Mattel Inc /De/ Q1 FY2026 Earnings Call

Hello, and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mattel, Inc. First Quarter 2026 Earnings Conference Call. I would now like to turn the call over to Jen Kettnich, Vice President and Head of Investor Relations for Mattel. Jen, please go ahead.

Thank you, operator, and good afternoon, everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer; and Paul Ruh, Mattel's Chief Financial Officer. This afternoon, we reported Mattel's First Quarter 2026 financial results. We will begin today's call with Ynon and Paul providing commentary on our results, after which we will provide some time for questions. Please note that during the question-and-answer session, we respectfully ask that you limit yourself to one question and one follow-up so that we can get to as many analysts and questions as possible today. 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. 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 remind you that certain statements made during the call may include forward-looking 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 Form 10-Q quarterly reports, 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.

Thanks, Jen. Good afternoon, and thank you for joining Mattel's First Quarter 2026 Earnings Call. We are off to a good start to the year with growth in net sales and positive consumer demand for our products in the first quarter. We continue to make progress on our strategy to grow our IP-driven play and family entertainment business and are seeing top-line acceleration in the second quarter to date. Key financial highlights for the quarter as compared to the prior year: gross billings grew 2% in constant currency with increases in vehicles and challenger categories overall, partly offset by a decrease in dolls and infant, toddler and preschool. Net sales grew 4% as reported and 1% in constant currency, and adjusted earnings per share declined $0.18. Per Circana, Mattel was #1 globally in our larger categories: dolls, vehicles and infant/toddler and preschool, and we gained share in vehicles and action figures. We also executed on our capital allocation priorities, including closing the acquisition of full ownership of Mattel163 mobile game studio and repurchasing $200 million of shares in the quarter while maintaining a strong balance sheet. The toy industry grew in the first quarter, and we continue to expect it to grow in 2026 with the benefit of a strong theatrical slate and further expansion of adult consumers. As it relates to current geopolitical events, including the war in the Middle East, there has been minimal impact on our business to date, but we continue to monitor the situation and hope for a swift resolution and peaceful days ahead. Turning back to our portfolio performance in the quarter: several standout brands grew double digits or higher across owned brands, including Hot Wheels, Uno and Monster High; partner brands such as Toy Story and WWE; relaunch franchises like Masters of the Universe; and innovative new product lines like Mattel Brick Shop. We are making strong progress on our digital strategy, including the integration of Mattel163 as well as the upcoming launch of our first two self-published mobile games. Acquiring full control of Mattel163 meaningfully strengthens our digital games business and adds significant development, publishing and digital customer acquisition expertise. As it relates to self-published mobile games, our first game is based on Masters of the Universe and is currently in soft launch ahead of the theatrical movie premiere on June 5. The second game is in advanced development and targeted for release later this year. We plan to share more details soon. We are also expanding our presence on creative platforms. On branded digital game experiences, we launched on Roblox and Fortnite with strong reach and engagement. Our Barbie Dreamhouse Tycoon Roblox game continues to rank in the top 10 among hundreds of branded games on the platform. Our digital game licensing business contributed to overall growth in the quarter and benefited from partnerships, including Pictionary with Netflix and Scramble with Scopely. The upcoming Masters of the Universe movie will be released with wide distribution in thousands of theaters globally. A robust multi-platform marketing campaign spanning digital, out-of-home and strategic brand partnerships is underway, led by Amazon MGM and Mattel. A full cross-category product line across toys, adult collectibles, apparel, publishing and more began rolling out this past weekend. We are very excited to bring this classic mythology to life on the big screen and reimagine the franchise for original fans and a whole new generation. We are also gearing up for the Matchbox movie in October and have a robust slate of films in development, including Hot Wheels, Polly Pocket, Barney and others. As we've shared, we're making strategic investments totaling approximately $150 million in 2026 to drive accelerated growth and profitability consistent with our capital allocation priorities. These investments are designed to allow us to capture even more value from our IP faster, such as in self-published mobile games, building sets, B2C, first-party data and technology and infrastructure. We believe these investments in aggregate will have high ROI with a net positive contribution to the bottom line in 2027 and beyond. Before I turn it over to Paul, I would like to touch on the recent leadership announcement that Steve Totzke, President and Chief Commercial Officer, will step down from his role effective May 1, and Sanjay Luthra, Managing Director of EMEA and Global D2C, will succeed Steve as Chief Commercial Officer, overseeing Mattel's global sales and commercial operations. We thank Steve for his many contributions, and I'm personally grateful for his years of partnership. Sanjay is a 23-year Mattel veteran. In his most recent role, he has steered the EMEA transformation to achieve record sales and growth and expanded Mattel's leadership across the region in key categories. We look forward to his impact on driving our strategy to grow our IP-driven play and family entertainment business. Over to you, Paul.

