All right, great. Thank you everyone for taking the time to join us this morning. My name is Stephen Laszczyk, and I am the lead entertainment analyst here at Goldman Sachs. We are excited to welcome back to the retail conference this year, Ynon Kreiz and Paul Ruh, the CEO and CFO of Mattel. Thank you both for being with us today.
Thank you, Stephen, for inviting us. Always good to be here.
Great. Maybe to start us off, Ynon, Paul, would love to just maybe start with a theme coming out of last quarter's earnings, where you said consumer demand remained healthy and that top-line growth had continued into the third quarter. Would love just with maybe another five or six weeks more of data behind you to get your latest sense of what you are seeing today in terms of consumer demand and retail ordering patterns.
Sure. Let us take a big picture view of the toy industry as a whole, which is having a very strong year. The toy industry as a whole is growing double digit. In fact, this is broad- based. The primary drivers are games, trading cards, action figures, vehicles, and building sets. As a whole, the industry is growing strongly. In fact, according to Circana, which tracks 17 different general merchandise retail categories, toys is by far the largest driver. Even when you take out trading cards, which benefited from the World Cup, toys as a category remains a very strong driver. We have talked about it before. Toys is a growth industry. The industry has grown in 23 out of the last 25 years, and it plays into a fundamental human behavior.
It's a strategic category for retailers, and we expect the toy industry to remain healthy and continue to grow. That growth, by the way, is driven both by units and price so far year to date. Within this environment, we are also seeing growth and momentum in our business in consumer demand, which is positive quarter to date. We are seeing growth across categories driven primarily from Mattel by vehicles and action figures, and in some areas that are importantly becoming a key part of our portfolio, including building sets and Mattel Brick Shop. We are very confident about continued growth and expect to achieve our full year guidance in this environment.
Great overview. I want to dive into a lot of those key themes a bit more. Maybe, Ynon, you mentioned the annual guide. Last quarter, you reaffirmed the full- year guidance, and within that, there were some moving pieces. Would love if you could maybe just take a look back on the year, and talk a little bit about what you've seen as the biggest drivers, both positive and negative, in terms of how this year has played out.
Sure. Happy to talk about how the cadence of the year we've evolved. Overall, as we say, we are reiterating guidance. We are confident in what we are seeing in the balance of the year. There are some puts and takes, as you well say, and it's more a matter of how things will evolve between Q3 and Q4 rather than how the full year will look like. If I go down the P&L, if I start with the top line, we have a wonderful array of activations for the balance of the year. That will certainly be a driver. On the other side, given the shift in retailer ordering patterns that we observed last year, now they're largely stabilized, but that will shift sales more toward the fourth quarter.
What you will see is more of a back-loaded towards Q4 sales momentum, but it's also substantiated with the activations that we're seeing, with the movie slates that we're seeing. All of that gives us confidence that over the second half of the year, we will be pretty good in terms of the top line. If I go down the P&L, when it comes to gross margin, there's some puts and takes as well. We have definitely seen on the headwind side, we have seen higher inflation. That's a reality given the Middle East conflict. We've seen higher inflation in commodities, in packaging materials, in labor, in shipping costs. We also have things going our way, and we have some tailwinds as well.
One of them is favorable forex inflation. Also, the tariffs assumptions that we planned as we went into the year are materializing to be slightly lower. All of that puts and takes gives us confidence that we will be within the guidance range of approximately 50% that we talked about. Going down further into the P&L, we continue to manage our expenses very judiciously. As you heard us talk in the last earnings release, we are managing the digital advertising spend prudently to make sure that it matches the launch of our digital games and that we are maximizing the return on our investment. As you can hear, we are progressing well. There are some shifts between Q3 and Q4. There are tailwinds and headwinds, but overall, we are confident in the guidance that we just talked about.
That is helpful, Paul. Maybe just to put a finer point on that, it sounds like the guide for approximately 50% gross margin this year puts and takes, but on net, it works out into that range. Would love just any cadence commentary on SG&A and advertising expense in the back half.
In terms of the gross margin, as I said, still targeting approximately 50% for the full year. In terms of cadence, it is worth remembering a couple of things. Number one, we are seeing higher inflation, but remember, as we go into the fourth quarter, last year, we had approximately 500 basis points of higher promotional spend. We do not expect that to happen anymore this year given a couple of things. Number one is the innovation that we are seeing, the product slate, the movie slate that we are seeing, but equally important, we do not see the highly promotional environment materializing this year any longer. The industry has come in with a proper level of inventory, both the retail inventory and also our inventory are at the appropriate level. We see less pressure to drive a more normalized in promotional environment. That is on the gross margin side.
