Mattel 2005 Annual Report Download - page 23

phenomenon of children outgrowing toys at younger ages and an increasing use of more sophisticated technology
in toys. As a result, Mattel must also compete with many other companies, including the makers of video games
and consumer electronic products, to meet the entertainment demands of older children. If Mattel does not
successfully meet the challenges outlined above in a timely and cost-effective manner, demand for its products
could decrease and Mattel’s revenues, profitability and results of operations may be adversely affected.
Mattel’s business is seasonal and therefore its annual operating results will depend, in large part, on sales
during the relatively brief traditional holiday season. Improved inventory management by retailers
resulting in shorter lead times for production and possible shipping disruptions during peak demand times
may affect Mattel’s ability to deliver its products in time to meet retailer demands.
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 from September through December. As a result, Mattel’s
annual operating results will depend, in large part, on sales during the relatively brief traditional 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.
Management believes that the increase in “last minute” shopping during the holiday season and the popularity of
gift cards (which often result in purchases after the holiday season) may negatively impact customer re-orders
during the holiday season. 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 may decrease sales or 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.
Uncertainty and adverse changes in the general economic conditions of markets in which Mattel
participates may negatively affect Mattel’s business.
Current and future conditions in the economy have an inherent degree of uncertainty. As a result, it is
difficult to estimate the level of growth or contraction for the economy as a whole. It is even more difficult to
estimate growth or contraction in various parts, sectors and regions of the economy, including the many different
markets in which Mattel participates. Because all components of Mattel’s budgeting and forecasting are
dependent upon estimates of growth or contraction in the markets it serves and demand for its products, the
prevailing economic uncertainties render estimates of future income and expenditures very difficult to make.
Adverse changes may occur as a result of soft global or regional economic conditions, rising oil prices, wavering
consumer confidence, unemployment, declines in stock markets or other factors affecting economic conditions
generally. These changes may negatively affect the sales of Mattel’s products, increase exposure to losses from
bad debts, or increase costs associated with manufacturing and distributing products.
The concentration of Mattel’s business with a small retail customer base that make no binding long-term
commitments means that economic difficulties or changes in the purchasing policies of its major customers
could have a significant impact on Mattel’s business and operating results.
A small number of customers account for a large share of Mattel’s net sales. In 2005 Mattel’s three largest
customers, Wal-Mart, Toys “R” Us and Target, in the aggregate, accounted for approximately 45% of net sales,
and its ten largest customers, in the aggregate, accounted for approximately 54% 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. Customers
make no binding long-term commitments to Mattel regarding purchase volumes and make all purchases by
delivering one-time purchase orders. Any customer could reduce its overall purchases of Mattel’s products,
reduce the number and variety of Mattel’s products that it carries and the shelf space allotted for Mattel’s
products, or otherwise seek to materially change the terms of the business relationship at any time. Any such
change could significantly harm Mattel’s business and operating results.
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