The current economic environment could make for a challenging holiday shopping season for Mattel, the world's largest toy manufacturer. Chief Executive Bob Eckert admitted to analysts on the third-quarter 2008 earnings call that borrowing difficulties were making it harder for some of the company's retail distributors in Western Europe to acquire Christmas toy inventories, and that some of its smaller Chinese vendors -- hurt by rising raw material and labor costs -- had folded their Asian operations. In addition, the company's account receivable collectibility risk rose for the three-months ended September 30, according to its recent FORM 10-Q regulatory filing:
- Mattel expects that some of its customers and vendors may experience difficulty in obtaining the liquidity required to buy inventory or raw materials. Mattel monitors its customers' financial condition and their liquidity in order to mitigate Mattel's accounts receivable collectibility risks. During the three months ended September 30, 2008, bad debt expense increased approximately $10 million as compared to the corresponding period in the prior year as a result of certain customers facing financial difficulties.
Management is confident that as it enters the important fourth quarter, it can partner with its customers and vendors to mitigate risk and position Mattel for a successful holiday season. At October 20, debt-to-total-capital ratio was a manageable 37 percent, reflecting ample liquidity to fund is business needs -- and those of its customers -- with $447 million in cash and access to a $1.3 billion credit facility.
Although gross margin fell 80 basis points year-on-year to 46.2% in the quarter-ended September 30, attributable to higher raw material costs, management has adeptly managed supply and demand. Receivables were $1.7 billion, or 79 days of sales outstanding, down one day versus last year; and, inventories at $751 million represented 55 days of supply, which was seven days lower than last year.
Eckert said early feedback signals Mattel and Fisher-Price toys, including Diamond Castle, Hot Wheels Trick Tracks, American Girl's Bitty Twins, and Fisher-Price's Laugh & Learn toys are already topping 'must have' holiday toy lists for parents and their children alike. In addition, most online outlet and some stores quickly sold out of initial inventories of the latest update of the Sesame Street character fave, called Elmo Live!, which launched last week.