On the SG&A side, on the advertising side, as part of our brand-centric model, we have shifted from doing item-based advertising to a much more brand-building, thematic advertising. That will be spread out more evenly throughout the year. As a result, you will be seeing in Q3 advertising as percent of sales higher than we traditionally see, compared to a Q4 that is going to be lower than we traditionally see as percent of sales. We are managing the business very judiciously quarter-over-quarter. We are taking the puts and takes, but it is more about how the cadence will transpire between Q3 and Q4. Overall, given the momentum that we see in the industry, given our products and advertising slate that we see, we are very confident in delivering the full year numbers.
I just want to add one important point is that, as you remember, last year, there was a meaningful impact of the change in retail order patterns from direct import to domestic shipping. This headwind was a reason why we had so much needed to do promotion, especially in Q4, and disrupted most of the year on gross margin and other factors that were the headwind last year. This is no longer the case for this year, and it will be particularly important in the second half of the year and more so in the fourth quarter. That is the cadence Paul was talking about, where most of the improvement you will see in the fourth quarter in terms of gross margin and sales to reach the 50% gross margin number.
This is important to say, and again, this improvement already started in Q2 this year, and you will continue to see that playing to our benefit for the rest of the year.
That is helpful. Paul, maybe touching on potentially another benefit that could come into purview this year, tariff refunds. We have seen some of your peers starting to receive tariff refunds. Could you maybe give us an update on what the latest is for tariff refunds for Mattel? Then maybe more broadly, we have heard some retailers investing back into price.
Yeah.
Assuming you receive additional tariff refund, how might you put that money to work?
Yes. Just as the rest of the industry, as you well say, we are participating actively in the tariff refund process. To date, we have received approximately $90 million of IEEPA tariff refunds. We are evaluating closely what we do with the refunds. We will definitely prioritize brand-building activities. That is our first priority, and we will do that. We will determine, and we will share with everyone more in the Q3 earnings how we will be utilizing those and what the impact will be to the P&L. S o far, we are tracking well. We are receiving the refunds, and we are coming up with very precise plans to continue to build our brands for 2027 and beyond.
Helpful. Maybe zooming out now, Ynon. Taking a look across your power brands, Hot Wheels is on track to deliver, I think, the ninth consecutive year of consecutive growth. I know you have done a lot of work to expand that brand into collectibles and to content beyond just the core toys business. What do you think the main drivers looking ahead here are of future growth for Hot Wheels, the drivers and levers worth calling out?
Hot Wheels has been an incredible success story that is not slowing down. What we have done so well around Hot Wheels is taking a play pattern, continue to expand it, and turn Hot Wheels to become much more about car culture and lifestyle. The brand is driven by incredible innovation in product. We continue to broaden the aperture across play patterns, more audience demographic, extending from young kids all the way to adult fans and collectors. W e do that across very broad range of price points. From $1.49 for a Hot Wheels basic car, all the way to $700 for a collector set. As we said, we expanded into content, digital games, consumer product and merchandise, location-based entertainment, traveling shows and exhibitions, and it is becoming stronger and broader and having more and more cultural impact. We also continue to expand the play pattern into other categories.
From vehicles, we are now participating in building sets, and this is Mattel Brick Shop, which is itself becoming a runaway hit for the company. Still early days, but getting stronger and stronger, and we expect that to be a meaningful contributor and growth driver for Mattel. Hot Wheels has been our largest brand since 2024. It is on track to exceed $2 billion of sales at very healthy margin, and we couldn't be more confident about the momentum and the fact that it will continue to grow for years to come. The important takeaway from Hot Wheels is not just the success of this particular brand, but is how we are applying our strategy, our brand- centric strategy in the Mattel playbook to take a strong brand, make it even more relevant in culture, and continue to expand it beyond the traditional toy aisle. T hat is the opportunity.
There's plenty of headroom to grow, and we are excited to take it to next year and beyond.
Could you maybe touch a little bit more on some of those key learnings from Hot Wheels, and if you apply it to some other brands in the portfolio where you think there's parallel and opportunity there?
When we talk about our brand centric strategy, it's about two aspects. One is how do you think holistically about the brand ecosystem to create a playbook that expands the brand beyond the toy aisle? This is about the Mattel flywheel, where we begin our journey in toys. Success in toys drives success in entertainment, and success in entertainment, which is about content, digital games, consumer product, and merchandise, drives even more success in toys, and that flywheel continues to grow and expand. The second aspect is about fandom. We don't just sell toy items off the shelf. We manage brands, and we build on the very strong emotional connections that people have with our brands.
