on the products going forward, you know, adding content, does that necessarily mean lower gross margin?

Or you think you can get that through price or greater sell or whatever?

Well, it's hard to speculate on a go-forward basis.

Content does cost us more and we're willing to make that investment, certainly over time we expect to realize some benefit as a result of that.

But I think it's certainly too early for us to anticipate how that's going to play out.

We're going to make the investments we need to make to keep these brands healthy and to get some of these brands growing again.

And if that means that the gross margins are lower right now that means that the gross margins lower.

But like the question on SG&A, we have targets as a company for gross margin.

Last year we were at a 49% gross margin for the year.

That was probably up 300 and some basis points over two or three years prior to that and we believe this can continue to be a relatively good gross margin business vis-a-vis the other well-run consumer goods companies.

Okay, thanks.

If there are no further questions at this time, I'd like to turn the call back over to management for additional or closing comments.

All right, thanks, operator.

I'd like to thank you all for your participation on the call today.

The replay of today's call will be available beginning at 11:30 a.m. eastern time and the number for the replay is 719-457-0820.

I.D. number 461872.

Thank you.

That concludes today's conference call, thank you for your participation.

You may now disconnect.