Mattel 2015 Annual Report Download - page 10

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changes in buying patterns of both retailers and consumers, and overall economic conditions. Unexpected changes in these
factors could result in a lack of product availability or excess inventory in a particular product line.
The majority of Mattel’s raw materials are available from numerous suppliers but may be subject to fluctuations in price.
Competition and Industry Background
Mattel is a worldwide leader in the manufacture, marketing, and sale of toys. Competition in the toy industry is based
primarily on quality, play value, and price. Mattel offers a diverse range of products for children of all ages and families that
include, among others, toys for infants and preschoolers, girls’ toys, boys’ toys, youth electronics, hand-held and other games,
puzzles, educational toys, media-driven products, and fashion-related toys. The North America segment competes with several
large toy companies, including Bandai, Hasbro, Jakks Pacific, Leap Frog, Lego, MGA Entertainment, Spin Master, Tomy, and
VTech, many smaller toy companies, and manufacturers of video games and consumer electronics. The International segment
competes with global toy companies including Bandai, Hasbro, Lego, MGA Entertainment, Playmobil, Tomy, and VTech, other
national and regional toy companies, and manufacturers of video games and consumer electronics. Foreign regions may
include competitors that are strong in a particular toy line or geographical area but do not compete with Mattel or other
international toy companies worldwide. The American Girl segment competes with companies that manufacture girls’ toys and
with children’s book publishers and retailers.
Competition among the above companies is intensifying due to trends towards shorter life cycles for individual toy
products and an increasing use of high technology in toys. In addition, as a result of the phenomenon of “children getting older
younger” resulting from children outgrowing toys at younger ages, Mattel competes with companies that sell products outside
the toy aisle, such as electronic consumer products and video games. Competition continues to be heavily influenced by the
fact that a small number of retailers account for a large portion of all toy sales, allocate the shelf space from which toys are
viewed, and have direct contact with parents and children through in-store purchases, coupons, and print advertisements. Such
retailers can and do promote their own private-label toys, facilitate the sale of competitors’ toys, and allocate shelf space to one
type of toy over another. Competition is also intensifying due to the availability of online-only distributors, including
Amazon.com, which are able to promote a wide variety of toys and represent a wide variety of toy manufacturers, and, with
limited overhead, do so at a lower cost.
Seasonality
Mattel’s business is highly seasonal, with consumers making a large percentage of all toy purchases during the traditional
holiday season. A significant portion of Mattel’s customers’ purchasing occurs in the third and fourth quarters of Mattel’s fiscal
year in anticipation of holiday buying. These seasonal purchasing patterns and requisite production lead times create risk to
Mattel’s business associated with the underproduction of popular toys and the overproduction of less popular toys that do not
match consumer demand. Retailers have also been attempting to manage their inventories more tightly in recent years,
requiring Mattel to ship products closer to the time the retailers expect to sell the products to consumers. 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. Additionally, as retailers manage
their inventories, Mattel experiences cyclical ordering patterns for products and product lines that may cause its sales to vary
significantly from period to period.
In anticipation of retail sales in the traditional holiday season, Mattel significantly increases its production in advance of
the peak selling period, resulting in a corresponding build-up of inventory levels in the first three quarters of its fiscal year.
Seasonal shipping patterns result in significant peaks in the third and fourth quarters in the respective levels of inventories and
accounts receivable, which result in seasonal working capital financing requirements. See Part II, Item 8 “Financial Statements
and Supplementary Data—Note 5 to the Consolidated Financial Statements—Seasonal Financing and Debt.”
Product Design and Development
Through its product design and development group, Mattel regularly refreshes, redesigns, and extends existing toy
product lines and develops innovative new toy product lines for all segments. Mattel believes its success is dependent on its
ability to continue these activities effectively. See Item 1A “Risk Factors.” Product design and development activities are
principally conducted by a group of professional designers and engineers employed by Mattel. During 2015, 2014, and 2013,
Mattel incurred expenses of $217.8 million, $209.5 million, and $201.9 million, respectively, in connection with the design and
development of products, exclusive of royalty payments. See Part II, Item 8 “Financial Statements and Supplementary Data—
Note 13 to the Consolidated Financial Statements—Supplemental Financial Information.”