Mattel 2002 Annual Report Download - page 49

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Competition and New Product Introductions
Mattel’s business and operating results depend largely upon the appeal of its toy products. Consumer
preferences are continuously changing and the toy industry experiences significant, sudden shifts in demand
caused by “hit” toys and trends, which are unpredictable. In recent years there have been trends towards shorter
life cycles for individual products, the phenomenon of children outgrowing toys at younger ages—particularly in
favor of interactive and high technology products—and an increasing use of high technology in toys. In addition,
Mattel competes with many other companies, both large and small, which means that Mattel’s market position is
always at risk. Mattel’s ability to maintain its current market share, and increase its market share or establish
market share in new product categories, will depend on Mattel’s ability to satisfy consumer preferences, enhance
existing products, develop and introduce new products, and achieve market acceptance of such products. If
Mattel does not successfully meet these challenges in a timely and cost-effective manner, demand for its products
will decrease and Mattel’s results of operations will suffer.
Seasonality, Managing Production and Predictability of Orders
Mattel’s business is subject to risks associated with the underproduction of popular toys and the
overproduction of toys that do not match consumer demand. Sales of toy products at retail are seasonal, with a
majority of retail sales occurring during the period of September through December. As a result, Mattel’s annual
operating results will depend, in large part, on sales during the relatively brief holiday season. Retailers are
attempting to manage their inventories better, requiring Mattel to ship products closer to the time the retailers
expect to sell the products to consumers. This in turn results in shorter lead times for production. Shipping
disruptions limiting the availability of ships or containers in Asia during peak demand times may affect Mattel’s
ability to deliver its products in time to meet retailer demand. These factors increase the risk that Mattel may not
be able to meet demand for certain products at peak demand times, or that Mattel’s own inventory levels may be
adversely impacted by the need to pre-build products before orders are placed.
Adverse General Economic Conditions
Current conditions in the domestic and global economies are extremely uncertain. As a result, it is difficult
to estimate the level of growth for the economy as a whole. It is even more difficult to estimate growth in various
parts of the economy, including the markets in which Mattel participates. Because all components of Mattel’s
budgeting and forecasting are dependent upon estimates of growth in the markets it serves and demand for its
products, the prevailing economic uncertainties render estimates of future income and expenditures even more
difficult than usual to make. Adverse changes may occur as a result of softening global economies, wavering
consumer confidence caused by the threat or occurrence of terrorist attacks such as those in the US on
September 11, 2001, war, or other factors affecting economic conditions generally. Such changes may negatively
affect the sales of Mattel’s products, increase exposure to losses for bad debt, or increase costs associated with
manufacturing and distributing these products.
Customer Concentration
A small number of Mattel’s customers account for a large share of net sales. For 2002, Mattel’s three largest
customers, Wal-Mart, Toys “R” Us and Target, in the aggregate accounted for approximately 50% of net sales,
and the ten largest customers in the aggregate accounted for approximately 62% of net sales. The concentration
of Mattel’s business with a relatively small number of customers may expose Mattel to a material adverse effect
if one or more of Mattel’s large customers were to significantly reduce purchases for any reason. In addition,
some large chain retailers have begun to sell private-label toys designed and branded by the retailers themselves.
Such toys may be sold at prices lower than comparable toys sold by Mattel, and may result in lower purchases of
Mattel-branded products by such retailers.
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