Mattel Inc

NASDAQ:MAT

Earnings Call Analysis

Mattel Reports Growth Amid Challenges from Barbie Movie Comparison

In the third quarter of 2024, Mattel faced tough year-over-year comparisons due to the previous success of the Barbie movie. Despite a 4% decline in net sales to $1.84 billion, adjusted gross margins rose 210 basis points to 53.1%. Adjusted EPS increased by 6% to $1.14. Free cash flow improved by nearly 50% to $688 million. Looking ahead, while full-year sales are anticipated to be flat to slightly down, the company expects fourth-quarter growth driven by strong product offerings and holiday season performance. Adjusted EBITDA is forecasted between $975 million and $1.025 billion, with EPS projected to grow by double digits to $1.35-$1.45.

Navigating a Challenging Comparison

In the third quarter of 2024, Mattel faced a tough comparison against the previous year's surge driven by the Barbie movie. Despite this, the company reported a modest decline in net sales, which fell 4% year-on-year to $1.84 billion. However, when adjusted for constant currency, the decline was slightly less severe at 3%. This performance indicates that while the previous year's success was hard to match, Mattel effectively managed to offset the impact on profitability through enhanced gross margins.

Strong Margin Performance Drives Profitability

A standout feature of the quarter was the company's adjusted gross margin, which climbed by 210 basis points to reach 53.1%. This improvement stemmed from strategic supply chain efficiencies and cost-saving initiatives under their 'Optimizing for Profitable Growth' program, which alone generated savings amounting to $23 million for the quarter. Powerful margin enhancements compensated for the sales decline, leading to adjusted operating income remaining stable at $504 million.

Encouraging Guidance Despite Market Fluctuations

Looking ahead, Mattel has updated its guidance for 2024, projecting net sales to be either comparable to or slightly down from the previous year. However, strong expectations for the fourth quarter are supported by a favorable retail environment, increased marketing efforts, and a strategic push for higher shelf space and visibility for their products. The company anticipates an increase in its adjusted EBITDA, forecasting it to be between $975 million and $1.025 billion, and expects adjusted EPS growth of 10-13% to a range of $1.35 to $1.45.

Robust Cash Flow and Strategic Investments

Mattel reported a notable improvement in free cash flow, rising by nearly 50% to $688 million over the trailing 12-month period. This financial strength has enabled the company to repurchase $268 million of shares in the first nine months of 2024, reflecting its ongoing commitment to returning value to shareholders. The firm is also in the process of investing in a new global design center, expecting capital expenditures in the range of $200 million to $225 million.

Product Performance and Market Trends

Performance varied significantly across product categories. Vehicles, particularly Hot Wheels, experienced a 13% growth, driven by innovative product introductions and a growing adult collector segment. Conversely, the Dolls category—which saw a 14% decline—was heavily influenced by the absence of the Barbie movie stimulus. Yet, segments like Fisher-Price and the Games category, led by Uno, also achieved notable growth, indicating Mattel's diversified portfolio can yield positive results even amidst challenges.

Looking Towards a Strong Holiday Season

Mattel expressed optimism for the upcoming holiday season, reinforced by encouraging data from the National Retail Federation, which predicts overall holiday sales growth of 2.5% to 3.5%. The company aligned its marketing strategy to attract consumers during this peak period, emphasizing established brands that resonate with toy shoppers. Their robust lineup for 2024 includes new product launches tied to impending theatrical releases, setting a foundation for potential market share gains.

Digital Innovation and Future Growth Areas

Additionally, Mattel is placing significant emphasis on enhancing its presence in digital gaming through strategic partnerships and internal development. The joint venture with NetEase, Mattel163, is projected to surpass $200 million in gross billings, highlighting the direction the company plans to take in extending its product lines into digital realms. Mattel’s outlook believes these segments can contribute positively to both top-line and overall profitability moving forward.

Navigating Regulatory and Market Challenges

Despite various macroeconomic factors affecting consumer behavior and market dynamics, Mattel's strong supply chain strategy, diversified manufacturing locations, and adaptive organizational structure position it favorably. The company's ability to pivot amid changing market conditions enhances its competitiveness, particularly as retail partners remain positive about the toy category heading into the high-demand fourth quarter.

Earnings Call Transcript 2024-Q3

[Operator]

Thank you for standing by, and welcome to the Mattel, Inc. Third Quarter 2024 Earnings Conference Call. [Operator Instructions]

I'd now like to turn the call over to Jen Kettnich, Vice President of Investor Relations. You may begin.

[Unknown Executive]

Thank you, operator, and good afternoon, everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer; and Anthony DiSilvestro, Mattel's Chief Financial Officer. As you know, this afternoon, we reported Mattel's Third Quarter 2024 financial results. We will begin today's call with Ynon and Anthony providing commentary on our results, after which, we will provide some time for questions.