Thanks, Ynon. As you just heard, we're off to a good start to the year. Looking at key financial metrics as compared to the prior year quarter, net sales grew 4% as reported and 1% in constant currency to $862 million, ahead of expectations. Adjusted gross margin declined 450 basis points to 45.1%, primarily due to the gross incremental cost impact of tariffs that we previously mentioned as part of our guidance, as well as unfavorable foreign exchange and inflation, and adjusted earnings per share declined by $0.18 to a loss of $0.20. Turning to gross billings in constant currency: total gross billings grew 2% with Mattel's global POS up mid-single digits. Vehicles momentum continued with a 13% increase. Hot Wheels and Disney and Pixar Cars each grew double digits. Dolls declined 11% due to Barbie, partially offset by growth in Monster High. American Girl was comparable. Infant, toddler and preschool declined 18%, primarily due to Fisher-Price. Within Fisher-Price, Little People grew double digits. Challenger categories collectively increased 17%, and Games grew led by Uno, including the benefit of the partial-quarter contribution of Mattel163. Action figures growth was driven by a robust slate of owned and partner properties. Mattel Brick Shop also performed exceptionally well as it continues to expand following a successful launch. As it relates to gross billings by region, international was up 8% with growth in each of EMEA, Latin America and Asia Pacific. North America declined 4%, including the impact of the shift in U.S. retailer ordering patterns from direct import to domestic shipping. Based on what we are seeing today, we believe U.S. retailer ordering patterns are stabilizing and expect our North America region to grow in Q2. Moving down the P&L, adjusted gross margin in the first quarter was 45.1%. The decline was due to the impact of 240 basis points from the gross incremental cost of tariffs, 140 basis points from unfavorable foreign exchange and 90 basis points from inflation. Going the other way, tariff mitigation actions and our optimizing for profitable growth savings partially offset several factors and contributed a benefit of 30 basis points. Advertising expenses increased $23 million to $93 million, reflecting the timing of Easter this quarter and the inclusion of Mattel163 expenses. Adjusted SG&A expenses increased $19 million to $366 million, primarily due to the strategic investments previously discussed. As mentioned in our earnings press release, beginning in fiscal 2026, we are excluding the impact of amortization of acquired intangible assets from non-GAAP measures to facilitate period-over-period comparisons of underlying business performance and have also recast these non-GAAP financial measures for prior periods. Adjusted operating income was a loss of $70 million as compared to a loss of $8 million in the prior year period, primarily due to higher advertising expenses, lower adjusted gross profit and higher adjusted SG&A. Adjusted EBITDA was a loss of $12 million as compared to a gain of $57 million, and adjusted earnings per share was a loss of $0.20 as compared to a loss of $0.02, both primarily due to the same factors that impacted adjusted operating income. Free cash flow generation on a trailing 12-month basis was $335 million as compared to $582 million in the prior year period. The decline was primarily due to the lower net income, excluding the impact of noncash items. We repurchased $200 million of shares in the quarter, bringing the total to $1.4 billion since resuming the share repurchases in 2023, representing a reduction in shares outstanding of approximately 21%. We continue to expect to buy back a total of $400 million of shares this year as part of our $1.5 billion share repurchase authorization, which we expect to complete by the end of 2028. Turning to the balance sheet: cash at quarter end was $866 million compared to $1.24 billion a year ago. The decrease was primarily due to $640 million of share repurchases over the last 12 months and $75 million of cash used for the acquisition of the remaining 50% interest in Mattel163, net of cash acquired, partially offset by free cash flow generation. Total debt was consistent with prior year. Owned inventory at quarter end was $677 million, a modest increase versus prior year, primarily reflecting tariff-related costs. Our gross leverage ratio was 2.7x and we continue to manage our balance sheet in line with our capital allocation priorities. Retailer inventories declined low digits compared to the prior year and we believe we are well positioned overall for Q2. As part of the optimizing for profitable growth program, we achieved savings of $16 million in the quarter bringing the cumulative total savings for the program to date to $189 million. We continue to target approximately $50 million of efficiencies this year for a program total of $225 million between 2024 and 2026. 2026 guidance is unchanged with the exception of recasting adjusted operating income and adjusted EPS to exclude the impact of amortization of acquired intangible assets. Our net sales guidance is unchanged, and we still expect growth in the range of 3% to 6% in constant currency. At current spot rates, FX would be a tailwind of 1 to 2 percentage points on full-year reported net sales. We also continue to expect adjusted gross margin of approximately 50% for the full year. The recast guidance includes expectations for adjusted operating income of $580 million to $630 million, reflecting a $30 million adjustment attributable to amortization of acquired intangible assets from prior acquisitions. For clarity, Mattel163 amortization of acquired intangible assets was not included in prior 2026 guidance. This results in adjusted EPS guidance in the range of $1.27 to $1.39. In terms of 2026 gross billings performance by category, we continue to expect vehicles as well as challenger categories combined to grow strongly. Toys to be comparable and ITPS to decline. This includes the following growth drivers: continued strong performance in key brands, including Hot Wheels, Mattel Brick Shop, Uno and Little People further amplified by Masters of the Universe global theatrical release and product line, the Matchbox film product for major theatrical releases, including Disney and Pixar's significant new toy partnerships, upcoming self-published digital game releases and the consolidation of Mattel163. The guide for 2026 full-year adjusted gross margin of approximately 50% includes an expectation of sequential improvement in the second quarter, although we expect it will remain below 50% in Q2 and then improve in the second half. Looking to 2027, we continue to expect mid- to high-single-digit revenue growth in constant currency and strong double-digit growth in adjusted operating income, benefiting from our brand-centric strategy, innovation in toys, major partnerships and the anticipated returns of strategic investment, including digital games. We are monitoring developments related to the current events in the Middle East as well as possible changes related to tariffs, and our guidance includes a range of assumptions and scenarios. Conditions remain fluid and current guidance is subject to market volatility, unexpected disruptions as well as other macroeconomic risks and uncertainties, including further developments in the Middle East and regulatory actions impacting global trade. With that, I will turn it back to Ynon.

