Mattel Inc (MAT) Q3 2021 Earnings Call Transcript

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Mattel Inc (MAT 0.67%)
Q3 2021 Earnings Call
Oct 21, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Mattel Incorporated Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to David Zbojniewicz, Vice President of Investor Relations. Please go ahead.

David Zbojniewicz -- Vice President of Investor Relations

Thank you, operator, and good afternoon everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer; Richard Dickson, Mattel's President and Chief Operating Officer; and Anthony DiSilvestro, Mattel's Chief Financial Officer. As you know, this afternoon we reported Mattel's 2021 third quarter financial results. We will begin today's call with Ynon and Anthony providing commentary on our results, after which we will provide some time for Ynon, Richard and Anthony to take your questions. To help supplement our discussion today, we have provided you with a slide presentation. Our discussion, slide presentation and earnings released may reference non-GAAP financial measures including adjusted gross profit and adjusted gross margin, adjusted other selling and administrative expenses, adjusted operating income or loss and adjusted operating income or loss margin, adjusted earnings or loss per share from which we exclude the impact of $510 million non-cash tax benefit associated with releasing valuation allowances on deferred taxes.

Earnings before interest, taxes, depreciation and amortization or EBITDA, adjusted EBITDA, free cash flow, free cash flow conversion, leverage ratio and constant currency. In addition, we present changes in gross billings, a key performance indicator. Please note that we may refer to gross billings as billings in our presentation and that gross billings figures referenced on this call will be stated in constant currency, unless stated otherwise. Our accompanying slide presentation can be viewed in sync with today's call when you access it through the Investor Section of our corporate website corporate.mattel.com. The information required by Regulation G, regarding non-GAAP financial measures, as well as information regarding our key performance indicator is included in our earnings release and slide presentation, and both documents are also available in the Investors section of our corporate website.

In the second quarter of 2021, we elected to revise prior periods for certain immaterial out of period adjustments, which do not require us to amend previous filings. These adjustments are reflected in our third quarter earnings release and slide presentation, and will be reflected in our 2021 third quarter Form 10-Q. These adjustments will also be subsequently updated on the financial History section of our Investor Relations website at a later date. Before we begin, I'd like to remind you that certain statements made during the call may include forward-looking statements related to the future performance of our business, brands, categories and product lines.

These statements are based on currently available information and assumptions and they are subject to a number of significant risks and then uncertainties that could cause our actual results to differ from those projected in the forward-looking statements, including risks and uncertainties associated with the COVID-19 pandemic. We describe some of these uncertainties in the Risk Factors section of our 2020 annual report on Form 10-K and on our Q2 2021 quarterly report on Form 10-Q. Our earnings release and the presentation accompanying this call and other filings we make with the SEC from time to time, as well as in other public statements, Mattel does not update forward-looking statements and expressly disclaims any obligation to do so except as required by law. Now I'd like to turn the call over to Ynon.

Ynon Kreiz -- Chairman and Chief Executive Officer

Welcome and thank you for joining Mattel's third Quarter 2021 earnings call. Before we begin on behalf of everyone at Mattel, I would like to take a moment to mourn the loss last week of one of the industry is great leaders, Brian Goldner. I had the pleasure of knowing Brian for over 25 years. He was passionate, he was an optimist, he operated with integrity and was a highly respected competitor. He will be greatly missed across our industry and secondly, by many on this call today. Our thoughts are with his family and team at Hasbro. Turning to the third quarter results, Mattel continued its strong performance despite ongoing global supply chain disruption, high inflation in COVID-related lockdowns.

The company exceeded expectations with strong consumer demand for our products. Key highlights for the third quarter, as compared to last year, our net sales grew 8% as reported and 7% in constant currency. This was the fifth consecutive quarter of year-over-year growth in net sales. Adjusted EBITDA was $463 million, essentially flat and cash generation continued to improve with free cash flow for the trailing 12-month growing almost 2.5 times to $320 million. Looking at our performance in more detail. Gross billings, as reported, grew 8% versus the prior year and were up 18% versus the third quarter of 2019 pre-COVID. U.S. grew high single-digits with strength in North America, EMEA and Latin America, more than offsetting the impact of temporary retail closures in several countries in Asia-Pacific.

Third, the NPD Group. Mattel continued to outpace the industry with global market share gains for the fifth quarter in a row, and all regions growing share in the third quarter. Also for NPD, looking at market share by region in the third quarter, Mattel gained 35 basis points in North America, 31 basis points in EMEA, 97 basis points in Latin America and 83 basis points in Australia. Even as brick and mortar improved e-commerce also grew and represented more than 25% of our total POS in-line with our strategy to expand in the and retail and e-commerce space. Our supply chain and commercial organizations were successful in working through global supply chain disruption and closely collaborated with our retail partners in trying to meet consumer demand. The strong performance of our supply chain this year is attributable to our scale expertise and flexible model. We anticipated short supply and longer lead times, and factored that into our planning with mitigating actions. For example we expedited procurement of raw materials, pulled forward finished goods production to increase capacity, invested in additional tooling to dual source manufacturing of critical product lines, leveraged our diverse manufacturing footprint to optimize nearshoring of production, contracted ocean freight capacity and rates in advance and secured access to additional imports and shipping lanes.

