Mattel Lays Out Its Roadmap for the Future

In this segment from Industry Focus: Consumer Goods, the cast continues their discussion of Mattel (NASDAQ: MAT), including specific elements of the company's turnaround strategy. With cost cutting goals in place and a roadmap established for the future of the company, will management be able to restore its legendary brands?

A full transcript follows the video.

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This video was recorded on Oct. 31, 2017.

Vincent Shen: I wanted to talk a little bit about what the company is looking to do going forward to right the business, and what it's focusing on in terms of its strategy. In terms of where that money will go, the several hundreds of millions of dollars they're looking to save with the dividend cut and the other expense cuts, they're looking at their omnichannel capabilities. As you can imagine, e-commerce is very important right now for the company. They're looking at their emerging markets, where the industry growth is focused across the toy industry, and the company is positioned very well, especially in China. They're focused on their IT infrastructure, spending there so that the company can have better tools at its disposal for things like demand forecasting. Then, lastly, they want to focus and put some investments into content and gaming, which is essentially the next step for their brand and product development. They've spent about $30 million so far in 2017 as a result of these plans they announced over the summer, another $170 million expected to be spent in the next two years. I want to give you a second here, Danny, to talk about the five strategic pillars they also laid out during their investor day earlier this year as the guiding model that they're going to follow to try and restore the business to growth and some of the stronger operating results they saw in the past. Can you tell us about those?

Danny Vena: Sure can, Vince. I'm going to take these in reverse order. Some of them are really common sense. The last one that they talked about was reigniting the culture and the team. A couple of things that have come up with Mattel in the past, the first is that they had become bogged down in a bureaucracy. It seemed like, in order to get anything done, there were layers and layers and layers of approvals that had to be done. It was disheartening for the folks that worked there, seeing these quarter after quarter of poor results, year after year of declining or flat sales for Barbie. So what they wanted to try to do was, first, they wanted to clear up some of those layers of bureaucracy and get that out of the way so that they could reignite their corporate culture and get their team back to where they could have a little positive spin on the business, so they'd get their belief back in their company. And part of that was, again, reshaping the operations. One of the things that they've talked about on the investor day presentation was, in order to get a new toy approved, it had to go through a really long and complicated approval process.

And when the new CEO came in, she decided that was something else holding them back, so they're going to get rid of those layers of bureaucracy, try to speed up the approval process, get some more toys out there faster. That was part of reshaping their operations. That also fed into strengthening their innovation pipeline. They had spent so much time focusing on their core brands -- Barbie, Hot Wheels, Fisher Price, Thomas the Tank Engine, the American Girl brand -- that they were really not looking forward, they weren't developing any new toys or new ways for kids to connect with those toys. As a result of that, they wanted to strengthen their innovation pipeline. As you mentioned, they also wanted to accelerate their entry into emerging markets. They think one of the reasons they fall in behind is that North America represents so much of their sales and they figure, if they can bring in new geographies, new international markets, that's going to help take care of some of those ebbs and flows in the business. If sales aren't going well in North America, they might pick up in some of the international markets, and that'll help stabilize their sale somewhat. Finally, the biggest thing, which I wanted to save for last was, they said they wanted to build their Power Brands into connected 360-play experiences, which is kind of a mouthful.

Shen: Absolutely.

Vena: It's important to note that their new CEO has a history at Google, so really has a technology background and has spent a lot of time working with technology and wants to bring tech to Mattel. So they wanted to start at those core brands of theirs, and they wanted to evolve them from, instead of being just the toys themselves, they wanted to give kids new ways to interact with the toys. One example that they used was the Barbie Dreamhouse that's a connected toy, and you can download the app and customize some of the features on the Barbie Dreamhouse -- you can customize sounds that come out of particular rooms. So they wanted to use that as a starting point and look at all of their brands and see if there were other ways that they could connect with kids. So other ways to, perhaps using Internet of Things as an option, they wanted to make these more connected play systems, they wanted to develop online communities where people who are interested in chatting with one another about Barbie, for instance, they could go online and have Barbie Chat. So there are a number of different things that they were looking at. They're hinging their change here, their [evolution] here, their change, that they want to evolve from here into a more technology-based toy company.

Shen: Thanks, Danny. With those pillars, management, during this latest earnings call, had some progress reports, essentially, for how they're doing. I think you touched on some good examples. Going back to something you mentioned with reshaping the operation and how they wanted to improve their time to market, some numbers behind that. They were looking at a goal of 50% improvement from the traditional 12 to 18 months it would take in order for a toy to hit the market. They've already released four new products, and they launched them with their new process in three to nine months, so seeing an improvement there. Then, on the culture and team side, I think it's important to note, the company has also brought on a new chief financial officer, chief technology officer, communication officer, people officer, I believe, head of manufacturing, and head of product development. So a lot of new management, new people brought in for leadership to refresh their approach to things.

The trends, the last thing we'll talk about for Mattel that they've identified that are really shaping their industry, and these will bleed into our discussion of the Hasbro earnings as well, but management mentioned specific trends they think are really changing the toy industry. One, it's still growing each year, but the bulk of that growth is concentrated in emerging markets, hence some of the strategic pillars they've established. Two, kids are adapting to and growing up in a very digital and mobile-first world, so toys and entertainment need to be very engaging, they need to be personalized, they need to be customizable. That also plays into their Power Brands and 360 experiences. The last point is with parents, and this is more on the brand-building side, that connection with customer loyalty. They want their kids to be able to succeed and adapt in a very fast-changing world. They also want strong, genuine, responsible brands. So the company overall is rethinking the brands, how it's presenting them, trying to create more of a connection with customers, both the kids and parents alike.

Danny Vena owns shares of Hasbro and Mattel. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Hasbro. The Motley Fool has a disclosure policy.