Thanks, Paul. In summary, we are off to a good start to 2026. We are seeing momentum in the business and continue to execute our strategy to grow our IP-driven play and family entertainment business. We are seeing top-line acceleration in the second quarter to date and expect to achieve our full year 2026 guidance. With that, I'll now hand the call off to the operator for Q&A.

Your first question comes from the line of Megan Clapp with Morgan Stanley.

I wanted to start maybe, Paul, you left off, you said you're monitoring what's going on in the Middle East. Obviously, things are fluid and the guidance assumes a range of assumptions and scenarios. You said, I think, Ynon, you mentioned there's minimal impact to date as well. I guess as we think about the cost side of things, resin and freight have both moved significantly higher, just obviously as oil has risen, and so can you maybe just remind us of your exposure to those two cost buckets and maybe walk us through your hedging and contracting and what you're kind of embedding in the guide at this point? I understand there's some inventory timing as well, so maybe the potential headwind is pushed out. But just trying to kind of understand and frame the degree of potential cost pressure we could see and how are you thinking about managing it?

Of course, and thank you for the question. As we said in the prepared remarks, we see minimal impact on our business year-to-date. But of course, we continue to monitor closely. We did reiterate our guidance, and that includes a range of assumptions and several scenarios. We are not immune, but it's too early to speculate. It depends, particularly on how long the disruption lasts and also how long oil prices remain elevated. We are experienced; we have a team on the ground that's managing this situation. And at this point, we are reiterating our full year guidance both in gross margin of approximately 50% with all these puts and takes.

Okay. And then maybe just on the top line, the 4% reported growth in the quarter and 1% in constant currency was better than what you had laid out when we talked a couple of months ago; I think you were expecting down low single digits in the first quarter. So maybe you can just talk through the drivers of what came in better than expected? Was there any sort of Easter timing benefit we should be aware of as we think about the second quarter? That would just be helpful.