The Mattel Playbook is driving consumer demand across multiple categories, and our portfolio strategy is delivering growth overall. The fourth quarter is off to a good start. We expect to continue growing for the balance of the year, gain market share and have a strong holiday season. Our strength is foundational and broad-based. For the third time this year, we are raising guidance for both revenue and adjusted EBITDA for the full year in 2021, and believe we are well positioned to achieve our goals in 2022 and 2023.

Turning to third quarter gross billings and POS in constant currency by category versus the prior year. Dolls gross billings was up 3% led by Barbie, Universal Spirit and Polly Pocket and aligned with POS. Barbie grew globally, up 3% with POS up low-single digits. Gross billings was up 26% year-to-date. Per NPD Dolls continue to gain market share globally and Barbie remained the number one global dolls property in the third quarter and year-to-date. For the full year, Barbie is expected to grow double-digits.

American Girl was flat in the quarter and up 17% year-to-date. American Girl is showing strong results across key metrics, and high consumer engagement, as we enter the biggest quarter with approximately 50% of sales typically occurring in the fourth quarter. For the full year, we expect American Girl to grow high-single digits.

Vehicles grew 5% led by Hot Wheels. Category POS continue to be strong, up double digits. Hot Wheels gross billings grew 4% and was up 20% year-to-date. Global demand was robust across key segments with POS up double digits. According to NPD, Hot Wheels remains the number one vehicles property globally in the third quarter and year-to-date. Hot Wheels is on the road to achieve its fourth consecutive record year of sales.

Infant, toddler and preschool declined 1% in the quarter and was up 8% year-to-date. Category POS was up low-single digits. With particularly strong demand in North America. Fisher-Price Core declined 1% with POS up mid-single digits. Gross billings was up 9% year-to-date. For the full year, Fisher-Price and Thomas is expected to grow for the first time in five years, as the brands' turnaround continues. Per NPD Mattel continued to grow market share in the Infant, toddler and preschool category and Fisher-Price was the number one Infant toddler and preschool property globally in the third quarter.

Action Figures, Building Sets, Games and other our Challenger categories together, grew 25% with exceptional strength in Action Figures and strong growth in Building Sets and other. POS was up double digits. Action Figures continued to benefit from very strong demand with growth of more than 50% in the quarter and 76% year-to-date, driven primarily by Jurassic World, Masters of the Universe and WWE. Building Sets also continue to grow with new offerings and greater distribution driving a double-digit increase for the quarter and 29% year-to-date. Games saw a mid single-digit decline as we lapped high comps a year ago in the search category. POS was up in the quarter led by UNO, and per NPD UNO continued to be the number one card game globally. Other, which includes Plush was up 25% with expanded products tied to Star Wars and new license offerings driving continued growth. For the full year, our challenger categories together, are expected to grow double digits.

The Mattel team continue to execute on our strategy to improve profitability and accelerate topline growth, while also capturing the full value of our IP. While COVID drove industrywide consumer demand for toys, it has also created significant headwinds and ongoing disruption in global supply chain and retail closures. The short capacity in global supply chain also caused significant inflation in ocean freight, which is impacting profitability. That said, Mattel continued to grow well ahead of the industry for the fifth consecutive quarter increasing market share in all our core categories, two challenger categories and all regions in the third quarter and year-to-date, per NPD. We believe that our growth can be mostly attributed to the strength of our brands, quality and breadth of our product, our world class supply chain, global commercial capabilities and very effective demand creation in close collaboration with our retail partners. Our restructured organization and optimizing for growth program together with the pricing action announced last quarter helped mitigate inflationary pressures.

As part of our growth strategy, we are also actively expanding our portfolio of licensed partnership. We are excited to announce that we have renewed our decade long partnership with WWE, which we expect will drive growth. We just announced an expansion of our relationship with business consumer products games and publishing for Disney and Pixar's eagerly anticipated movie Lightyear. This is the origin story of Toy Story's Buzz Lightyear and it is expected to be very toyetic. Mattel has the global licensing rights to develop the toy line for the franchise, which is expected to launch at retailers around the world beginning summer 2022.