Today's discussion, earnings release and slide presentation may reference certain non-GAAP financial measures and key performance indicators, which are defined in the slide presentation and earnings release appendices. Please note that gross billings figures referenced on this call will be stated in constant currency unless stated otherwise. Our earnings release, slide presentation and supplemental non-GAAP information can be accessed through the Investors section of our corporate website, corporate.mattel.com, and the information required by Regulation G regarding non-GAAP financial measures as well as information regarding our key performance indicators is included in those documents.

The preliminary financial results included in the earnings release and slide presentation represent the most current information available to management. The company's actual results when disclosed in its Form 10-Q may differ as a result of the completion of the company's financial closing procedures, final adjustments completion of the review by the company's independent registered public accounting firm and other developments that may arise between now and the disclosure of the final results.

Before we begin, I'd like to caution you that certain statements made during the call are forward looking, including statements related to the future performance of our business, brands, categories and product lines. Any statements we make about the future are, by their nature, uncertain. These statements are based on currently available information and assumptions, and they are subject to a number of significant risks and uncertainties that could cause our actual results to differ from those projected in the forward-looking statements.

We describe some of these uncertainties in the Risk Factors section of our latest Form 10-K annual report, our latest Form 10-Q quarterly report, our most recent earnings release and slide presentation and other filings we make with the SEC from time to time as well as in other public statements. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so, except as required by law.

Now I'd like to turn the call over to Ynon.

[Ynon Kreiz, executive]

Thank you for joining Mattel's Third Quarter 2024 Earnings Call. This quarter, we continue to execute our multiyear strategy to grow Mattel's IP-driven toy business and expand our entertainment offering. Coming into the quarter, we always knew there would be a tough comp relative to the prior year, which benefited from the success of the Barbie movie. The highlight of the quarter was that we fully offset this comp in our bottom line through strong gross margin performance.

Our balance sheet continued to strengthen and free cash flow was up significantly in the trailing 12 months. This is in line with our priorities this year to grow profitability, expand gross margin and generate strong cash flow. Looking at key financial metrics compared to the year ago quarter. Net sales declined 4% as reported and 3% in constant currency. Adjusted gross margin increased 210 basis points to 53.1%. Adjusted EBITDA improved 1% to $584 million and adjusted EPS grew 6% to $1.14.

Free cash flow in the trailing 12 months improved nearly 50% to $688 million compared to the same period a year ago. Supported by our strong balance sheet, we have now repurchased $268 million of shares through the first 9 months of the year and expect to make further share repurchases in line with our capital allocation priorities. Given where we are in the year, where we now anticipate our net sales to be comparable to slightly down for the full year. We expect growth in the fourth quarter and are on track to achieve our full year adjusted EBITDA and EPS guidance driven by strong gross margin performance.

Looking at third quarter performance by category as compared to the prior year. Dolls' gross billings were down as expected with comparisons impacted by the success of the Barbie movie in the year ago quarter. Within the Dolls portfolio, Monster High continued to grow as we expand the ski franchise. Vehicles performance was very strong, led by Hot Wheels' core diecast innovation in new segments and adult collector expansions.

Hot Wheels is expanding its fan base, and we recently announced a multiyear licensing partnership with Formula One that includes a broad range of products and experiences. Hot Wheels is on track for its seventh consecutive record year and is well positioned for long-term growth. Infant, Toddler and Preschool declined as we exit certain product lines in Baby Gear and Power Wheels, in line with our stated strategy.

Fisher Price grew for the second consecutive quarter, driven in part by the early success of the wood line as we expand globally. Challenger categories collectively grew with Uno achieving its largest quarter on record as we drive innovation and new forms of play. Mattel's total market share declined slightly year-to-date, though we gained in Dolls, Vehicles and Games per Circana. Looking ahead, we expect to gain market share in the fourth quarter and full year.

We are also making further progress with our entertainment strategy. Here are some recent highlights. In film, the Masters of the Universe live action movie with Amazon MGM Studios have started preproduction with the worldwide theatrical release scheduled for June 5, 2026. The Matchbox live action movie with Skydance and Apple original films was greenlit and will star John Cena. And just last week, we announced that a Vew-Master live action movie will be codeveloped with Sony Pictures Entertainment and Escape artists.

In television, Hot Wheels' Let's Race Animated Series Season 2 was related to Netflix last month and ranked as a top 10 TV series in 27 countries across the platform. And Barney's World premiered on Max last week as we relaunched the franchise for a new generation of fans. In digital gaming, Mattel163, our joint venture with NetEase continued to grow and is expected to exceed $200 million in gross billings this year. Our 50% interest in the JV contributed $7 million to net income in the quarter and over $18 million year-to-date.

As it relates to the toy industry, it continued to perform better than first anticipated heading into this year. The industry was down a low single digit in the first 9 months as compared to the same period in the prior year, and our expectation for it to decline modestly in 2024 is unchanged. Beyond this year, we believe trends will further improve and that the industry will return to growth and continue to grow over the long term. The fundamentals are strong, toys are an important part of consumers' lives and retailers prioritize the category as a strategic lever.