Yes, Megan. As we said on the call, we had a strong start to the year. The growth came from several standout brands that grew double digit, including in our owned brands: Hot Wheels, Uno, Monster High, Masters of the Universe ahead of the movie release, and Mattel Brick Shop, which is becoming a meaningful hit for Mattel, as well as partner brands like Toy Story and WWE. Consumer demand and POS were positive, and this is in the context of strong growth in the industry. So what we are seeing is consumers are buying toys—the toy industry is in a healthy position. For Mattel, we are continuing to see demand, and as we said, we saw acceleration of shipping quarter-to-date, second quarter to date. So we're well positioned to grow in the second quarter: consumer demand is positive and we continue to execute our strategy.

Your next question comes from the line of Arpine Kocharyan with UBS Investment.

To follow up on Megan's margin question, actually, I was hoping you could go through what EPA tariff rollback means for you for the year? And then how much of wiggle room that gives you to basically offset some of the impacts you might see through 2027, as I understand most of your raw materials are locked in for the year. But we are hearing of fuel surcharges for freight. Just if you could kind of give a little bit more on those puts and takes? And then I have a quick follow-up.

Yes. Our guidance related to tariffs includes a range of assumptions and scenarios. Specifically, what we have included in the guidance is the expectation that the actions we took in 2025 will fully offset the annualized dollar cost impact in 2026. We said that, and at this point we are reiterating that point. But the tariff situation is fluid. We started the process of refunds and we're actively working through the systems. More broadly, the overall framework is still evolving, including potential appeals. So the timing and ultimately the outcomes are not clear. That's why I say our guidance includes a range of assumptions and tariff rates for the year. But it's important to say that our guidance does not factor in a refund given the uncertainty at this point in time.

And then maybe for you, you talk about digital strategy and integration of the JV going well ahead of the releases of digital games. Anything else you would like to share on your investment cadence as we progress through the year, anything that has changed in your outlook maybe for 2027 and what kind of returns you could be looking at? Anything else you feel like you should share as you think about the three months that have passed since we last spoke?

Thanks, Arpine. Yes. We did close the acquisition, as we've said, on March 2. The integration is tracking according to plan. We have a cross-functional team that is focused on all the relevant activities. Acquiring full control of the JV meaningfully advances our digital games business and will add significant development, publishing and digital customer acquisition expertise to the company. So this is a good development. The deal is done and we are in full integration mode. Regarding our strategic investments, as we've shared, these investments are meant to drive accelerated growth and profitability, which is consistent with our first capital allocation priority to invest in organic growth. It's in line with our strategy to grow our IP-driven play and family entertainment business. The investments, as we've said before, are in areas designed to allow us to capture even more value from our IP and do that even faster. Examples we gave were in self-published mobile games, building sets, B2C, first-party data and technology and infrastructure. When it comes to self-published mobile games, this is progressing very well. As we've said in the prepared remarks, we are ready to launch the first game, which is based on Masters of the Universe. The game is now in soft launch and all the metrics are where we want to see them. The second game is in advanced development and will be in soft launch soon and released later this year. We'll be able to share more down the road, but it's tracking well. All of the testing and metrics that we are monitoring are where we want to see them. It's exciting to be in a position where we will launch our first self-published games that can have asymmetric impact on the company. All of that is part of our investment in areas that can accelerate top-line growth and profitability.

Your next question comes from the line of Jim Chartier with Monness, Crespi, Hardt & Company.

Last quarter, you said infant/toddler/preschool would be a 2% to 3% headwind to the business this year. That implies a mid- to high-teens decline in that business. Can you just give us some more color on what's driving that and when you think that business could stabilize?

Yes, Jim. It's exactly what we said: it will be a 2% to 3% headwind this year, and this is still where we see things tracking. But as we also said, the drag is becoming smaller, especially from baby gear and Power Wheels. We do expect to see growth in key segments within Fisher-Price, including specifically Little People, which is growing double digits. This is driven by new partnerships that we have with important players like Nintendo and Disney across Toy Story and other brands. Overall, this is a fast-growing, higher-margin business within Fisher-Price, and it's great to see that. We're also getting ready to relaunch Thomas in the second half of the year. There will be animated content and premium content that we are producing. It will be on all the major leading kid platforms with a new product line, new branding and more engagement. We continue to assess the business and the category as a whole because the category is an important part of the toy industry overall. Fisher-Price is the market leader; it's a brand that has been around for more than 90 years, globally recognized and cherished by generations of parents and families, and there is significant vested value in that brand. We are looking at the numbers and want to make sure the business is in the best position to grow and achieve its full potential. We'll come back with more information down the road.