That emotional connection is fundamental to what we do because it allows us to continue to expand the play pattern, the engagement, and create multiple touch points for fans to engage and interact with our brands. B etween creating a full franchise ecosystem on one side and building fandom on the other is how you continue to strengthen the brand management capabilities and expertise that we have and ultimately drive much more growth for the company, both in top line and in profit.
Paul, I wanted to come back to you and maybe touch on the topic of capital allocation and maybe off the back of Ynon's comments, investing in the business. Mattel has a strong free cash flow generation outlook. It's strong balance sheet, multi-year share purchase framework that's been in place now. I'd just be curious for an update on how you're thinking about investing for growth and balancing that against shareholder returns. I'd be curious, looking ahead, if you think stronger free cash flow generation could possibly support an acceleration in the buyback.
Yes. Mattel is a strong cash flow generator, and we are also a very disciplined capital allocator. The capital allocation priorities are very clear. Number one, we will invest organically in our business. That's exactly what we have done with investments that we have talked about. We're putting more investments to grow our brands, our toys, our digital games, and that's exactly what we did when we announced the investments that we're doing in 2026, which is an investment year, and we will see strong returns in 2027 and beyond. T hat's exactly what we're doing from a capital allocation priority number one perspective. Number two, we maintain a strong balance sheet that is investment grade.
We continue to do that, and we will maintain the flexibility that that strong balance sheet gives us to be able to withstand the cycles of the business throughout the year, but importantly, to continue to invest the cash when we need it. Number three, it's about looking at strategic inorganic opportunities when they make sense, when they advance our strategy, when they create economic value for our investors and shareholders, and when it drives acceleration of growth. When we see an opportunity such as Mattel163, when we acquired the remaining stake of Mattel163, we go for it, and that's exactly what we did. T hat is priority number three. Capital allocation priority number four is share buybacks to manage our capital structure. As you know, we have bought back approximately $1.5 billion in shares since we resumed buyback in 2023.
That represents approximately 23% of our float, and we are still targeting the $400 million of share buybacks in 2026 that we talked about as part of our longer- term capital allocation and buyback program. As you can see, we generate strong cash. We are very disciplined in terms of our capital allocation priorities to be able to maximize our shareholder value.
Great. Maybe on the topic of investing back in the business, Ynon, Paul, you've spoken throughout the year about some OpEx initiatives, $110 million of incremental strategic investments this year. In 2026, I think some of the $150 million that you originally cited for this year is getting reallocated to next year. Maybe you could just talk a little bit about that, and then more importantly, the brands and verticals you're investing most heavily in as well as what gives you confidence that these investments will pay back over the next 12 to 18 months.
These investments are in line with our strategy to grow our IP-driven play and family entertainment business. This is exactly the first capital allocation priority, which is invest in organic growth. These investments are in our capabilities, in our own brands, in our own IP, in areas where we see high return opportunities within a short period of time, and that can continue to grow and amplify our capabilities to grow the business. Examples that we gave are mobile games, first-party data, direct-to-consumer, trading cards, building sets, including Mattel Brick Shop specifically, as well as technology and infrastructure to improve how we work, accelerate our strategy, reduce time to market, lower cost, and as a whole, become a stronger company with better capabilities. The investments are tracking to plan. We said that we expect to see a return on these investments within a year.
In other words, starting in 2027 and beyond. As a whole, we do see 2026 as an investment year where we proactively took some of our earnings and put back in the business to drive growth, but we will see a return on these investments in 2027 and beyond.
Helpful. Then in terms of maybe things that investors should be paying attention to as we track the rollout of some of these initiatives, anything that is top of mind or important for investors to keep in mind?
The investments that we are putting in place are both for capability building and to drive growth. We monitor that with very strict KPIs, and we make sure that we maximize the return on investment. I will give you an example of the adaptation that we have done. We announced in the last earnings release that the release of our latest digital game will be delayed until the beginning of 2027. To be able to match the investments against that initiative, we also postponed the investment into the beginning of next year. That is because the window in the end of the year is very cluttered from a user acquisition perspective, and we do believe it will maximize the return on investments when we launch the game in full in the beginning of 2027.
That is an example of how we are closely monitoring the performance of each one of our businesses, how we allocate the investments. On the other side, we continue to make investments on our DTC businesses. We talked about other areas of investments like trading cards that we are very excited about. All of that gets measured on a very carefully monitored KPI dashboard, and we make the proper decisions so that we are judicious in terms of the impact in 2026, but also the longer-term impact for 2027 and beyond.