Mattel is well positioned competitively in the fourth quarter with a broad-based lineup of innovative product offerings and segment launches with a range of play patterns and price points across our portfolio. We also have an exciting lineup of product tied to the theatrical movie releases of Disney's Moana 2 and Universal's Weekend in November. We expect a good holiday season for Mattel with more retail support, additional shelf space, greater representation across major holiday catalogs and increased marketing and promotions as compared to the prior year.

In closing, we continue to execute on our multiyear strategy and this year are prioritizing profitability, gross margin expansion and cash generation. We expect top line growth in the fourth quarter, driven by a good holiday season market share gains and a toyetic theatrical slate and are well positioned for long-term growth and shareholder value creation.

And now I will turn the call over to Anthony.

[Anthony DiSilvestro, executive]

Thanks, Ynon. We achieved another strong quarter of profitability with significant margin gains fully offsetting the impact of wrapping the Barbie movie related benefits in the prior year. Net sales were $1.84 billion, a decline of 4% as reported or 3% in constant currency. The decline was primarily due to the Barbie movie comparison, which benefited the prior year.

Adjusted gross margin reached 53.1%, an increase of 210 basis points, benefiting from supply chain improvements and cost savings. Adjusted operating income was comparable at $504 million as the net sales decline was offset by margin improvement. Adjusted EPS increased 6% to $1.14, benefiting from fewer shares outstanding as a result of share repurchases.

Turning to gross billings in constant currency, first, by category. Overall, gross billings declined 3% in the quarter. Excluding the movie-related benefit in Q3 of last year, gross billings would have increased modestly. POS declined high single digits in the quarter and was down low single digits through the first 9 months due primarily to the Barbie related decline in Dolls. Dolls gross billings declined 14% and POS declined low double digits. Barbie gross billings declined 17% and POS declined low double digits.

Vehicles had an outstanding quarter, growing 13%. Growth was primarily driven by Hot Wheels, with gains in diecast cars and RC and supported by the Hot Wheels Let's Race streaming content. Matchbox and Disney Cars also contributed to growth. Vehicles POS increased mid-single digits. Infant, Toddler and Preschool declined 2% due to Baby Gear and Power Wheels as we exit certain product lines in those segments, partly offset by 2% growth in Fisher-Price which benefited from Wood as we expand distribution to more markets. Category POS declined low double digits overall, with Fisher Price down mid-single digits. Challenger categories in aggregate grew 3%. The Games category achieved double-digit growth driven by Uno. The Action Figures business also grew, while building sets declined.

Turning to gross billings by region. North America declined 3% due primarily to the Barbie move-related comparison. The other power brands, Wheels and Fisher-Price achieved growth in the quarter. POS declined high single digits. EMEA declined 6%, also impacted by the movie-related comparison. POS declined high single digits. Latin America grew 2% and driven by gains in our 2 largest markets, Mexico and Brazil. POS declined high single digits. Asia Pacific had a strong quarter, growing 8%, driven by gains in India and Japan. POS increased low single digits. Retail inventory levels ended the quarter down high single digits compared to the prior year, and we are well positioned for the holiday season.

Adjusted gross margin increased 210 basis points to 53.1%. The improvement was driven by several factors. Supply chain efficiencies, including fixed cost absorption, added 190 basis points, the Optimizing for Profitable Growth Program added 80 basis points as we continue to generate cost savings. Foreign exchange rate movements added 70 basis points and cost deflation contributed 50 basis points. These gains were partly offset by a negative mix impact of 180 basis points as we wrap the margin accretive benefits associated with the Barbie movie.

Moving down to P&L. Advertising expense declined to $19 million or 16% versus the prior year. The reduction reflects our strategy to shift advertising to later in the year. Adjusted SG&A increased $23 million or 7%, primarily driven by higher compensation expenses partly offset by savings from the optimizing for profitable growth program. Adjusted operating income was comparable at $504 million, with lower net sales and higher adjusted SG&A offset by adjusted gross margin expansion and lower advertising. Adjusted operating income margin for the first 9 months of 2020 was 15.5%, an expansion of 260 basis points versus the prior year period.

Adjusted EBITDA in the third quarter increased 1% to $584 million, benefiting from the previously mentioned margin improvement. Adjusted EPS was $1.14 compared to $1.08, an increase of 6%. The increase benefited from a lower share count, reflecting our continuing share repurchase activity. Year-to-date, cash from operations was a use of $62 million compared to a use of $80 million in the prior year period.

Capital expenditures increased by $39 million, primarily driven by the acquisition of a property that will serve as our new global design center and replace our current leased facility. This resulted in free cash flow of a use of $219 million compared to a use of $197 million in the prior year.