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

First, Ynon, maybe away from the digital gaming strategy, I was curious if you could maybe talk a bit more about the strategic initiatives you laid out last quarter and some of the organizational changes that have taken place over the last couple of months. Where are you investing in the business today? How should investors expect to see some of these initiatives and changes playing out over the balance of the year as you work towards that goal of capturing more value from your IP faster?

Yes. Thanks, Stephen. This goes back to our strategy that is oriented around being more brand-centric where this is no longer about toys versus non-toys. This is about growing our brands holistically. The new operating model we are deploying is designed to accelerate the value that we will capture out of our brands. Toys remains a key pillar of this strategy—it's a foundational part of our business and we believe there is significant upside in the toy industry, and we're seeing it play out this quarter as well as last year, and we expect that will continue for the full year in 2026. That said, we would like to leverage the success we have in toys and the strength of our brands outside of the toy aisle. To do that, a holistic management of the business with brand-centric planning allows us to be more effective in how we create demand. In the past, the orientation was more about promoting certain toy lines. We are shifting more towards brand marketing, not specifically just on certain lines or certain products, but more holistic marketing and looking to leverage the significant resources we spend in demand creation across the business overall. The other thing is it allows us to manage the business holistically where success in toys and success in entertainment will reflect and inflect back on the broader business. For example, when developing digital game titles based on our brands, we do it with a holistic strategy to promote both the games as well as stories, content, location-based entertainment and other executions. We believe if we do this right, as we are now deploying, it will accelerate our business significantly and drive higher margin and stronger performance overall.

Your next question comes from the line of Eric Handler with ROTH Capital.

Ynon, I wonder if you can talk a little bit about Mattel Brick Shop. Reviews have been really strong for the product line. Just wondering how fast this can ramp so that it's a meaningful contributor to the business? And when will we start seeing full shelves at retail? And just talk about some of the dynamics going on there, please?

Thanks, Eric. The Building Sets category is one of the fastest-growing parts of the toy industry, obviously driven by LEGO. Within the building sets category, building sets for cars specifically is one of the fastest-growing segments. When it comes to vehicles, we are by far the global leader. We understand car culture better than anyone. With Mattel Brick Shop, we brought our expertise in cars together with the capabilities and innovation we have within our building sets footprint and created an exceptional product. What is unique about Mattel Brick Shop is that these are not just cars you construct and put together—by the time you finish building them, they look and feel like cars. We infused metal parts, rubber wheels, and great packaging and branding. The instruction manual itself is a book you would put in your library. The quality is that high. We're very excited to see the initial reaction. Consumer demand is stronger than we can accommodate. We are chasing demand. It's growing double digits, and we believe there's significant runway ahead of us—not just in 2026 or 2027. This can be a long-term growth driver and really leverage the Mattel playbook across cars and building sets by infusing innovation, brand purpose, cultural relevance, great partnerships and a franchise mindset that extends play patterns and creates multiple touch points across entertainment verticals and other opportunities to engage fans.

Okay. And then as a follow-up question: when you look at the mobile gaming industry, it is the largest segment within the video games business but has become very mature, growing maybe low single digits. It's very competitive and costs a lot to scale a game. So I'm wondering why you view that this is a business Mattel wants to be in? How are you going to measure success in the genre?

You're right in the premise that it is competitive, but a few things have changed in industry dynamics. It is now less costly to develop a game: you don't need to own a large studio or the game engine. For the development of a mobile title, you can fund development in the single-digit million dollar range. What is more capital intensive is user acquisition. However, user acquisition today is driven by performance marketing where you can understand and measure the ROI of your spend. So while you do spend capital, you typically do so when you know the marketing and user acquisition will yield the expected return. What is unique to Mattel is the strength and appeal of our brands. Our economics are different from a typical publisher because people proactively search to engage with our brands. When we put out a Barbie-branded game on Roblox, it was the #1 branded game for more than a year with essentially zero marketing. When we put out an UNO experience on Fortnite, on the first day it became one of the top 10 most active experiences on the platform against thousands of islands and experiences. We know our brands percolate to the top and people proactively search for them. Because of that, our economic equation for demand creation and user acquisition is different. With good execution—and execution is critical—we believe our capabilities and the partners we work with will enable us to deliver successful experiences that have the potential to generate asymmetric returns for Mattel. We're excited to participate in this large and important part of the ecosystem.