We continue to make progress on our mid-to-long term strategy to capture the full value of our IP. Mattel Films is actively working on the development of the 13 live-action projects announced to-date, and Mattel television has launched 8 shows in 2021 with 13 more in production and over 30 in development. During the quarter, Mattel released exciting new content to Netflix including Barbie Polly Pocket, two Masters of the Universe series, as well as expanded global distribution for Thomas and Friends across more than 150 countries. Last week, Mattel launched Barbie Radio in partnership with iHeartMedia and Warner Music Group's Arts Music.

In online gaming, we launched the Hot Wheels Unleashed video game on all major consoles to widespread acclaim, and announced the release of Mattel 163's Skip-Bo mobile game launching next week. This is the third mobile game for Mattel 163 joining our popular UNO and Phase 10 mobile games. During the quarter, we advanced our role as a responsible corporate citizen with the publication of our new Citizenship Report including updated environmental, social and governance strategy and goals. Last week, we announced that in 2020, we achieved 97% of recycled or FSC-certified content in the paper and wood fiber used in our products and packaging exceeding our goal of 95%. The Forestry Stewardship Council has honored Mattel with a 2021 Leadership Awards for Excellence. Mattel was also ranked among Forbes World's Best Employers and Best Employers for Women in 2021.

We are proud and excited to make so much progress in this important area, and continue to focus on our culture and employee well-being. Given our results year-to-date, strong consumer demand and expectations for continued growth in the fourth quarter with a strong holiday season we are raising our full year guidance. We now expect full year net sales in constant currency to increase by approximately 15% and adjusted EBITDA to also increase and be in the range of $900 million to $925 million. Beyond 2021, we reiterate our goals to grow net sales by mid-single digits in constant currency in 2022 and in 2023 and achieve an adjusted operating income margin in the mid-teens by 2023. We also reiterate our expectation to exceed $1 billion in adjusted EBITDA in 2022.

In closing, this was another strong quarter for Mattel with continued consumer demand for our products. We achieved growth and continued to gain market share in spite of significant and unprecedented extraneous challenges. The increased guidance puts Mattel on track to achieve its highest full year growth rate in decades. The company is on a clear trajectory to improve profitability and accelerate topline growth. Our transformation strategy is working and we are operating as an IP-driven high performing toy company. We remain focused on growing shareholder value and look forward to finishing the year on a high note. With a strong holiday season. Thank you. Anthony, over to you.

Anthony DiSilvestro -- Chief Financial Officer

Thanks, Ynon. As you just heard, this was another strong quarter with results exceeding expectations despite supply chain in COVID-related disruptions. Taking a closer look at our results for the third quarter and compared to the prior year reported net sales were $1.762 billion compared to $1.636 billion, an increase of 8% reflecting the strength of our portfolio with gains primarily in North America and across most categories globally. Excluding the impact of currency translation, net sales increased 7%. Adjusted gross margin was 47.8% declining 280 basis points due to the impact of cost inflation, partly offset by the benefit of pricing and cost savings. Adjusted operating income was $401 million compared to $397 million, an improvement of $4 million.

On an as reported basis EPS was $2.29 per share, including a $510 million non-cash tax benefit associated with releasing our valuation allowances on deferred tax assets, reflecting improvements in profitability and future outlook. Adjusted EPS was $0.84 compared to $0.94. The year-over-year comparison is impacted by lower tax rate in the prior year and adjusted EBITDA was $463 million compared to $465 million. Overall, strong results for the quarter, as top line growth. And the benefits from our cost savings program and pricing actions offset the impact of cost inflation. Gross billings increased by 7% in constant currency in the quarter with global POS increasing high-single digits. POS growth outpaced the industry and for NPD, we again achieved market share gains in each of our four regions.

Looking at gross billings in constant currency by region. North America was up 11% with POS increasing high-single digits, driven by growth across the portfolio. EMEA was up 3% with POS increasing high-single digits. Latin America increased 8% with POS increasing by double digits, as we further expanded our leadership position in the region. In Asia Pacific, gross billings declined 22% and POS declined roughly half that rate reflecting the impact of temporary retail closures in several key markets. At the end of the third quarter, except for the Asia-Pacific region, all of the retail outlets that sell our products were open. In the Asia-Pacific region, 4% of stores representing 7% of our revenues were closed and together with the lower retail traffic, more negatively impacted results. Overall, we deliver growth above expectations, despite the impact of supply chain disruption. Adjusted gross margin declined by 280 basis points to 47.8%.