On a trailing 12-month basis, free cash flow was $688 million, an increase of 49% from the prior year period. The improvement was driven by increased cash from operations partly offset by higher capital expenditures. In line with our capital allocation priorities, we have utilized a portion of free cash flow to repurchase shares. During the first 9 months of 2024, we repurchased $268 million of shares. And during the trailing 12-month period, we have now repurchased $361 million.

Turning to the balance sheet. We finished the quarter with a cash balance of $724 million, an increase of $268 million versus the prior year. The increase reflects the free cash flow generated over the past 12 months, partly offset by the use of cash to repurchase shares. Total debt of $2.35 billion was comparable to last year, with no scheduled maturities until 2026. Accounts receivable declined $94 million due primarily to lower sales.

Inventory levels remained below the prior year as we ended the quarter at $737 million, down $53 million. Our leverage ratio continued to improve compared to the prior year. Debt to adjusted EBITDA finished the quarter at 2.3x compared to 2.7x in the prior year quarter. The improvement was driven by the increase in our trailing 12-month adjusted EBITDA.

We had another quarter of achieving significant cost savings under our Optimizing for Profitable Growth Program, which we commenced this year, we generated $23 million of savings in the quarter, with $15 million benefiting cost of goods sold and $8 million in SG&A. For the 9-month period, we achieved $60 million of savings. Given the progress to date, we now expect to generate approximately $75 million of savings in 2024, exceeding our original target of $60 million and are on track to achieve total program savings of $200 million by 2026.

As we draw closer to the end of the year, we are updating our guidance for 2024. We expect net sales in constant currency to be comparable to slightly down, given our year-to-date results and outlook for the remainder of the year. From a category perspective for the full year, we expect Vehicles to grow, Infant, Toddler and Preschool and Challenger categories to be comparable, and Dolls to decline. With respect to the power brands, we expect Hot Wheels and Fisher-Price to grow and Barbie to decline as we wrap the movie benefit.

This guidance reflects our expectation for top line growth in the fourth quarter as we continue to anticipate a good holiday season. Full year 2024 adjusted gross margin is expected to increase to approximately 50% compared to 47.5% in 2023. The improved outlook reflects incremental cost savings and improved supply chain performance. Advertising is expected to remain relatively stable as a percent of net sales and adjusted SG&A to now increase slightly as a percent of net sales versus 2023.

We continue to expect adjusted EBITDA to be in the range of $975 million to $1.025 billion and for adjusted EPS to grow by double digits to the range of $1.35 to $1.45. The adjusted tax rate is projected to be 21% to 22%. Capital expenditures are forecasted to be in the range of $200 million to $225 million which includes our recent purchase of a global design center to replace the current leased facility. Free cash flow is still expected to be approximately $500 million. We will provide full year 2021 guidance on our 2024 fourth quarter call.

The guidance considers what the company is aware of today, but remain subject to further market volatility and any unexpected disruption and other macroeconomic risks and uncertainties.

In closing, the highlight of the quarter was achieving meaningful expansion in gross margin and growth in adjusted EPS despite a challenging comparison. We generated significant cash flow on a trailing 12-month basis, further strengthened our balance sheet and repurchased additional shares. We are in a strong position to continue executing our multiyear strategy to grow our IP-driven toy business and expand our entertainment offering and create long-term shareholder value.

And now I will turn the call over to the operator, and we'll be happy to take your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Arpine Kocharyan from UBS.

[Arpine Kocharyan, analyst]

Jen, welcome to Mattel and look forward to working with you. Ynon, could you give a quick sense on the retail environment. There's a lot of concern about macro tariffs, the election, persistent inflation and generally about the consumers sort of holding up into Q4. What gives you confidence from where you sit to, I guess, reiterate growth guidance for Q4? And then I have a quick follow-up.

[Ynon Kreiz, executive]

Sure. Arpine, from where we sit, the toy industry continues to perform better than initially expected at the start of the year. we expect growth in our business in the fourth quarter and see demand for our products. We also are seeing different studies, one that is interesting is the National Retail Federation that recently said that they expect holiday season -- holiday sales to grow between 2.5% to 3.5%, which is generally in line with other excellent forecast that we're seeing.

Our own internal research shows that more consumer plan to shop for toys in the fourth quarter and that the majority of toy shoppers are looking for evergreen well-known brands, which bodes well for Mattel. So all in all, we do expect a good holiday season. We expect to grow shares -- sorry, gross sales, gain market share and continue to execute our strategy.

[Arpine Kocharyan, analyst]

Wonderful And this is maybe for Anthony. Anthony, when you look at the implied margin for Q4, it is closer to, if my math is right, 47.9%, something like that, close to 48%. But comps were tougher in margin in Q3, I think, right, given the Barbie proceeds, if I'm not mistaken, then why are margins a bit more pressured in Q4? Is it you sort of being conservative given so much of retail is still ahead of you? Or what is driving this margin outlook for Q4?