I would like to put more emphasis on two areas that are important that we have not really spoken a lot about before in terms of investment areas. One is trading cards, which is one of the fastest-growing areas in the toy industry and play. This is an area that we have not participated at all in the past. Yet many of our brands lend themselves perfectly to a collectability play pattern. We also own the number one game in the market, which is UNO. W e have the basic capabilities, and getting into trading cards is a natural extension of what we do. It requires some investment because we do not have certain retail capabilities in terms of selling product into hobby stores and other areas where we are not as present today.
With relatively low investment, we can become a meaningful participant in one of the most important areas in the industry. The other one that we did touch on, but I want to put even more emphasis on, is Mattel Brick Shop. Building sets as a category is also one of the key drivers in the industry. One of the most important areas within the category are cars. These are buildable cars that you construct and build as part of the category. When it comes to cars, we know that business better than anyone. We understand car culture.
This is not just about building cars. It is about understanding fans, understanding collectors, and the consumer journey, the fan journey within this sector. When we build cars or when we design cars that people build, they actually look like cars. They do not look like cars that are designed out of bricks.
These are performance cars. If you look at the Mattel Brick Shop product across different price points and different variations, it's work of art. These are not just toys. Collectors could not be more excited about engaging with this product. We see this as an important growth driver for the company. We've said before that we are struggling to keep up with demand. This is one area where we're investing in capacity because we see a tremendous opportunity to grow the business in a very meaningful way. These are two examples where we are leaning into important growth drivers in the industry, where we see tangible opportunities, where we already have one foot in those areas, but we look to accelerate that and enhance that opportunity in a much more meaningful way.
Any other brands, just because you brought up trading cards and collectibles in such an important way, that you feel like would be leverageable in those two categories?
Well, we haven't announced specific brands and products, but it's not hard to imagine some of the brands where we have particular appeal with adult fans and collectors. As a whole, adult fans is becoming an important part of the industry, driving significant growth. We don't see that as a fad. We see this as a way for people to engage with important brands. We know that play begins in childhood, but doesn't end there. When you expand the concept of play, it's about engaging people in activity that brings them joy. We see Mattel not just as a toy company, but as a joy company, a company that drives joy and creates excitement for people, leveraging the strength of our brands, which is the initial way we connect and engage with fans.
We create innovative products and experiences that inspire fans, entertain audiences, and develop children through play.
That's helpful. Then maybe with just a few minutes left here to bring the conversation together, Ynon, Paul, Mattel's at this moment balancing near term execution around interesting consumer dynamic, retail dynamic. You have tariffs out there as well, as well as focusing the business on the long- term investing for the business. We spoke a lot about those opportunities ahead. I would just love if you could maybe speak a little bit about what are the one or two milestones you think the company must deliver on over the next 12 months, 24 months that could maybe increase confidence around the earnings algorithm and the broader strategy moving forward for the business?
We're focused on achieving our guidance for 2026. This is an investment year, but still obviously important to achieve our guidance. We do that in the context of high inflation or rising inflation, as Paul said before. This is something that we are watching carefully. Obviously, this will not impact just Mattel or just the toy industry, but the economy as a whole. This is one area that we are watching carefully, then benefiting from some tailwinds as well. 2026 is an important year where we look to achieve our guidance. Then we're already turning into 2027, which we expect to be a high- growth year for the company, where our investment will play out and, as we said, will achieve positive return. Where our brand centric strategy that we are betting in 2026 will mature and become full-fledged in 2027 and beyond.
Part of the brand- centric model is also how we create demand. Paul talked a bit about the cadence of A&P, but the broader point is that we're changing how we create demand. We used to be more item- focused or specific product- focused and very weighted towards the back end of the year, the holiday season. Now as part of our brand management strategy are pacing ourselves differently throughout the year. What we are promoting is the brand more holistically, given that we do so many things around our brands, much more than a toy line or any specific product item. We do that obviously in close collaboration with our retail partners. We continue to position Mattel as an important partner for retailers all over the world. Don't forget, we sell product in 500,000 stores, brick- and- mortar stores, not including online retail and e-commerce.
2027 is where this will come together, and we expect 2027 to be a high- growth year for the company. We haven't given specific guidance. We'll do that on Q4 of 2026, as we always do. W e are seeing momentum. We expect our key brands to continue to lead the way. We expect our categories to perform well and gain share in key markets, and over time, continue to grow and pace ahead of the toy industry.
It's a great place to leave it. Ynon, Paul, thank you very much for taking the time to join us today. Please join me in thanking Mattel for participating in the conference.
Thank you, Stephen.
Thank you.