Here is a breakdown of the key drivers. As anticipated, cost inflation had a significant impact of 350 basis points due primarily to increases in materials and logistics. Other factors including mix had a negative impact of 140 basis points, and foreign exchange had a negative impact of 70 basis points. On the positive side, pricing had a positive impact of 110 basis points. As we've discussed, we began implementing incremental pricing actions during the third quarter. The scale benefit driven by our top line growth contributed 90 basis points. Cost savings contributed 80 basis points. In the quarter, optimizing for growth delivered $14 million of savings within cost of goods sold. Moving down the P&L, advertising expenses for $118 million, an increase of 15%, as we continue to drive demand creation to support POS. Adjusted SG&A expenses were $324 million, a decline of 2% primarily driven by benefits from our cost savings programs and lower incentive compensation expense. Adjusted operating income increased 1% to $401 million. The increase was driven by top line growth and lower SG&A, partly offset by a decline in gross margin and higher advertising expenses.

Adjusted EBITDA declined by $2 million or less than 1% to $463 million in the quarter and is up 58% year-to-date. We continue to meaningfully improve our cash flow generation. Cash from operations year-to-date, improved by $186 million to a seasonal use of $256 million driven primarily by gains in net income adjusted for the non-cash impact of the release of the valuation allowances. Free cash flow year-to-date, improved by $153 million driven by gains in cash from operations, partly offset by an increase in capital expenditures of $33 million to support future growth.

On a trailing 12-month basis, we continue to make significant progress in improving cash generation. Free cash flow was $320 million, an improvement of $191 million from the prior year, driven by higher cash from operations, slightly offset by an increase in capital expenditures. As you'll see on the balance sheet, free cash flow has been used to reduce long term debt. On the trailing 12-month basis, we converted 33% of our adjusted EBITDA into free cash flow compared to 21% in the prior year. We believe, we are well-positioned to continue our positive cash flow trends through the fourth quarter and beyond. Taking a look at our balance sheet, we finished the quarter with a cash balance of $149 million, short term borrowings of $128 million and long term debt of $2.570 billion. On a net basis, this compares very favorably to the year ago quarter in which we had cash of $452 million, short term borrowings of $400 million and long term debt of $2.853 billion. The improvement in our net debt position was primarily driven by our free cash flow generation over the trailing 12 months. The reduction in long term debt, reflects our redemption early in the third quarter of the remaining $275 million, principal amount of 6.75% notes due 2025.

The incremental debt reduction will lower annualized interest expense by $19 million, which is an addition to the $40 million annualized benefit from the refinancing transaction completed earlier in the year. We continue to expect, as reported interest expense to be approximately $255 million for 2021 including $102 million of one-time cost associated with the redemption of the 6.75% notes. Accounts receivable increased by $112 million to $1.438 billion, in line with sales growth. We ended the quarter with an inventory balance of $854 million dollars, up $174 million versus the prior year, primarily due to cost inflation and increases to support future growth. The inflation impact on inventories will negatively impact gross margin in the fourth quarter and into 2022.

Our leverage ratio continues to improve meaningfully, we ended the quarter with a debt to adjusted EBITDA ratio of 2.8 times compared to 5.3 times a year ago. As we've stated, we remain focused on strengthening the balance sheet and utilizing excess free cash flow to reduce debt and returning to investment grade metrics, which will provide flexibility to consider other capital allocation strategies in the future. We continue to make good progress on our optimizing for growth program, generating $20 million of savings in the quarter and $69 million year-to-date. We expect to achieve savings of approximately $80 million to $90 million in 2021 and are on track to achieve our total targeted savings of $250 million by 2023, a key driver toward our mid-teens adjusted operating income margin goal by 2023.

As Ynon stated, we are increasing our 2021 net sales in constant currency and adjusted EBITDA guidance relative to the guidance we provided last quarter. We now expect net sales to increase by approximately 15% in constant currency, up from our prior guidance range of 12% to 14%. Full year net sales growth reflecting the strength of our portfolio is expected to be driven by Dolls, Vehicles, Action Figures, Infant Toddler Preschool and Building Sets categories. We also forecast full year growth in our three power brands, Barbie, Hot Wheels and Fisher-Price and Thomas, as well as American Girl. This net sales guidance reflects our expectation for continued growth in the fourth quarter. Guidance for gross margin has not changed, we continue to expect adjusted gross margin to decline to a range of 47.6% to 48.1%.

The gross margin guidance is impacted by cost inflation partly offset by savings from our optimizing for growth program and pricing actions, including those that we're implementing in the second half. We are increasing guidance for adjusted EBITDA by $25 million to a range of $900 million to $925 million. As we did last quarter, we are providing guidance for tax expense. On an as reported basis we now forecast tax expense to be a net benefit in the range of $390 million to $400 million including the benefit of releasing the valuation allowances and the impact of other tax-related adjustments. Forecasted capital expenditures are still expected to be approximately $150 million to $175 million including capacity additions to support growth.

