Barbie's Back

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We own one of the strongest catalogs in the world. The second part of our strategy is to be an important player in film, television, video games or online games, live events, consumer product and merchandise, music.

Welcome to the Barron Streetwise Podcast. I'm Jack Howe. The voice you just heard is Enan Kryze. He's the CEO of Mattel, and it's a great time to hear from him for two reasons. First, who better than a top toy maker to give us an update on supply chain challenges and the Christmas selling season? And second, Mattel is a turnaround story. Its shares have sharply outperformed those of Hasbro since Enan took over. In a moment, we'll hear about what's working and what's next from Enan and a couple of top Wall Street analysts. We'll also hear from a real estate broker with a multi-million dollar portfolio of Hot Wheels. Listening in is our audio producer Jackson. Hi Jackson.

Hi Jack.

I gotta talk about Barbie now, and it's a bit of a cultural minefield, so I might need you for a lifeline in a moment. Just stay frosty, all right?

Yeah, I got a social Geiger counter just for these occasions.

So, we'll come to Mattel's digital and show business push in a moment, but let's start with Barbie. I played a tiny part, maybe, in the Barbie crash, and now the Barbie comeback has got my attention. I hit my peak doll buying years around 2014 because that's when my daughter hit her peak doll playing years. I bought zero Barbies, and I guess it wasn't an accident. Anti-Barbie sentiment was running high at the time.

The brand went through a period where it was actually anti-Barbie. I know in my experience that some mothers were saying, don't bring Barbie as a gift for the birthday party. So mothers were against it. You're right, because of the positioning of the brand.

That's Linda Bolton Weiser, who covers Mattel for investment bank DA Davidson. We'll hear more from her in a bit. Back in 2014, I heard a lot of talk about Barbie's unrealistic body proportions and excessive focus on shopping and clothing. And I'm not what you describe as a social activist, but I try to make good decisions where I can. The Disney movie Frozen had just come out, and its female characters seemed strong and complex. So my daughter and I stuck with Disney princess dolls, including ones from Frozen. And apparently I wasn't alone, because between 2011 and 2015, Barbie sales fell by one-third. And to make matters worse for Mattel, it lost the Disney Princess toy license to Hasbro shortly after Frozen came out. Today you can find Barbies with 9 different body shapes and more than 30 skin tones and over 90 hair colors. There are different careers and interests. There's a Barbie in a wheelchair and another with a prosthetic leg. Barbie has never been more inclusive, and sales have been more or less improving for years. So it seems like a straightforward matter of an out-of-touch brand being rehabilitated. But Barbie's history is a little more complicated than that. Mattel is named for Harold Matson, who went by Matt, an Elliott Handler. It's not named for Elliot's wife Ruth, even though she was a co-founder and the creator of the company's most important toy. The three had a plastic goods and picture frame business and began turning their scraps into dollhouse furniture in the early 1940s. Most dolls at the time resembled babies or small children. Elliot would develop one of those with a pull-string voice box called Chatty Cathy.

Well, I told you she could talk. I just pulled this ring and she says 11 different things. Will you play with me?

