Mattel grows on the back of Barbie and Hot Wheels, concludes whistleblower case

Toymaker Mattel's gross sales grew 3% in the third quarter of this year, led by Barbie and Hot Wheels, which contributed US$413 million and US$293 million respectively. Barbie grew 10% year-on-year (yoy) in the third quarter and 9% for the year to date. Meanwhile, Hot Wheels posted 25% yoy for the third quarter and 13% in 2019.

Overall, Mattel saw strong growth across all regions in the third quarter. In Asia Pacific, it grew 14% yoy with US$100 million in international gross sales. For 2019, the region grew marginally at 1%, reporting US$279 million in gross sales. By category, worldwide gross sales for dolls were US$567.6 million, up 5% compared to the prior year?s third quarter. It is driven by growth in Barbie partially offset by a decline in American Girl.

Worldwide gross sales for vehicles were US$346.9 million, up 13%, driven by growth in Hot Wheels partially offset by a decline in CARS and Jurassic World vehicles. Worldwide gross sales for action figures, building sets and games went up?12% to US$311.4 million, driven by Toy Story 4 and MEGA partially offset by Jurassic World.

However, worldwide gross sales for infant, toddler and preschool were down 11% at US$431.0 million due to declines in Fisher-Price Friends and Power Wheels.

Mattel chairman and CEO Ynon Kreiz said the third quarter performance demonstrates the continued momentum of the company's "multi-year turnaround and consistent progress in transforming Mattel into an IP-driven, high-performing toy company". He added that Mattel has been executing "very well" on its?strategy to restore profitability, and is?starting to see positive revenue trends with growth for the second quarter in a row.

Financial reporting lapses

Alongside the release of the earnings, Mattel has also announced the departure of its CFO Joseph J. Euteneuer, who is?serving a transition period of up to six months. The news comes after an internal investigation into a whistleblower's letter in August?found errors in publicly-filed Mattel financial statements for the last two quarters of 2017.

In a statement, the company said the investigation determined that the income tax expense was understated by US$109 million in the third quarter of 2017, and overstated by US$109 million in the fourth quarter of 2017, with no impact for the full year. The errors were non-cash, did not affect operating income or EBITDA, and had no impact on Mattel?s full year financial results for 2017 or subsequent periods.

There were also failures to properly consider and disclose such errors to the then-CEO Margaret Georgiadis, and the audit committee once they became known. Factors that contributed to these failures include "a confluence of one-time events; management?s reliance on the accounting advice sought and received on the error from the lead audit engagement partner of Mattel?s outside auditor; and lapses in judgement by management".

However, the investigation did not find that management engaged in fraud.?The audit committee also concluded that the objectivity and impartiality of Mattel?s outside auditor has not been impaired.

In light of the findings, Mattel will undertake a series of remedial actions, including restating the last two quarters of 2017, and certain related information, as well as strengthening its internal control over financial reporting.

Kreiz said the audit committee has identified issues and control weaknesses that need to be addressed. To help ensure that the matters identified by the investigation do not recur, he will work with the audit committee and board to enhance accounting and independence policies, internal controls and employee training. "We will ensure these issues are resolved thoroughly and quickly so that we can continue to execute on our strategy with the highest level of internal control and diligence," he added.

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