FOOL PLATE SPECIAL
An Investment Opinion

Mattel's TLC a Scrub

By Dave Marino-Nachison (TMF Braden)
October 4, 1999

Its stock's performance a disappointment over the past year, top toy maker Mattel (NYSE: MAT) was counting on the multibillion-dollar acquisition of consumer software firm The Learning Company (TLC), completed in May, to help boost earnings straight away by jump-starting its move into the electronic entertainment arena.

And all indications as of midyear were that the integration of the $3.8 billion buy was going as planned.

Now, though, with Mattel's first full quarter of TLC ownership on the books, it appears there's still considerable work ahead. The company said in a press release yesterday that it expects the division to report a "significant" revenue shortfall in Q3 -- results are set for release on Oct. 21 -- due to a decision not to proceed with a planned licensing agreement and higher-than-expected returns.

The resultant lower revenues at TLC -- combined with the write-off of bad debts, increased customer benefits, and the termination of certain distributors -- are expected to create a third-quarter loss of between $50 million and $100 million.

Mattel was looking for a profit of about $50 million for the division; it was unprofitable in last year's third quarter as an independent company. Companywide quarterly EPS is expected to be between $0.30 and $0.40 with revenues down between 2% and 4%. Wall Street's consensus estimate was $0.70 per share. The company's stock fell some 20% on the news this morning.

Still, the company insists that the rest of its operations are strong.

"Unfortunately," said Mattel Chairman and CEO Jill Barad, "the Learning Company performance masks the underlying vitality of our core U.S. business." She said over-the-counter sales of her company's flagship Barbie, Fisher-Price, and Wheels brands were strong with shippable orders more than $100 million higher than the company could handle; those shipments will be moved into Q4. It's an encouraging sign for investors who remember last year's announcement that retailers were buying cautiously in Q4.

This story nevertheless highlights the importance of closely watching a company as it works to integrate acquisitions, particularly major ones. It's a serious test of management's acumen as financial, cultural, and strategic issues come to the fore and require attention above and beyond that needed to run a company's core business.

Mattel still appears well-positioned for future growth with heavy tie-ins to the upcoming sequel to Disney (NYSE: DIS) and Pixar's (Nasdaq: PIXR) Toy Story animated feature. Other promising projects include a series of agreements -- like one with Power Rangers pusher Bandai -- and the possibility of a spin-off of its online retail operation.

And we can't forget all of the benefits Mattel expected to reap when it bought TLC in the first place, not the least of which included the opportunity for crossover opportunities for its own brands.

With Mattel shares currently trading at a 52-week low -- which is saying something given the stock's performance -- investors who believe Barad can make the TLC acquisition work might want to start taking a closer look at the company.

But today's announcement highlights the impact that more foul-ups could have on Mattel's performance. Investors should proceed carefully.

Related Links:

• Mattel Web Page
• Mattel Message Board