Adorable in a terrifying way. Now, Ruth wanted something more grown-up. Her daughter Barbara was playing with flat paper fashion dolls with changeable outfits. Ruth proposed a three-dimensional fashion doll shaped like an older teenager, not a small child, but Mattel's male executives weren't interested. So Ruth pushed ahead on her own. On a vacation in Europe in 1956, she found a curvaceous doll called Lily and used it as the basis for Barbie, which she launched in 1959. And customers went crazy for Barbie, making it the company's best-selling toy ahead of Chatty Cathy. I guess I should mention here that Lilli, the German doll that Ruth modeled Barbie after, wasn't marketed to children in Europe. It was a gag gift for men based on a comic strip about a blonde-haired seductress. The dolls were sold at bars and tobacco shops and adult toy stores. I feel like things just got super weird. Jackson, you there? I'm here. What about those Seahawks? I see they're 3-5 this season, tied with the Niners at the bottom of the NFC West. Sorry, buddy. It's a tough division. Good talk. Thank you. Where was I now? Barbie. Her shape has been a long-running controversy. The National Organization for Women once estimated that the chances of a real woman having Barbie's proportion were 1 in 100,000. A study in a psychology journal concluded that girls who play with Barbies tend to think more about their weight than other girls. Now, Ruth said that Barbie was created to allow a girl to, quote, project herself into her dream of her future. So who's right? I am definitely not in charge of deciding things like this, but let me just say that Barbie seems to have had a dual identity for decades. Part inspirational and part cringeworthy. So maybe she hasn't been just one thing, but rather the result of decision-making by many people, and maybe she's had to carry a lot of cultural baggage over the years for a toy too. Take 1965. That year, Mattel introduced Slumber Party Barbie, who came with a scale that was permanently set to 110 pounds and a book titled How to Lose Weight that contained exactly one instruction: don't eat. That one has not aged well, as they say. But that same year, the company released Astronaut Barbie, which means that 4 years before America put a man on the moon, Mattel put a toy woman in a spacesuit. The company launched Christie a doll resembling a Black teenager, back in 1968. It had its first racially diverse Barbie line in 1980. In 1992, there was another controversy. Mattel introduced Teen Talk Barbie, which had a voice box programmed with 4 phrases out of 270 possible choices. One of those choices was, "Will we ever have enough clothes?" And another was, "Math class is tough." You don't hear a lot of mention of the other choices, including, "I'm studying to be a doctor." The following year, a group calling itself the Barbie Liberation Organization, or B.L.O., began pulling hundreds of Teen Talk Barbies off the shelves and performing surgery to replace their voice boxes with ones from G.I. Joe dolls. And then returning them to shelves so that some little girls ended up with Barbies that said things like, "Vengeance is mine." So the anti-Barbieism I heard back in 2014 was not particularly new. What's clear, as I said earlier, is that Mattel's latest efforts have been well received. It says Barbie sales are likely to increase by a double-digit percentage this year. Last year they rose by 16%, the fastest rate in decades. Now there's a new Barbie streaming music channel, Barbie-branded shows streaming on Netflix, and a new live-action Barbie in the works. Margot Robbie has signed on as Barbie and Ryan Gosling as Ken, and shooting is expected to begin early next year. I wanted to learn more about this Hollywood turn for Barbie and other Mattel brands. Hi, Enan. It's Jack Howe from Barron's.

Hi, Jack. How are you?

Doing well, thanks. And thanks for making a few minutes to speak with me.

Oh, sure. Thank you for inviting me to the show.

That's Enan Kryze. When Mattel appointed him as CEO in April 2018, he was the company's fourth chief in 4 years. Toys "R" Us, a major U.S. toy seller, had filed for bankruptcy protection the year before. Investors wondered if screen-savvy kids still wanted to play with toys. Expectations were low, but Mattel stock has now returned 93% over the past 2 years. That's 40 points more than the S&P 500 index and more than 80 percentage points more than shares of Hasbro. I asked Inan, do kids still want to play with toys? He says the industry has grown over the past 5 years and that Mattel has recently been gaining share, and he says that one industry research group predicts toy sales will grow by 5% a year over the next 5 years.

What we see is that while there is growth in screen time and kids spending time online, what we do see is that it's not at the expense of physical play. And we believe that physical play is here to stay. There are a lot of advantages. Parents love physical play. We have a very clear mission to inspire, entertain, and develop children through play. And that is a very important component of healthy growth and healthy living and positive influence on children.

I asked for a supply chain update and Inan says, so far so good.

We did anticipate short supply and longer lead times, and all of that was factored into our planning. And we put together very specific mitigating actions to address the global supply chain disruptions that we saw coming our way. So with that, we do expect strong holiday season and lots of toys under the trees for children to play with.

