When setting final-year students at the University of Liverpool their annual task of analysing a company’s financial statements, I usually become very familiar with the stories of Apple, Tesla, Netflix and (perhaps more surprisingly) the UK retailer Marks & Spencer.
Every now and then I come across a student taking on a new company, where I get to dig into a whole new story. This year, the top-scoring student, the excellent Stephanie, decided to take on Mattel. For those who are unfamiliar with Mattel, it is the second largest toy company in the world, second in size only to Lego.
Barbie is Mattel’s flagship yet its potential value is nowhere to be seen
Like many people, I figured that the story was that the company was floating on a Barbie-fuelled high following the success of the 2023 Barbie movie. While there is some truth in this, the company’s financial statements definitely encapsulate some of the problems encountered in modern financial reporting.
Worthless Barbie?
As Barbie is an internally generated brand from Mattel, it goes unrecognised and is therefore assigned zero value in Mattel’s balance sheet. This problem is currently being explored in the International Accounting Standards Board’s (IASB) intangible assets project, a subject I have previously addressed.
In the case of Mattel, few could have predicted the runaway success of Barbie, which led to an overall boost of US$150m to revenue in the form of doll sales, merchandise sales and movie earnings in 2023.
Speaking to investors in a conference call after the earnings release, Mattel executives said they expected the Barbie movie to drive sales for years to come. With an incredibly healthy operating margin of 60% on the dolls, this would be music to the ears of investors.
But the reality is that in 2024 this growth could not be maintained. Sales of Barbie dolls were down 12%, showing that even in the light of positive news, projections should always be treated with a healthy dose of caution.
Allocating goodwill to an entire division can give a misleading picture of performance
This huge fluctuation in popularity of the Barbie brand is reflected within the revenue growth and subsequent fall back towards 2022 levels but is not reflected anywhere within the balance sheet. Conversely, it also means that any potential falls in value of the brand go unrecognised, protecting the profits of Mattel from impairment expenses and removing the ‘sniff test’ as to whether the brand is overstated or not.
While those elements are excluded, it does raise the issue surrounding the relevance of the balance sheet. Barbie is the number one brand listed on Mattel’s website and is in many ways the company’s flagship product, and yet its potential value (or changes in value) is nowhere to be seen.
Overstated goodwill?
While Mattel’s overall sales are reasonably consistent year on year, two brands stand out as struggling. Sales revenues in Fisher Price and American Girl continue to decline. While these are just two of a large number of Mattel brands, both Fisher Price and American Girl were acquired subsidiaries and make up a vast part of a US$1.3bn goodwill balance, one of the largest assets on Mattel’s balance sheet.
The American Girl doll range contains US$200m goodwill and has not produced a meaningful profit since 2016. This does raise investor concerns of overoptimistic forecasting leading to goodwill impairment happening ‘too little, too late’. This was something the IASB tried to resolve in the goodwill project but sadly made little headway on.
Hot Wheels is tapping into the nostalgia market
The Fisher Price goodwill is allocated to Mattel’s North American and international divisions, which makes it difficult to assess whether it requires impairment, as it is swept up along with the performance of other areas. In other words, goodwill performance is shielded by the performance of other assets.
While this may make logical sense, the goodwill relates to the acquisition of a specific brand, so allocating it to an entire division can give a misleading picture of the performance of that acquisition. The fact that the overall division is performing well means that goodwill is not being impaired when perhaps it should be.
To further that case, Forbes reported in 2024 that activist investor James Mitarotonda, founder of Barington Capital, suggested Mattel would be better off without its American Girl doll and Fisher Price divisions, which were ‘putting a dark cloud over the company’ and hurting shareholder value. So investors have concerns, the excellent Stephanie believes the divisions are impaired, and yet no expense is recorded.
The next crossover
One of the divisions that is carrying the above areas is the vehicles portfolio, in particular the Hot Wheels brand. This has made record sales figures six years in a row, and is particularly driven by high numbers of sales to adults. The brand appears to be tapping into the nostalgia market – collectible items are at an all-time high in the US.
Following the success of Barbie, Mattel unsurprisingly announced potential movies across many of its toy lines. While there is little progress on some of these, the director of the movie Wicked, which earned 10 Oscar nominations, has agreed to direct the live-action production Hot Wheels. Based on the success of Barbie and A Minecraft Movie, coupled with the continuing growth of the Hot Wheels line, this just might be the next crossover success.
Like the Barbie brand, the Hot Wheels brand is internally generated and therefore carries no value in the Mattel balance sheet. Overall, this means that the company’s two largest brands are not recorded, while some select brands are. We also have a situation where the potential performance of these unrecognised brands is protecting the value from the acquired brands in impairment reviews, making it tricky to truly judge the assets of the business.
Watch and learn
See the latest video in Adam Deller’s series, looking at luxury brand LVMH’s non-controlling interests