The guidance takes into account the anticipated supply chain disruption that we are aware of today, but is still subject to any unexpected supply chain disruption, market volatility and other macroeconomic risk and uncertainties. Looking beyond 2021, we are well positioned to achieve our goals of mid-single digit net sales growth in constant currency in 2022 and 2023, and an adjusted operating income margin in the mid-teens by 2023, as well as exceed $1 billion in adjusted EBITDA in 2022. We look forward to providing guidance for 2022 on our fourth quarter earnings call. In closing, this was another strong quarter for Mattel. We are very pleased with our overall financial performance, and remain focused on growing shareholder value. I will now hand it over to the operator for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Eric Handler with MKM Partners. Please go ahead.

Eric Handler -- MKM Partners -- Analyst

Good afternoon, and thank you for the question. So, congratulations on the the Light Year license. I'm guessing that was separate from the Toy Story deal, do you still have overall Toy Story license? And if we could go back to the last Toy Story movie, I seem to remember expectations of revenue something in excess of $200 million of retail sale. Is that still, do you think that's a good starting point for Light Year?

Ynon Kreiz -- Chairman and Chief Executive Officer

Hi, Eric. This agreement is separate from what we've done to-date. We are not providing specific guidance for this particular partnership, but as we said in the prepared remarks it is expected to be a very toyetic movie. So, it's a meaningful addition to our portfolio.

Richard Dickson -- President and Chief Operating Officer

And Eric its Richard. We still maintain the origin story of the original Toy Story movies of which we continue to market and sell products against.

Eric Handler -- MKM Partners -- Analyst

Great, thank you very much.

Operator

Your next question comes from the line of Tami Zakaria with JPMorgan Chase. Please go ahead.

Tami Zakaria -- J.P. Morgan -- Analyst

Hi, thank you so much for taking my question. So, could you provide any color on the POS trends you're seeing quarter-to-date, given you're lapping Amazon Prime Day from last year?

Anthony DiSilvestro -- Chief Financial Officer

Sure. This is Anthony. Look, we are off to a strong start in the fourth quarter, and look ahead to a strong holiday season.

Tami Zakaria -- J.P. Morgan -- Analyst

Got it. That's helpful. If I could ask one more follow-up. I think, Fisher-Price POS was up about mid-single digit in the quarter, but it seems like shipments were down about a point. Can you help us understand the gap there?

Richard Dickson -- President and Chief Operating Officer

Sure. It's Richard. Hi. Despite a decline in gross billings for the first quarter, the POS, as mentioned remains strong. We grew our market share per NPD, the segments of growth were really little people, infant newborn and Imaginex. We saw growth in North America and the decline in gross billings was primarily attributed to Asia-Pacific because of COVID lockdowns. NPD also mentioned, as well that Fisher-Price is the No.1 Infant toddler pre-school property globally in the third quarter, as well as year-to-date and we expect growth in the category for 2021.

Operator

Your next question comes from the line of Steph Wissink with Jefferies. Please go ahead.

Stephanie Wissink -- Jefferies -- Analyst

Thank you, good afternoon, everyone. Anthony, I think this one might be best for you, but it's a question related to pricing. I think if I jotted it down correctly, you said about 110 basis points of benefit in the third quarter. How should we think about the benefit you expect to see in the fourth quarter? And I think you also mentioned that you expect margins to be down again, I'm just trying to reconcile benefits from price both in sales guidance and margins. And then anything you want to help us think through in terms of '22, just the anniversarying of those price increases and how that should factor into our gross margin bridge for '22? Thank you.

Anthony DiSilvestro -- Chief Financial Officer

Sure. As we said in the remarks, pricing, it did have a benefit of 110 basis points in Q3, but that does not not yet reflects all the incremental pricing actions that we're implementing in the second half. So, we should have a greater pricing benefit in Q4. That being said, our gross margin guidance implies a decline of about 300 basis points of gross margin in Q4. Obviously, the biggest driver of that is cost inflation, which we expect to partly offset with the pricing actions we're implementing, as well as continued savings from our Optimizing for Growth program. It's a little early to talk about 2022, and we look forward to providing guidance for '22 on our fourth quarter earnings call. And lastly, I'll just add, I mean, as Ynon stated in the remarks, we do expect to exceed $1 billion of adjusted EBITDA in 2022.

Stephanie Wissink -- Jefferies -- Analyst

Okay. And what are you assuming in your sales guidance for the benefits of price in the fourth quarter?

Anthony DiSilvestro -- Chief Financial Officer

We're not going to get specific on the magnitude of the pricing action, for competitive regions -- reasons, but we are implementing those pricing actions. It's going well. We haven't seen any negative response in terms of consumer purchases that will continue to implement those programs.

Operator

Your next question comes from the line of Kocharyan with UBS. Please go ahead.