Hasbro has had great success in the past turning toy brands like Transformers and My Little Pony into movies and shows. 2 years ago, it bought a production company called Entertainment One, whose shows include Peppa Pig. Enon has an entertainment background. He ran a kids programming business for Fox and a YouTube content business called Maker Studios, which Disney bought in 2014. So the choice of Enon as CEO suggests Mattel wants to push into content too, and that's just what it's doing. Here's Enon. You're going to hear him mention IP, that's intellectual property.

This is something that we have not been focused on as a company. We used to think of ourselves more as a toy manufacturing company, and this has been a key part of our transformation to become an IP-driven, high-performing toy company. And the opportunity around our IP in success can be transformative. And we're very excited about that. And this doesn't take away from the momentum and great success we have on the toy business. We actually on track to achieve our highest growth rate the company had in decades this year on the toy side, purely on the toy side. So incredible momentum in the toy business, but a lot of opportunities to commercialize our catalog in other accretive ways.

Mattel isn't exactly following Hasbro's approach on content. Here's Linda from D.A. Davidson.

Hasbro and Mattel have slightly different strategies in the sense that Hasbro actually acquired eOne and has Hasbro Studios, so they develop their own content based on their own brands as well as content for others. So Hasbro has a much bigger economic interest in each entertainment property that involves a toy brand, whereas Mattel won't be able to capture quite as much of the economic profit related to the entertainment property because they're partnering with studios.

That works both ways. By partnering with outside studios, Mattel limits its upside if it makes hits, but also limits its downside if it makes flops. It's a way to pursue steadier, more dependable cash flow. Mattel just announced a cast for a new Monster High live-action movie, and I don't recognize the names, but that's not necessarily because they're not famous. It's probably because I'm not young. Monster High, if you're wondering, is a line of dolls based on high school students that are half monster, like Clawdeen Wolf. And Frankie Stein. I feel like if your child is born half Frankenstein monster and you name him Frankie Stein, it's a little too on the nose, but I'm not here to judge. There's also a revival of the He-Man Masters of the Universe series on Netflix. Magic 8-Ball is being turned into a movie. The card game Uno now has a smartphone game, and Skip-Bo is getting one. Mattel's other key toy brands include Hot Wheels and Fisher-Price. Hot Wheels has had 3 straight years of breaking its own sales records, and not nearly all of those Hot Wheels are bought for kids. Mattel has a new direct-to-consumer business called Mattel Creations. It focuses on adult collectors, and there you'll find a $100 Darth Vader-inspired Barbie and a $52 set of Hot Wheels big rig trucks. Who's that into Hot Wheels? I'll tell you who, right after this break.

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Welcome back. Let me introduce you to a Hot Wheels superfan.

I was born in 1961. So Hot Wheels came out when I was 7 years old. So bam, played with them, my favorite toy. They were pretty amazing. I remember fighting with my brothers with the orange track and And of course, like a lot of kids, put them in a box when I was 11 years old and never saw them again until my mother called me in 1999, handed them back to me in a box, and opened them up. And a friend of mine was with me that day and said, I'll give you $200 for them. I said, no, I'm going to keep them. And within 6 months, I started becoming a full-fledged collector, you know, running ads to buy cars and newspapers. And then 6 months later, the rarest Hot Wheel in the world became for sale, and I said, I'm going for it.

That's Bruce Pascal, and he's a commercial real estate agent in Washington, D.C., although he says you could call him retired. That's how slow the market has been. But back to that rarest Hot Wheels car.

In 2000, I saw an ad for a Hot Wheel for $72,000. And mind you, no Hot Wheel had ever sold for, I think at that stage, over $20,000. And it was the rarest Hot Wheel. It's a pink Volkswagen bus that was made in 1969, and then Mattel discovered it was so tall and skinny, it was so accurate, that it kept falling down on the track. So they took off the top, added metal on the sides, and the Volkswagen bus that was issued to the rest of the world was dramatically different than this prototype. About 50 of these prototypes had escaped the factory in Mattel's employees' pockets, and from 1969 And 2 of them are in pink. And pink is most desirable color 'cause that was a color for girls and most boys beat 'em up with hammers and firecrackers. So it's beautiful, it's rare, and it's the holy grail of the hobby.