[Anthony DiSilvestro, executive]

Sure, Arpine. As we said, we're guiding to 50% on a full year that's up 250 basis points. And it does imply the year to go down slightly, and there's a couple of reasons for that. One is -- and we've seen cost deflation year-to-date. We expect to see a little bit of cost inflation in the fourth quarter. And we're also continuing to have some of the movie wrap. About 1/3 of last year's benefit occurred in the fourth quarter so we have a little bit of wrap to go. So those are the 2 drivers.

The other driver in terms of operating income margin really reflects our strategy to shift average pricing into the fourth quarter. On a year-to-date basis, our advertising is actually down $40 million, and we're guiding for it to be comparable as a percent of net sales, which implies a pretty significant increase in advertising in Q4, which is impacting the margin as well.

[Operator]

Your next question comes from the line of Megan Alexander from Morgan Stanley.

[Megan Alexander, analyst]

I wanted to start, Anthony, I think you said POS was down high single digits in the quarter. Gross billings in constant currency were down 3%. And I think you said would have actually increased modestly if you take out some of the movie-related impact last year, which I think that wasn't toy, but correct me if I'm wrong. And retail inventories were also down high single digits, which is, I think, the same as they were last quarter. So can you just help us understand those -- how that all works together? The POS down high singles gross billings down 3% would imply that you overshipped POS in the third quarter?

[Anthony DiSilvestro, executive]

Yes. So look, there's typically some volatility in our retail inventory movements and the correlation between POS and gross billing is not an exact science. I mean what I would point you to is on a year-to-date basis, both gross billings and POS are down slightly and fairly aligned. I think also importantly, as we look at the retailer inventory positions at the end of Q3, they are down high single digits versus last year. They are a very good quality, and we believe we are well positioned as we head into the holiday season.

[Megan Alexander, analyst]

Okay. That's helpful. And then just on the top line guide, the change. Now you're saying comparable to slightly down. I don't think you changed your expectations for the industry, and you said you still expect to gain share. So can you just help us understand what changed? Did you change your market share total expectation? Or do you no longer expect to ship ahead of POS? And I guess if that's the case, do you expect POS to be positive in the fourth quarter?

[Anthony DiSilvestro, executive]

Yes. I would say there's no specific drivers to call out. It's based on an assessment of our results year-to-date and our outlook for the remainder of the year. And importantly, to note, we do expect a good holiday season. We do expect POS to grow in the fourth quarter. We expect our sales to be up in the fourth quarter, outpace the industry and gain share, not only for the fourth quarter but for the full year as well.

[Operator]

Your next question comes from the line of Drew Crum from Stifel.

[Andrew Crum, analyst]

Ynon, you've continued to endorse industry growth in '25. Can you remind us or share with us what the source of optimism is? What are the factors you see driving a rebound for the market next year? And then I have a follow-up.

[Ynon Kreiz, executive]

Thanks, Drew. Well, first of all, the toy industry is a growth industry. And it has grown in 23 of the past 25 years. It continues to perform better than initially expected at the start of the year, although we still expect it to decline modestly for the full year. Beyond this year, we do believe, as we said before, the trends will improve and that the industry will return to growth and continue to grow over the long term. We still see strong industry fundamentals in that toys are an important part of consumers' lives, retailers prioritize the category as a strategic lever or shoppers drive traffic to the store, they spend more time in the store and they have typically a bigger basket or vast basket is worth more.

Over time, toy POS has been growing and outpacing decline in birth rates. The industry growth has been driven. If you look at the big -- the top -- the key markets has been driven by both pricing and units. And we're also seeing positive drivers for the industry overall in that more theatrical or toyetic theatrical movies are coming online. You're seeing a fast-growing adult segment not just collector but adult buying toys. And all in all, it's been -- you have good positive, healthy fundamentals.

Within all of that, we believe that we are very well positioned to capitalize on future industry growth. We continue to invest in organic growth focus on great product, innovation, supply chain, commercial capabilities, demand creation capabilities and expect to outpace the industry and continue to gain share.

[Andrew Crum, analyst]

Got it. And maybe for Anthony. We've heard that one of your major retail partners has changed their payment terms. And I'm just curious if that in any way shifts working capital and puts your free cash flow guidance at risk for the year. I mean, you're reiterating it today, but I just want to understand if that, in any way, impacts working capital?

[Anthony DiSilvestro, executive]

No, no impact on us. I mean we talked about we continue to guide to $500 million of free cash flow despite a little bit of uptick in the capital expenditures.

[Operator]

Our next question comes from the line of Stephen Laszczyk from Goldman Sachs.

[Stephen Laszczyk, analyst]

Maybe first for Anthony on CapEx. You called out the acquisition of the new Global Design Center. Can you just talk a little bit more about the sizing of the investment you're making there and any longer-term related CapEx you're expecting from the build? And then for longer-term CapEx, is the $200 million to $225 million, perhaps a good proxy to think about that going forward?