Arpine Kocharyan -- UBS -- Analyst

Hi, thank you. And this is Arpine. You're probably very well aware there is considerable concern among investors regarding supply chain disruption, and what it could mean for the holiday season? And primarily what risks it poses for the first half of the year? Could you spend a few minutes going over the tightest contingency measures you have taken to sort of mitigate any unanticipated disruption? And also if you could detail what percentage of your volume, do you expect to go through direct import programs in Q4, if you have a sense at this point, which I'm hoping you do? Thank you.

Ynon Kreiz -- Chairman and Chief Executive Officer

Yes, hi, Arpine. During the third quarter our supply chain and commercial organizations were very successful in working through global supply chain disruptions. And it's not that we were not impacted, but we did anticipate short supply and longer lead times, and factor that into our planning and took very specific mitigating actions. A few -- some of the examples we talk about is how we expedited procurement of raw materials, we pulled forward finished goods production to increase capacity, we invested in more tooling in order to dual source manufacturing of very specific product lines where we expected shortage. We leveraged our scale, our diverse manufacturing footprint to optimize near shoring of production, we also contracted ocean freight capacity and rates in advance and secured access to additional ports and shipping lanes, which appears obvious in hindsight, but we were ahead of the game. And this is really where our scale expertise and flexible supply chain -- all the work we've done over the last three years, is working to our advantage. And with that we are ready for a strong holiday season, and do what we can to meet the strong demand for our product.

Anthony DiSilvestro -- Chief Financial Officer

And to the second part of your question, we don't really see it, we don't really expect to see any material change in the mix of trade and direct import going ahead.

Arpine Kocharyan -- UBS -- Analyst

Would you say that could be as much of north of 40% of your volume, could you just like breakdown. I know during the tariff period, tariff disruption, it could have been as low as 35% and above, but could you kind of give a sense of what that -- where that percentage stands?

Anthony DiSilvestro -- Chief Financial Officer

Yeah, I mean we are not going to get into that level of detail for competitive reasons.

Arpine Kocharyan -- UBS -- Analyst

Okay, no problem. Thank you, everyone, and great job. Thank you.

Ynon Kreiz -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Drew Crum with Stifel. Your line is now open.

Drew Crum -- Stifel Nicolaus -- Analyst

Okay. Thanks. Hey guys, good afternoon. Just talk about your experience with Masters of the Universe in terms of product sales. Anything separate from any content revenue recognized from Netflix? And what would be the next marker for this brand? And then I have a follow-up for Anthony.

Richard Dickson -- President and Chief Operating Officer

Sure. We are incredibly pleased with the progress and momentum, not only with Masters of the Universe but the entire Action Figures category. I mean, we've been consistently growing share in this category all of 2021. We are particularly excited about Masters of the Universe. The relaunch has been going incredibly well, product is performing, content is working. During the quarter, we released two series, which we have part two, actually, Masters of the Universe Revelation, that's premiering on Netflix next month. Our performance in Action Figures really is a great example of the successful execution of our category structure.

And we've been applying this methodology across our portfolio to existing properties like WWE, Jurassic and Minecraft, and it's really showing up on the scoreboards. 2021, it's been a phenomenal year for Action Figures, of course, with the excitement with Masters of the Universe as Mattel IP, but 2022 is going to be even bigger, and better. Jurassic World, Minions, we just renewed our license with WWE and of course the expansion of Disney Pixar's Lightyear, we are incredibly excited about the category and certainly Masters of the Universe is a prized performed property.

Drew Crum -- Stifel Nicolaus -- Analyst

Okay. Thanks, Richard. And then my follow-up for Anthony. The updated guidance for '21 would imply an adjusted EBIT margin in the low-teens range. If my math is correct, kind of of 13, 14 percentage. Does that suggests you're pacing ahead of you goal for the mid-teens threshold by fiscal '23 and does it cause you to rethink that goal with perhaps something higher?

Anthony DiSilvestro -- Chief Financial Officer

Yes. So we are making great progress against our goal of an adjusted mid-teens OI margin by 2023. I'm not going to sit and tell you we're ahead of that. But with the success we're seeing on our Optimizing for Growth program, the scale benefit we're getting from a higher top line, we are well on our way. And I think when we get to our fourth quarter call, we'll be able to provide more specific 2022 guidance then.

Operator

Your next question comes from the line of Gerrick Johnson with BMO Capital Markets. Please go ahead.

Gerrick Johnson -- BMO Capital -- Analyst

Hi, good afternoon. Thank you. I want to talk about gaming for a second. Your Hot Wheels Unleashed game came out to great reviews, looks really cool. Just wondering about the economics of that a fact to be material to you guys and then other digital initiatives behind that, like UNO mobile and others. Thank you.