Bruce estimates that car is worth $150,000 to $250,000 today. He says he's constantly buying and selling His collection includes between 3,000 and 5,000 cars now and is probably worth $2 million. In addition to cars, Bruce has a collection of rare Hot Wheels documents and merchandise, including blueprints and hand-carved wooden mock-ups and promotional materials. And he got many of these things by finding a 1969 Mattel employee handbook and tracking down as many of the former employees as he could and asking them what they still have in their garages. He says he picked up some extremely rare cars that way. And yes, he goes to conventions at least twice a year, and those conventions attract more than 20,000 people. When you walk into the room, are you the LeBron James of the group just collecting high fives as you walk through, or are there people out there who are even bigger in the, in the hobby than you are?

I'm the 5'6" Shaquille O'Neal. Okay, yeah, I, I, yeah, there, there, there are a bunch. The good news is there are a bunch of LeBron James and Shaquille O'Neals. There's definitely a, a heavy load of, uh, very serious top collectors, and each of us have our own little niche. You know, I'm the historian. A guy named Mike is the completist that has almost every Hot Wheel ever made. Uh, another guy is an expert and wrote books on variations of Hot Wheels that are released. So we all have our own little category. So One may be a center, one may be a shooting guard. Is that a good way of saying it?

I asked Bruce if he still likes the cars that Hot Wheels is making today, and he says it's a modern-day miracle that the cars are still so affordable, and that he still buys new ones, and he thinks Mattel is doing a fantastic job. Okay, back to Mattel. Not all of the changes it has made have been visible to top buyers. Here's Garrick Johnson, who covers Mattel for BMO Capital Markets.

I think the most fundamental change in a company and a business that happened in the last couple of years is the structural simplification program where they eliminated about $1 billion worth of cost from their system. A lot of it, you know, overhead. Some of my favorite examples are eliminating redundant SKUs and rationalization. For example, the number of hairbrushes that American Girl needs, you can cut down those, the number of SKUs.

When Garrick says SKUs, he means stock keeping units or individual items, and by rationalization, he means getting rid of unnecessary items. For example, Mattel's American Girl doll line didn't need quite as many hairbrushes. In all, Mattel was able to carve out $1 billion in costs, which has made it more profitable and made its supply chain easier to manage. Garrick has an Outperform rating on Mattel and a market perform rating on Hasbro. Linda at DA Davidson has buy ratings on both but says she prefers Mattel because it has a more attractive valuation and better consistency and visibility. Back to Enon, I asked about inflation. The U.S. just posted its fastest inflation rate in more than 3 decades. We'll have more to say about that in the weeks ahead. Enan says he recently raised prices, and in the short term, higher costs are affecting Mattel, but over the long term, he expects to be able to offset them with efficiency gains. He expects to take out another $250 million of costs by 2023. He says success can be transformative and that he believes Mattel is entering a growth phase for the next 3 years and beyond.

We are firmly on that journey, both on the toy side as well as putting the building blocks together on the IP side. And in a world where there's virtually unlimited distribution and very sophisticated efficient market, it's going to come down to known big franchises and quality product. And in these two areas, we excel. This is where we have such an opportunity.

Thank you, Enoch, Linda, Garrick, and Bruce. Next week, we'll hear from the CEO of Qualcomm. Send me your questions on any investing topic, and we'll try to answer them on the podcast. Just tape on your phone, use the voice memo app, and send it to jack.houw@investnews.com. @barons.com. Thank you for listening. Jackson Cantrell is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. And if you listen on Apple, write us a review. If you want to find out about new stories and new podcast episodes— what's this? You can follow me on Twitter. It's @JackHough, H-O-U-G-H. See you next week. I got a little excited there at the end.

The Geiger's not liking that one.

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