[Anthony DiSilvestro, executive]

Yes. So as we said, we purchased a building here in El Segundo that will serve as our global design center going forward. It does replace an existing leased facility in El Segundo as well. And that's the reason for the CapEx guide going up a little bit, although it's not going up by the full amount as we manage the rest of the spend. We'll have a little bit of build out related to that for next year. And as we get closer to next year, we can give you an update on what we expect for next year.

[Stephen Laszczyk, analyst]

Got it. And then maybe just a broader question on capital allocation and share repurchases. You bought back $68 million in the quarter, which is a bit slower than what we've seen over the first 2 quarters of the year. Could you maybe just talk a little bit about the pace of share repurchases going forward, maybe the opportunity to ramp as we look into the back half of the year and maybe how you're balancing that versus other capital allocation priorities heading into '25?

[Anthony DiSilvestro, executive]

Sure. What I would say is that we've been very active on the share repurchase front and $68 million in Q3 brings the year-to-date total to $268 million on a trailing 12-month basis, we're now at about $360 million. And since we resumed share repurchases last year, we've now bought back $471 million of shares. And in terms of the pace, we believe it's appropriate and really consistent with our stated capital allocation priorities. And looking ahead, we would expect we'll continue to buy back stock in line with those capital allocation priorities and fund that with free cash flow.

[Operator]

Our next question comes from the line of Jim Chartier from Monness, Crespi and Hardt.

[James Chartier, analyst]

Can you just talk about your digital gaming initiatives longer term? What's kind of the planned launch schedule within Mattel163 last quarter, you talked about developing some casual games internally? What's the time frame for launching the first game there? And then any other initiatives you might have?

[Ynon Kreiz, executive]

Thanks, Jim. As we've said before, our goal when it comes to digital gaming is to extend the physical play to the virtual world. by creating digital games and experiences that drive sustained engagement for fans of all ages. Our strategy has 3 components: licensing our joint venture with NetEase, that we co-own with NetEase and self publishing, which we recently started to talk about. We continue to make progress on the licensing front with more games where we work with third parties.

Mattel163 is expected to exceed $200 million of gross billings this year. with very attractive margins. And this is so far on the back of only 3 games that released until now. And when it comes to self publishing, this is what we see asymmetric opportunities for us in the mobile space, the mobile gaming space given the strength of our brands. And we are starting to ramp this strategy working already on the first game with a very strong studio, and we will be happy to share more as we progress the strategy. But we see that we see our digital gaming strategy as an important growth driver, both for top line and profitability.

[James Chartier, analyst]

Great. And then Anthony, how should we think about SG&A for the year? And then is the compensation growth driven by just merit raises and inflation? Or are there places where you're adding employees and investing?

[Anthony DiSilvestro, executive]

Sure. In terms of the full year guidance, we do expect SG&A as a percent of sales to be up slightly. And the primary driver of that is investment decisions that we've made, particularly to build capabilities in areas like digital gaming. We're also investing in some of our information technology, but those would be the 2 primary drivers coming through.

[Operator]

Our next question comes from the line of Christopher Horvers from JPMorgan.

[Christopher Horvers, analyst]

I'll take a shot to at the sort of change in the top line outlook. So as you think about the subtle change to the guide for the year on sales, guess to what degree was that what you've seen year-to-date versus taking a different view on how you thought about the fourth quarter prior to today?

[Anthony DiSilvestro, executive]

Yes. So as we said, I mean, we continue to expect growth in the fourth quarter. Obviously, it's a critical quarter for us. We're well positioned in terms of the demand creation activities and as we said, we expect to grow the top line. It's probably more of a function of us looking at our year-to-date performance that's causing us to be a little bit cautious in terms of top line. But we feel really good as we head into the fourth quarter in terms of more innovative products, more advertising, more shelf space, more retailer support, all those things give us confidence for a good holiday season ahead of us.

[Christopher Horvers, analyst]

Got it. Appreciate that. And my follow-up question is on tariffs. It's a pretty popular topic right now with the election right in front of us. Can you just help us remind us how you think about your tariff exposure from a manufacturing base in China versus what your sales are in -- sorry, what your sales are in the United States and think about what your experience was last time understanding it, I don't think List 4 ever went in, but how are you thinking about that today versus what it was prior?

[Ynon Kreiz, executive]

Well, we're always looking at different changes, whether it's government policy or regulatory dynamics that could impact our business. And our job is to design a flexible and responsive organization that can react to changing market conditions. And this is exactly what we've been doing over the last few years. Supply chain today is a competitive advantage for Mattel. It's geographically diversified. We make products in 6 different countries. And we continue to ensure that we have flexibility in our system to respond to changes in the marketplace.

