This is the time of the year when toymakers start creating their playgrounds for the next holiday must-have doll, toy, or toy. But as Ynon Kreiz prepares to report Mattel’s second-quarter earnings on Tuesday, he has more to ride on former holiday successes.
Three years following his appointment at the American company as CEO, Cruz struck movie and TV deals not only for perennial favorites like Barbie and Hot Wheels, but for retro franchises like He-Man and Rock ‘Em Sock’ Em robots.
Even Magic 8-Ball and View-Master Divination, the holographic slide viewer launched in 1939, have movies in the works.
The Covid-19 pandemic that has kept millions of children stuck at home has been pleasing for game companies that have weathered the supply chain disruptions it created, and it is especially pleasing for those with brands that stressed parents fondly remember.
But if Chris is riding a wave of nostalgia, he’s taken an unsentimental approach to the work legacy he’s inherited. A resume that includes Fox Kids TV, reality shows Endemol and Maker Studios’ YouTube content raised expectations that he would mine Mattel brands for Hollywood deals, but cleaning up Mattel’s core business consumed most of his first three years in charge.
In 2017, the company reported an adjusted operating loss of $203 million; Its sales are down more than 11 percent, and its debt is 25 times its EBITDA for the year.
Mattel underperformed Hasbro so much that it briefly received an offer from its larger competitor in 2017. After just 14 months as CEO, Margo Georgiadis, a previous Google CEO, left in April 2018.
When Craze took over, Mattel also lost its deal to make Disney Princess dolls and shareholders were concerned about the coming of gaming companies in the smartphone age and the bankruptcy of Toys R Us and Nintendo Switch.
Now, though, Chris is now ready to announce that the transformation is real. “We have done the heavy lifting of restructuring and we are now moving into growth mode,” he said. He asserts that Mattel has gone from a toy manufacturer to a lofty-growth company driven by its intellectual property.
Chris cut $1 billion from the annual cost base he inherited, reducing the number of items Mattel makes by a third, moving factories from China to Canada and cutting capital expenditures from $300 million to $120 million.
First-quarter numbers released three months ago, while boosted by the pandemic, show the extent of the change. Revenue is up 47 percent year-over-year following Mattel posted its third successive quarter of market share growth, while its leverage fell to just over 3x EBITDA. Mattel’s stock has surpassed Hasbro since the start of final year.
Kreese says the strategy is now two-stage: In its core business, Mattel is driving revenue growth by focusing on “play systems,” product ranges designed to fit together and have “cultural relevance.” (He noted that final year’s “American Girl” doll of the year was a hearing assist-equipped surfer.)
The second stage is about using its brands to apprehend opportunities outside the gaming industry: in film, television, digital games, live events, music, merchandise, and “digital experiences.”
These experiences include auctions of non-fungible tokens targeting the adult collectors’ market. Last month, Mattel Creations, a unit that works with artists and designers to create limited-edition games, released a series of NFTs based on Hot Wheels cars, giving buyers the opportunity to pay with the cryptocurrency ethereum.
Craze won’t disclose how big a business he expects to become NFTs, but he said the collectors’ market is a “very interesting” growth market for the company. “Because of the strength and heritage of our catalog, you have distinguished brands with a vast fan base.”
With more shopping shifting online during the pandemic, with e-commerce now accounting for 28 percent of Mattel’s sales, established brands are becoming more significant to beat the noise in what Craze calls “a world of ubiquitous distribution and virtually unlimited storage.”
But while Hasbro has been bolstering its brands with the Transformers and My Little Pony films since the mid-1980s, Mattel has fallen behind in the entertainment game.
Kreiz shows little doubt about his aptitude to catch up, citing the vast successes of the Lego Movie and Disney’s creation of a cinematic universe from the Marvel comic books. “Lego was competent to make a movie out of bricks. It’s been done prior.
Announcing in June that MGM will make a live-action Polly Pocket starring Lena Dunham of girls Fame and starring Lily Collins, Mattel’s number of films in the works rises to 13.
She delved into her IP archive to make that list: Greta Gerwig is set to direct a Barbie movie starring Margot Robbie, based on the dolls that debuted in 1959; Vin Diesel will appear in the movie Rock ‘Em Sock’ Em inspired by the fighting robots launched in 1964; Tom Hanks signed a photo of Major Matt Mason, an astronaut character first played by children in 1966.
It also fuels the battle for child-friendly franchises between existing cable television networks and the growing number of subscription video streaming services. Two Barbie movies have already hit Netflix on the service’s top 10 list in the former two years, and a deal for an animated series and a live-action movie on Nickelodeon will revive Monster High Fashion dolls launched in 2010.
“Besides Disney, I’m not aware of any company that has such a powerful catalog in terms of children’s and family entertainment,” Creez argued. But unlike Disney, Mattel takes little financial risk in trying to turn its brands into box office and digital successes.
“Our approach is light capital. We don’t fund movies. We don’t fund online game development,” he said, acknowledging that his entertainment strategy would have been impossible had he relied on Mattel to fund such projects.
Making this strategy work will require watchful balancing as Mattel fosters consumer interest in toy brands that many of them are too young to come across, without coming across as bare-bones.
“We don’t go into these areas just to sell more games,” Craze insisted: “The mandate is to make distinguished content that people want to watch. It’s not about ‘making content that sells more games.’ In today’s world you have to be original.”
He’s encouraged by beforetime evidence that some of Mattel’s older franchises are resonating: “Masters of the Universe: Revelation,” which released on Netflix final Friday, was the most popular children’s series in the US this weekend, ranking in the top 10 In 55 markets Netflix reaches.
When asked if Mattel would now accept the Hasbro deal, Kreiz objected.
“We have a very robust strategy that is working and that is our focus,” he said. “We are start to disclose the true value of the company.”