Mattel 2006 Annual Report Download - page 37

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increased 11% from 2005, including a 1 percentage point benefit from changes in currency exchange rates,
primarily driven by strong sales of Polly Pocket!™and Pixel Chix™worldwide and the continued success of
Winx Club™in international markets.
Worldwide gross sales in the Wheels category decreased 1% compared to 2005, including a 1 percentage
point benefit from changes in currency exchange rates. Strong sales of Hot Wheels®and Matchbox®products
internationally were more than offset by Hot Wheels®sales declines in the US and Tyco®R/C sales declines
worldwide. Worldwide gross sales in the Entertainment category, which includes games and puzzles and
Radica:®products, increased by 34% compared to 2005, with no impact from changes in currency exchange
rates. Excluding Radica:®products, worldwide gross sales increases in the Entertainment category, were driven
by the worldwide success of CARS™and Superman™products, which more than offset worldwide sales declines
of Batman™and Yu-Gi-Oh!™products.
Worldwide gross sales of Fisher-Price Brands increased 12% to $2.27 billion in 2006 compared to 2005,
including a 1 percentage point benefit from changes in currency exchange rates. Domestic gross sales
increased 8%, while international gross sales increased 20%, including a benefit of 2 percentage point benefit
from changes in currency exchange rates. Worldwide gross sales of Core Fisher-Price®increased 11% compared
to 2005, including a 1 percentage point benefit from changes in currency exchange rates, primarily driven by the
worldwide success of BabyGear™and infant and newborn products. Worldwide gross sales of Fisher-Price®
Friends increased 19% compared to 2005, including a 1 percentage point benefit from changes in currency
exchange rates, driven by several Nickelodeon properties including Go-Diego-Go!™, Dora the Explorer™, and
The Backyardigans™and T.M.X™Elmo from Sesame Street®.
Gross sales of American Girl Brands increased 1% to $440.0 million in 2006 compared to 2005, driven by
the American Girl Place®retail stores, including American Girl®’s third store which opened in
Los Angeles, California in April 2006. Growth in the retail stores was partially offset by a decline in the catalog
business.
Cost of Sales
Cost of sales increased by $232.2 million, or 8%, from $2.81 billion in 2005 to $3.04 billion in 2006, as
compared to a 9% increase in net sales. On an overall basis, cost of sales increased primarily due to increased
sales volume. Within cost of sales, product costs increased by $204.9 million, or 9%, from $2.21 billion in 2005
to $2.42 billion in 2006, which was primarily driven by increased sales volume and higher external cost
pressures, partially offset by cost savings realized from supply chain efficiency initiatives. Royalty expense
increased by $35.6 million, or 16%, from $225.6 million in 2005 to $261.2 million in 2006, and is reflective of
higher sales of licensed products in 2006. Freight and logistics expenses decreased by $8.2 million, or 2%, from
$365.5 million in 2005 to $357.3 million in 2006. The decrease in freight and logistics expenses was primarily
due to supply chain savings and distribution center efficiency initiatives, including strategies to shorten customer
shipping distances, partially offset by increased sales volume.
Gross Profit
Gross profit, as a percentage of net sales, was 46.2% in 2006 compared to 45.8% in 2005. The increase in
gross profit was driven by price increases and supply chain savings, which were partially offset by higher
external cost pressures and unfavorable product mix, including higher royalty costs for licensed products.
Advertising and Promotion Expenses
Advertising and promotion expenses were 11.5% of net sales in 2006, compared to 12.1% in 2005 due
primarily to overall higher sales volume and greater leverage in advertising spending. Mattel expects advertising
spending levels for 2007 to be fairly consistent with its 11%-13% historical range to support its plan to invest in
the business to drive long-term performance.
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