[Christopher Horvers, analyst]

So I guess just in terms of like how much do you actually source out of China? And and how much of that is directed at U.S. sales?

[Ynon Kreiz, executive]

We've made -- our products that is made in China is approximately 50% of our manufacturing. This is compared to an industry average of about 80% to 85%. These numbers are as of the end of 2023. We also talked about the fact that we continue to further diversify our manufacturing footprint and intend to continue to adjust for more flexibility in the system. The U.S. product heading into the U.S. is just around 50% in China. And that number has been declining over time as we continue to further diversify our manufacturing across different countries.

[Operator]

Your next question comes from the line of Kylie Cohu from Jefferies.

[Kylie Cohu, analyst]

Awesome. I was wondering if you could dig a little deeper into Optimizing for Profitable Growth Program. I was just kind of curious what's going really well so far, what's next to optimize? Is there any change to that total targeted $200 million number?

[Anthony DiSilvestro, executive]

Sure. So the Optimizing for Profitable Growth Program we initiated that at the beginning of the year targeting $200 million of savings by 2026, a combination of cost of goods sold and SG&A. And we're off to a very good start. Our initial target for the full year 2024 was $60 million. We hit that year-to-date at 9 months and are increasing the expectation for 2024 from that $60 million to $75 million and most of that upside coming through the cost of goods sold line.

As you know, we have a strong track record of identifying and achieving our targeted cost savings and our certainly very confident in our ability to achieve the $200 million 2020 goal, although we're not making any changes in that goal at this point, but we're out to a very good start on this one.

[Kylie Cohu, analyst]

Perfect. And one last follow-up for me. Obviously, you talked a little bit about what you're seeing in your international markets, but I was wondering if you could expand there. And I was wondering if there were any regional changes to call out quarter-over-quarter?

[Ynon Kreiz, executive]

Nothing specific about any specific call out. We continue to execute well. There are always going to be puts and takes within the business, but as a whole, we feel very good about our execution across region and continued focus on excellent executional excellence.

[Operator]

Our next question comes from the line of Alex Perry from Bank of America.

[Alexander Perry, analyst]

I guess, first, it seems like there's a lot of optimism around holiday. Can you maybe touch on how your top retailers are feeling about the category as we inch closer to holiday? And then can you talk about if you saw any shift in shipments from 3Q to 4Q as retailers take inventory on a more a just-in-time basis?

[Anthony DiSilvestro, executive]

Sure. So I would say, overall, retailer sentiment is positive. They prioritize toys as a strategic category. It drives foot traffic in brick-and-mortar and in e-commerce, among other benefits for them. I'd say we work very closely with our key retail partners, and we plan for the holiday season. And we have a full slate of demand drivers from new products to increase shelf space more presence in the holiday catalog. We're planning for significantly higher advertising on our part. And that's coupled with the inventory levels are appropriate, We're working with them to make sure we have the right product in the right place and the right quantity, and are very confident in that we'll see a good holiday season.

[Alexander Perry, analyst]

Perfect. And then I guess any change in sort of your outlook for the power brands? Is the expectation that Barbie is going to be down more significantly than you thought previously in the fourth quarter? And did your expectation come up for any of the other power brands, maybe Hot Wheels, for instance?

[Anthony DiSilvestro, executive]

Yes, I would say no change in the overall category guidance nor for the power brands themselves, so all moving ahead.

[Operator]

Our next question comes from the line of Linda Bolton-Weiser from D.A. Davidson.

[Linda Bolton-Weiser, analyst]

So on your Fisher-Price Wood line, it sounds like it's off to a good start. I believe there might have been an exclusive period of time at Walmart. What's the timing of when exclusivity ends and kind of like what's the time frame for that ramp-up and expansion more globally?

[Ynon Kreiz, executive]

Linda, yes, we started off with an exclusive period with Walmart, and we are now expanding the product globally. We're adding new franchises to little people as well. And feature price as a whole is having great momentum. It's up for the second quarter in a row. As you know, we have a new strategy, new leadership, Fisher-Price is still the #1 brand in the category. And we believe it's very well positioned for continued growth.

[Linda Bolton-Weiser, analyst]

Can I also ask about Hasbro? Hasbro has changed their approach where they're outsourcing more of their brands to other toy makers to market. Does that somehow benefit you when you're dealing with the retailers? Because that sort of fragments Hasbro's brand portfolio among more companies that are marketing -- supplying to the retailer. So does that somehow benefit you in terms of what their strategy is that they're undertaking?

[Ynon Kreiz, executive]

We continue to focus on our strategy to grow our toy business and expand our entertainment offering. When it comes to supply chain, we do believe we have a competitive advantage, both in terms of scale, quarterly service levels for the retailers and we continue to see the benefits and it's in the numbers. So we believe in the toy business, we believe in the benefits of the toy business, and we believe that the toy business is foundational for the opportunities we see outside of the toy aisle. It is very symbiotic. A strong toy business is good for our entertainment and franchise strategy and vice versa.

