Third Quarter 2026 Earnings Conference Call - MATTEL INC

Financial Performance:

• Net sales for Q3 2026 grew 4% year-over-year (YoY) to $1.81 billion, or 3% in constant currency.
• Adjusted gross margin improved 480 basis points to 55%, significantly boosted by $88 million in tariff refunds (contributing 490 basis points). Excluding refunds, inflation and higher royalties offset cost savings.
• Adjusted operating income rose $106 million YoY to $502 million; adjusted EPS increased $0.39 to $1.30.
• Advertising expenses increased $25 million to $143 million, primarily due to Mattel163 costs; Adjusted SG&A declined $8 million to $349 million due to lower equity/incentive compensation.
• Free cash flow for the trailing 12 months was $440 million, down from $488 million the prior year, driven by higher capital expenditures.
• Total debt remained comparable to the prior year; cash on hand was $541 million.
• Company opportunistically repurchased $308 million of shares YTD and nearly $500 million on a trailing 12-month basis, with $1.2 billion remaining under authorization.
• Owned inventory at quarter-end was $828 million, comparable to the prior year.

Guidance and Future Outlook:

• Revised full-year 2026 guidance reflects softer point-of-sale (POS) trends and deceleration in the latter part of Q3 continuing into Q4 across major markets.
• Net Sales: Revised to 1–4% growth in constant currency.
• Adjusted Gross Margin: Revised to approximately 48%.
• Adjusted Operating Income: Revised to $500–$570 million.
• Adjusted EPS: Revised to $1.15–$1.20.
• FX expected to benefit full-year sales by ~1%; effective tax rate expected at ~23%.
• Full-year guidance excludes tariff refund benefits; these are not expected to recur in future guidance.
• Management confirmed no 2027 guidance will be provided; updates are expected in February 2027.
• Capital allocation priorities remain: organic growth investment, maintaining investment-grade rating, capacity optimization, strategic external opportunities, and opportunistic share buybacks.
• Management expects to simplify operations and accelerate impact using technology, data, and AI in the coming months.

Business Segments and Product Lines:

• Vehicles: All brands grew; Hot Wheels is on track for a ninth consecutive record year, approaching $2 billion in gross billings and producing ~1 billion cars annually.
• Mattel Brick Shop: A new Hot Wheels building set category combining play patterns with car culture has seen great success; supply chain capacity is being optimized.
• Dolls: Growth driven by partner brands (e.g., K-pop Demon Hunters) but offset by declines in the core Barbie brand.
• Challenger Categories: Action figures and games grew double digits; excluding the Mattel163 license, this segment declined due to the loss of the Pokémon license and order timing shifts.
• Infant, Toddler & Preschool: Declined primarily due to performance at Fisher-Price.
• Regional Performance: North America (+4%), EMEA (+3%), Asia-Pacific (+15%), and Latin America (-3%).
• Hot Wheels Content: The Hot Wheels: Let's Race special reached #2 on Netflix's global top 10; Hot Wheels Ultimate Garage product launch aligns with the content.
• Barbie Strategy: Identified as a priority but currently underperforming; focus is on strengthening core products, innovation, and expanding appeal to adult fans/collectors.

Market and Competitive Landscape:

• Building sets are identified as the fastest-growing category in the toy industry; Mattel is capitalizing on this trend.
• Retailers are increasingly buying closer to demand, resulting in lower retailer inventory levels compared to the prior year.
• Management noted deceleration in POS trends across all major markets, viewing it as a broader industry headwind alongside company-specific execution challenges.
• The company maintains it has ample inventory to supply demand within the revised sales range.

Risks and Challenges:

• Sales Deceleration: Consumer demand softened in Q3 and continues into Q4, leading to revised full-year guidance.
• Barbie Underperformance: Core Barbie brand performance is "not where it needs to be," requiring improved consistency in product and content delivery.
• Licensing Losses: Decline in challenger categories impacted by the expiration of the Pokémon license.
• Inflationary Pressures: Inflation and higher royalties have offset cost-saving initiatives, despite tariff refunds.
• Execution: Management acknowledges the need to improve focus and execution to deliver consistent financial performance, having previously cut into "muscle" during cost-cutting cycles.

Management Commentary and Tone:

• New Leadership: Roger Lynch (Chairman/CEO), Peter Griffith (CFO), and Steve Totski (President/COO) are in transition, replacing previous leadership (Roberto Stanicki moving to Netflix, Adriana Cisneros leaving board).
• Strategic Shift: Lynch emphasized a shift from broad digital/entertainment ambitions to a "toy-centric" strategy, asserting that strong core toy business performance is the prerequisite for successful IP monetization.
• Priorities: Three core priorities announced: (1) Strengthen brands and winning toys, (2) Drive innovation and creativity, (3) Invest with discipline for profitable growth.
• Tone: Cautiously optimistic regarding long-term brand value but realistic and firm regarding the need for immediate financial discipline and execution improvement.
• Confidence: Management expressed confidence in Hot Wheels' trajectory and the long-term relevance of Barbie, despite current headwinds.

Analyst Questions and Answers:

• Cost Cutting vs. Investment: Analysts asked if cost-cutting had compromised future growth. Management responded that past optimizations were necessary but will now focus on efficiency through AI/technology and prioritized investment rather than blanket cuts.
• Barbie Outlook: When asked if Barbie would be down in Q4, management confirmed it remains a priority but currently lags, whereas Hot Wheels remains strong.
• Digital Strategy: Analysts queried the de-emphasis on digital in the new strategy. Lynch clarified it is a "focus change," not a strategy change; digital success is contingent on a strong core toy business.
• POS Deceleration: Management attributed the slowdown to broader consumer trends across all major markets, not just Mattel-specific issues, and confirmed supply chain readiness.
• 2027 Guidance: Management declined to provide 2027 targets, adhering to the historical practice of releasing next-year guidance in February 2027.
• Retailer Inventory: Confirmed retailer inventory levels have declined compared to the prior year due to the shift to buying closer to sales.

Other Key Points:

• Board Changes: Lee Matheson joined the board; Adriana Cisneros stepped down; Peter Griffith joined the board alongside his CFO role.
• Steve Totski's Role: Appointed President and COO, overseeing global brand portfolio and commercial operations with 30 years of tenure at Mattel.
• Roberto Stanicki's Departure: Former CMO stepped down to become Head of Consumer Products & Licensing at Netflix; Mattel expects a continued partnership.
• Mattel163: Mentioned as a significant contributor to Q3 growth in challenger categories, with acquisition of remaining 50% interest factored into cash flow.
• Hot Wheels Ecosystem: The "Hot Wheels" brand strategy involves building sets, content (Netflix), and live experiences (Legends Tour) to deepen fan engagement beyond traditional die-cast vehicles.
• Transition Plan: Paul Rue will remain through the end of the year to ensure a seamless transition to Peter Griffith.