Ynon Kreiz -- Chairman and Chief Executive Officer

Hi, Gerrick, we're not providing specific by project, but the message here is that we are growing our digital gaming activity. There is a strategic priority for us as part of our mid to long term strategy to capture the full value of our IP. Given the strength of our catalog, we believe there is significant opportunity for us to go -- to grow in in digital gaming, increased brand engagement and capture more opportunities outside of the toy aisle. So, yes, we got -- it was very -- out with a very positive reviews. We also launched another game as part of Mattel 163, our mobile gaming platform. This is a third game to come out on our own mobile gaming platform. And with that you will see additional activity in in digital experiences, not just gaming, but also NFT and other digital opportunities.

Gerrick Johnson -- BMO Capital -- Analyst

Thank you.

Operator

Your next question comes from the line of Mike Ng with Goldman Sachs. Please go ahead.

Michael Ng -- Goldman Sachs -- Analyst

Hey, good afternoon. Thank you very much for the question. I just wanted to follow-up on an earlier question about supply chain issues. Could you just give us a status update about where some of the biggest supply chain challenges are today, and how those challenges may have evolved over the last couple of months? And then separately, you talked a little bit about the flexible supply chain as a mitigant and how important is it to own your manufacturing facilities to actually be able to navigate through these supply chain challenges? Thank you very much.

Ynon Kreiz -- Chairman and Chief Executive Officer

Right. Hi, Michael. So, look, the -- I will start with the second question. In that we do believe that owning our own manufacturing especially, in relation to dolls and diecast where we have so much scale that gives us a competitive advantage in terms of cost, quality and service. We do have the ability to design for -- to do -- to have a strategy of design for manufacturing principle to drive down cost, improve quality, increase speed to market and all-in-all, allowed us to to perform so well in control and be in control of a of a key part of the chain.

In terms of the challenges. What type of challenges we're seeing? Look it does, it's not different from what you're reading and what everyone sees in terms of logistics, short supply on the on distribution capacity, but as we said earlier, given our scale given our expertise and how we evolved our supply chain platform to be more nimble, more flexible, be able to mobilize resources and shift manufacturing and distribution where needed. We were able to to manage through the disruption. And again, I want to say, this is not that we were not impacted. But even with that, we were able to grow our business, capture market share and position the company for growth in the fourth quarter and the holiday season.

Michael Ng -- Goldman Sachs -- Analyst

Great, thank you, Ynon. And if I could ask a follow-up question on Richard's comments regarding Action Figures. Obviously, a tremendous amount of strength in the quarter of 50% was that primarily, Masters of the Universe? I know you mentioned Jurassic World as well. I was just wondering if there was a specific content catalysts or something that you call out for Jurassic World that drove a lot of strength and how should we think about Action Figures growth from here on out? Thank you.

Richard Dickson -- President and Chief Operating Officer

Yeah. As I mentioned, and very specifically, I think this is really about our portfolio strategy. I mean, clearly, we've got a great portfolio of brands and the growth is really comprehensive. Jurassic has certainly been a successful partnership for us and we continue to see great growth. As we mentioned WWE has been a partner of ours for over a decade, so we're very excited about the renewal and we've got lots of great plans ahead.

As we look forward and we recognize our extension with the Disney partnership with Light Year, we're clearly looking at a continued growth in the category. I mean, as you can see it's already been a great year for Action Figures I mentioned as well. We've been consistently gaining market share in 2021 and 2022 is going to be an even bigger year. Masters specifically is a great story in relation to our overall strategy. Taking IP, unlocking the value, creating a franchise plan, working with content partners, driving toy product, both for adults as well as kid with a consumer product component and we're really starting to get traction in that strategy. So, overall Action Figures is definitely an exciting category for us.

Ynon Kreiz -- Chairman and Chief Executive Officer

And Michael, I just want to build off on what Richard said in talking about the portfolio, and how we run our Action Figures. This is really how we run the entire company. When we shifted to the category structure, the opportunity was to grow our business across all the full portfolio at scale. And the way you do that is through the category management strategy. If you look at our performance year-to-date, while -- we outgrow the industry growth rate by 1.7 times. So, this is not just growth relative to our own performance last year, but by industry standard we grew, where the industry grew in the third quarter by 6.4%, we actually grew by 11.5%. So, well ahead of the industry, and a lot of it is driven by our strategy, portfolio strategy. But of course, execution across the enterprise, including strong performance by our supply chain, as well as our commercial organization. And this is where the entire company is working hand-in-hand to follow our strategy, and you're seeing the results in the numbers.

Operator

Your next question comes from the line of Alok Patel with Berenberg Capital Markets. Please go ahead.

Alok Patel -- Barenberg Capital Markets -- Analyst

Hi, thanks for taking my question. So, I noted in Q1 that you guys said resin and freight was approximately 15% of COGS, where does that stand today in Q3? And I think you guys also said you were expecting 35% inflation in those two items, what are your expectations for inflation going forward?