So it's not either or it's both that work together hand in hand. And the Barbie movie and the Barbie franchise, is one good example. And you will see that across other execution that we will perform across other key franchises.

[Operator]

Your next question comes from the line of Jaime Katz from Morningstar.

[Jaime Katz, analyst]

I'm hoping you guys could share a little bit about what you guys are seeing on any sort of shift to value products if there is some price mix headwinds we should anticipate ahead?

[Anthony DiSilvestro, executive]

Yes. I mean we're certainly cognizant of what's happening in the consumer space and some cohorts are under a little bit of pressure and are seeking value. We know that price is important to many of those consumers. And I think we are well positioned in that regard, and we offer quite a range of price points, everything from a Hot Wheels diecast single to Barbie dream house to Mattel creation collector item. So again, we think we play into that very well with our brands and our product lines.

[Jaime Katz, analyst]

And then is there any sort of bifurcation and cadence between the benefits to gross margin and SG&A of the Optimizing for Profitable Growth Program? Like is it more front loaded to benefit gross margin? I'm just trying to think about where the trajectory of the gross margin goes after this year or what the potential is. Or do we see more benefits in the early portion? Or is it just split?

[Anthony DiSilvestro, executive]

Yes. I would say we're also -- like I said, we're off to a really good start, $60 million year-to-date, and we're probably under-indexed in terms of COGS. I think we're at 60% COGS where the whole program is going to be 70%, so more to come on the COGS side. And as we also said, we're taking our full year forecast up to $70 million, holding the $200 million target for 2026 for now, but off to a really good start.

[Operator]

Your next question comes from the line of James Hardiman from Citi.

[James Hardiman, analyst]

So a couple of follow-ups from earlier questions that were asked. Anthony, I think you mentioned versus the nice cost deflation that we've seen year-to-date, you expect that to flip back to inflation in the fourth quarter. I guess maybe early thoughts on inflation I guess, or deflation in 2025? And I guess more broadly, I'm assuming it's way too early to quantify. But just qualitatively, any other puts and takes as we think about margins for 2025. Obviously, you're going to continue to push the optimizing for profitable growth program. But curious if there are any other puts and takes.

[Anthony DiSilvestro, executive]

Yes. I would say, generally, a bit early for us to comment on 2025, but we have experienced that deflation benefit in each of our first 3 quarters, but it's getting less and less of a benefit. I think we did a little over $200 million of deflation in Q1, about $100 million benefit -- 100 basis point benefit in Q2 and 50 basis points in Q3, and we think that's going to flip to a little bit of inflation in Q4. And to date, in 2024, surely benefiting from some lower material prices and some declines in ocean freight. But again, too early to talk about next year.

[James Hardiman, analyst]

Fair enough. And then as you spoke about the retailer excitement towards the holiday season sounds like they feel like they have a pretty good -- the right amount of inventory, should we be expecting basically one-to-one wholesale to retail in that key fourth quarter? And can you remind us what that looked like a year ago? Were we still in a destocking mode a year ago in which case there might be a little bit of a good guy as we think about wholesale potentially outpacing retail?

[Anthony DiSilvestro, executive]

Yes. I would say all things the same potential for a little bit of a tailwind on that front. We came into the year after having made significant progress in 2023. We came into 2024 slightly elevated. So year-on-year, a bit of a tailwind, all else the same.

[Operator]

And your final question comes from the line of Fred Wightman from Wolfe Research.

[Frederick Wightman, analyst]

Just one quick one. If we just look at the EBITDA and the EPS guidance, you guys kept EBITDA guidance unchanged, but made a pretty big change to the tax rate and EPS didn't move. So was there something else below the line that's offsetting that?

[Anthony DiSilvestro, executive]

Right, give that one more time? Ask it one more time?

[Frederick Wightman, analyst]

Yes. It's really just the EBITDA and EPS guidance didn't move, but the tax rate came down pretty significantly. Is there another offset below the line?

[Anthony DiSilvestro, executive]

No. I'd say all else is saying that the tax rate favorability would move us up a little bit in the EPS range, but it's not significant.

[Ynon Kreiz, executive]

Thank you. Thank you, everyone, for your questions. Our priorities for the year were to improve profitability, expand gross margin and generate significant cash flow. In line with our priorities, we did exactly that. We achieved another strong quarter of profitability. We expect to grow our EBITDA, achieve double-digit growth in adjusted EPS in 2024 and generate strong cash flow, and this is despite wrapping the incredible success of the Barbie movie in the prior year.

The company is in the strongest financial position it has been in many years, and we continue to execute our multiyear strategy to grow our IP-driven toy business and expand our entertainment offering. We expect to grow the top line in the fourth quarter, and we look forward to a good holiday season for Mattel with 62 shopping days to go. And now I will turn the call back to the operator.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.