Mattel 2008 Annual Report Download - page 30

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the consolidated financial statements and the
related notes. See Item 8 “Financial Statements and Supplementary Data.”
Overview
Mattel’s objective is to continue to create long-term shareholder value by generating strong cash flow and
deploying it in a disciplined and opportunistic manner as outlined in Mattel’s capital and investment
framework. To achieve this objective, management has established three overarching goals.
The first goal is to enhance innovation in order to reinvigorate the Barbie®brand, while maintaining growth
in other core brands by continuing to develop popular toys. Additionally, Mattel plans to pursue additional
licensing arrangements and strategic partnerships to extend its portfolio of brands into areas outside of traditional
toys.
The second goal is to improve execution in areas including manufacturing, distribution, and selling. Mattel
continues to focus on improving the efficiency of its supply chain using Lean supply chain initiatives. The
objective of the Lean program is to improve the flow of processes, do more with less, and focus on the value
chain from beginning to end.
The third goal is to further capitalize on Mattel’s scale advantage. For example, as the world’s largest toy
company, Mattel believes it can realize cost savings when making purchasing decisions based on a One Mattel
philosophy.
2008 Overview
The toy industry was not immune to the downturn in the global economy. Consumer confidence reached an
all-time low in December of 2008, driving retail sales weakness in the fourth quarter as consumers, fearful of the
economy’s direction, cut back their discretionary spending. Toy retailers and manufacturers were impacted by
the economic downturn, with estimates of more than one thousand Chinese toy manufacturers closing their
operations and significant toy sellers in the US, UK, Mexico, and other major markets closing their operations or
entering bankruptcy. Against the backdrop of the broader economic and industry trends, Mattel underperformed
for the quarter, and ultimately the year, due to a combination of lackluster sales, lower gross margins, and higher
expenses:
• Mattel’s net sales declined 1 percent for the year, driven by an 11 percent decrease in sales during the
fourth quarter of 2008. Mattel experienced sales shortfalls across most of its brands and throughout
many of the countries in which it operates, with sales declines in the International segment for the first
time since the year 2000. The decrease in sales was primarily attributable to the macro economic trends
discussed above.
• Mattel’s gross margin rate declined in 2008 primarily because price increases implemented in June 2008
did not anticipate the record high product input costs Mattel experienced during its peak production
period last summer.
• Other selling and administrative expenses increased in 2008 primarily due to incremental legal costs,
settlements, and severance charges.
Mattel did make progress in 2008 in a number of important areas. During 2008, American Girl®achieved
record revenues despite the difficult economic environment; in Mattel’s litigation with MGA Entertainment, Inc.,
a unanimous jury verdict was rendered against MGA and its Chief Executive Officer; and Mattel was awarded
new toy licenses for the WWE®Wrestling, Disney/Pixar’s Toy Story, and HIT Entertainment’s Thomas and
Friends™, which will help Mattel grow in 2010 and beyond.
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