Mattel (NASDAQ:MAT) has become the latest poster child for a grossly mismanaged supply chain. Yes, they have been sourcing in China to take advantage of low wages and other efficiencies. But somehow the drive to efficiency allowed them to lose control over their products and actually endanger innocent children. This is a major management failing.
Yes, we could point fingers at the Chinese. Yes, there have been some unacceptable substances such as lead found in toys and their components. Yes, there are some bad actors in China who appear to have no scruples.
But the biggest problem is Mattel's management. They let the problem get by them and become so big that they now have a major crisis on their hands. As we enter the Christmas season, Mattel is stuck in the muck. Even if they can retool and reship in time for Christmas, will the consumer trust them? Will major retailers gladly stock their shelves, knowing full well that litigation lawyers are now one of their most careful shoppers? What indemnities should retailers be asking from Mattel?
How can the investor trust Mattel to find emergency solutions in a short time frame when they could not get it right in the normal course of business? There will be a series of lawsuits which will absorb senior management time and attention.
A few comments about MAT's balance sheet: About 35% of their book equity is invested in intangibles. If their brand starts to erode, kiss this number good-bye. Long term debt, while down slightly from historical levels, is still high - around $560 million. They need to keep this serviced and not blow the covenants. Today's lender is not waiving defaults very easily. With huge recalls and an almost sure revenue dip coming, debt service will become an major issue. This company may be restructured by the banks.
In addition to the immediate problems of product recall, there is a management issue. A company who puts up the following statement on their web site about governance and then fumbles the ball is not grounded in reality:
"At Mattel, unwaivering integrity defines our corporate culture on every level, guiding how we work and how we do business."