Richard Dickson -- President and Chief Operating Officer

Yeah, I'll take that. Things have gone a little, a little bit worse on the inflation front, we made some adjustments in our Q2 guidance. So, those 2 items resin and ocean freight, as you said they are somewhere around 15% to 20% of our cost base. And our latest estimate is that on a combined basis, they're increasing by a rate of 50%, so a little bit higher than the 35% we talked about earlier.

Alok Patel -- Barenberg Capital Markets -- Analyst

Okay. And I want to quick. Go ahead.

Richard Dickson -- President and Chief Operating Officer

I was just going to add that on a year-to-date basis, we've successfully offset all of that inflation in our gross margin through a combination of pricing, savings from our cost savings program as well as the scale benefit associated with our top line growth.

Alok Patel -- Barenberg Capital Markets -- Analyst

Okay, great, that actually was going to be my follow-up. I guess one more question. Are you guys taking on any hedging activities, mitigate some of the impact on the margins from these costs?

Richard Dickson -- President and Chief Operating Officer

Yeah. We have a pretty robust program across a number of commodities through a combination of advanced purchases and through financial hedges to basically lock-in for a period of time, so we're delaying the impact and that gives us some time to make adjustments such as the pricing actions that we're taking in the second half.

Alok Patel -- Barenberg Capital Markets -- Analyst

Okay, great. That's all I had. Thanks.

Operator

And your last question comes from the line of Jim Chartier with Monness, Crespi Hardt. Please go ahead.

Jim Chartier -- Monness, Crespi & Hardt -- Analyst

Hi, thanks for taking my question. It looks like on the balance sheet the inventory is pretty well positioned up over 20% on a two-year basis, which was stronger than your sales growth on a two-year. So I'm just curious, how much of that is in transit and make, be delivered late? And then, what is your inventory look like at retail at the end of third quarter? And where do you expect will end the year? Thanks.

Anthony DiSilvestro -- Chief Financial Officer

Yeah, I think there's two parts to the question. Yes, our inventories are up on the balance sheet year-over-year, I think about $174 million and there's two drivers of that. One is the cost inflation I just talked about, and the other part is increases to support future growth. In terms of retailer inventories, we ended the quarter with retailer inventory levels up mid-single digits in dollars compared to last year, but down low-to-mid single digits when you look at weeks of supply, and when you factor in the recent increases in POS. I think net-net, we believe, we are well-positioned as we head into the fourth quarter in the holiday season, and are working closely with our retail partners.

Jim Chartier -- Monness, Crespi & Hardt -- Analyst

Great, thank you.

Operator

That concludes our question and answer session for today. I will now turn the call back to our Chairman and CEO, Ynon Kreiz for final comments.

Ynon Kreiz -- Chairman and Chief Executive Officer

Thank you, operator. Just to say in summary, that our third quarter performance shows that we are operating as an IP-driven high performing toy company, you are seeing it in the numbers you're seeing it in the results. And while the industry as a whole has been growing strongly, we have been gaining market share for five consecutive quarters. There is strong demand for our product, we are entering the fourth quarter with great momentum, and are off to a good start toward a strong holiday season. We continue to successfully navigate global supply chain disruption that it is what the industry is facing as a whole, but we are on track to achieve our highest full-year growth rate in decades, having just raise our guidance for the third time this year. We are clearly executing on our strategy to improve profitability and accelerate topline growth, and appreciate you following our journey. Thank you for your time. We appreciate all the questions and the interest in Mattel, and we'll be happy to answer more questions offline. And I'll turn it back to Dave. Thank you, Dave.

David Zbojniewicz -- Vice President of Investor Relations

Thank you, Ynon, and thank you, everyone, for joining the call today. The replay of this call will be available via webcast and audio beginning at 8:30 PM Eastern Time today. The webcast link can be found on our Investor page or for an audio replay, please dial 404-537-3406. The passcode is 6941839. Thank you for participating in today's call.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

David Zbojniewicz -- Vice President of Investor Relations

Ynon Kreiz -- Chairman and Chief Executive Officer

Anthony DiSilvestro -- Chief Financial Officer

Richard Dickson -- President and Chief Operating Officer

Eric Handler -- MKM Partners -- Analyst

Tami Zakaria -- J.P. Morgan -- Analyst

Stephanie Wissink -- Jefferies -- Analyst

Arpine Kocharyan -- UBS -- Analyst

Drew Crum -- Stifel Nicolaus -- Analyst

Gerrick Johnson -- BMO Capital -- Analyst

Michael Ng -- Goldman Sachs -- Analyst

Alok Patel -- Barenberg Capital Markets -- Analyst

Jim Chartier -- Monness, Crespi & Hardt -- Analyst

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