Turnaround whiz hits wall as Bratz take a bite out of Barbie.

WHAT happens when a turnaround specialist fails to deliver a turnaround? After four years as chairman and chief executive of Mattel Inc., Robert Eckert still oversees a company with lackluster earnings, a depressed stock price and a shrinking market share for its star brand, Barbie.

Mattel reported a 73 percent drop in first-quarter earnings to $9 million, compared with $32.8 million for the like period a year earlier. Sales rose 5 percent, to $780.9 million.

Eckert inherited a troubled company from his predecessor, Jill Barad, who was ousted after the disastrous $3.5 billion acquisition of software maker Learning Co. Mattel's stock, which had traded above $40 a share in March 1998, fell to $9 by the time Barad resigned in early 2000.

While shares have recovered to $17.74 as of May 26, analysts complain that management is mired in cost cutting and quick fixes, such as stock repurchases, rather than focusing on developing new toys.

"Mattel may be exhibiting the characteristics of a classic value trap," said Banc of America Securities analyst Gary Cooper in an April report, citing problems with Barbie and disappointing earnings.

Through Mattel spokeswoman Lisa Marie Bongiovanni, Eckert declined comment. Bongiovanni said Eckert's restructuring efforts were positive and had raised cash flows. "Obviously we've been struggling with the top line and it's something we are addressing," she said.

Analysts also fault Eckert for failing to respond quickly to competitors--most notably, the creator of the Bratz line of dolls, who happens to be a former Barbie designer. In April, Mattel sued the former employee, Carter Bryant, for breach of contract.

Bongiovanni wouldn't say whether, as some have speculated, the Bratz concept was rejected by Mattel before Bryant took it to MGA Entertainment Inc. of Northridge.

The lawsuit "doesn't have anything to do with the Bratz doll," said Bongiovanni. "There's evidence to show that Carter Bryant, while working for Mattel, also worked for a competitor."

Through MGA, which is not named in the Mattel lawsuit, Bryant declined comment.

Some of Mattel's problems are emblematic of the often-fickle toy industry, which has suffered a rough three years because of the downturn in the economy and consolidation among retailers.

With KB Toys Inc., FAO Schwartz Inc. and eToys Inc. gone bust, big-box stores are demanding discounts that cut into the profit margins of manufacturers. Target Corp., Toys R Us Inc. and Wal-Mart Stores Inc. now account for 85 percent of all U.S. toy sales.

"There has been a .sea change in retail distribution," said Bruce Stein, a former president and chief operating officer at Mattel, who now runs the Hatchery LLC, a product incubator in Los Angeles. "Since those retailers have moved from just-in-time to just-this-instant delivery, it has impacted Mattel's ability to sell in the large quantities they were accustomed to, which will depress earnings."

In addition, Mattel has lost several top executives and key designers, including Ivy Ross, who headed up design and packaging for Mattel's girls' division. The company has since merged its boys' and girls' divisions under executive Matthew Bousquette, president of Mattel Brands.

Perhaps the biggest challenge is a continuing reliance on three core brands. Barbie accounts for 30 percent to 35 percent of total sales, Fisher-Price 25 percent to 30 percent, and Hot Wheels 24 percent to 28 percent.

Cooper said Eckert must find a way to stabilize Barbie, which is losing key shelf space at Target and Toys R Us to Bratz dolls. "Mattel's lack of diversity actually leaves the door open to risk," he wrote in his note.

Despite a 19 percent decline in its stock in the past year, Mattel's board awarded significant bonuses and loan forgiveness to Eckert, who received a base salary in 2003 of $1.25 million, a bonus of $634,000 and $11 million in the forgiveness of principal and interest on a loan approved by the board in 2000. (The board also came under attack for agreeing to a rich severance payout to Barad and loans to other executives.)

The Sarbanes-Oxley Act of 2002 bans any personal loans made to officers or directors.

"We really see it as a retention bonus," said Bongiovanni, noting that shareholders have been rewarded by "keeping these executives to manage the day-to-day activities of the company."

Mattel Inc.

YEAR (Dec. 31)                          2003               2002

Revenue (millions)                  $4,960.1           $4,885.3
Total Expenses (millions)            4,174.4            4,151.8
Operating Income (millions)            785.7              733.5
Net Income (millions)                  537.6              230.1
Earnings Per Share                     $1.22              $0.52

SUMMARY

Business: Toy maker
Headquarters: El Segundo
CEO: Robert Eckert
Market Cap: $7.48 billion Dividend Yield: 2.3%
Total Liabilities: $1.9 billion P/E Ratio: 15.2
Long-Term Debt: $589 million

Staff Reporter Kate Berry can be reached at [phone], ext. 228 or at [e-mail].