Your next question comes from the line of Anthony Bonadio with Wells Fargo.

So just to start on Masters of the Universe: it seems like some of the forecasting services are projecting it's doing pretty well at the box office. Can you talk a bit about how we should think about the lift to earnings, if that's the case, and walk us through what's embedded in guidance around this?

Yes. Things are tracking well and there's a lot of excitement around the trailers and initial marketing campaign; the actual campaign is about to kick off, so you will see a lot more activity. At the same time, we know it's hard to predict box office—this is Hollywood—but already Masters of the Universe is a big win for Mattel. The buildup toward the movie is driving awareness and strengthening relationships with fans. We have dozens of partners around the world, and we're seeing product sales ramping and growing double digits; it's only going to get stronger from here. What's unique about this movie is that it reimagines the classic mythology and will engage legacy fans while also appealing to young kids in a contemporary, culturally relevant way. It is an important addition to our portfolio and will drive toy sales—the movie is very toyetic. We rolled out our product offering this past weekend, a combination of mainline as well as collectors, and the response has been strong. We are very positive about it. We said it will be a driver, we expect double-digit growth and we expect it will give a whole new generation of fans an opportunity to engage with this franchise.

That's helpful. And then framing Megan's question another way: if commodity and freight prices remain where they are today, does that mean guidance remains intact for '26? Or does that become more of a challenge as the year progresses?

I'll take that one. As we said before, we're not immune, but at this point it depends how long the disruption lasts and how long oil prices remain elevated. So at this point, the guidance remains intact with those assumptions in mind.

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

I apologize if you've already addressed this, but I want to dig a little bit into the expected sales cadence for the year. Obviously, Q1 turned out better than you expected. Do you still expect a large step-up in sales growth in Q2? And any changes in how retail inventory posture has changed over the quarter would be helpful.

Yes, Kylie, I'll take that one. We had a good first quarter overall from a performance perspective, but we still have three quarters to go and Q1 is a small quarter. What we see into Q2 is certainly acceleration in the early times of the quarter in POS and acceleration in shipping in Q2 year-to-date. POS, given the seasonality in Easter, is flat to slightly down, but we're encouraged by the acceleration in shipping in Q2 year-to-date. Our full-year guidance remains unchanged: a strong start to the year, acceleration in Q2, and we continue to see strength in the second half of the year.

Great. And then any update on the strategic review of infant, toddler and preschool?

No update. We continue to assess the business. We talked about the importance of the category and the importance of Fisher-Price within the category, and we'll come back with more detail about our review of the best positioning of this business to maximize its potential.

Your next question comes from the line of Gerrick Johnson with Seaport Research Partners.

So on the investment spending, the $150 million—or actually the $110 million excluding the $40 million in user acquisition—is that still the target, $110 million for the year? And how much has been incurred so far?

Yes, that is still the target. We are not breaking out the spend by quarter, but we are tracking on plan in full execution mode across all the initiatives we mentioned. It's still early in the year, but we're happy with the progress and very confident that these investments in aggregate will have high ROI with a net positive contribution to the bottom line in 2027 and beyond. We talked about the areas where we invest—this is about our owned brands and designed to accelerate and improve performance overall.

Okay. And perhaps related, CapEx for the quarter looked like $65 million, the highest first quarter CapEx since 2017. What's your CapEx guidance for the year? And why was it so high in the first quarter?

We don't necessarily guide CapEx specifically, but we are investing in our infrastructure and this is in line with our guidance in terms of cash flow in general. We are tracking to our expectations. Overall, this is in line with the 3% to 4% of net sales that we have executed on over the last few years. We are doing normal upgrades to increase productivity and efficiency and it's pretty much in line with our expectations.

Still within the framework of 3% to 4% of net sales, which we believe is healthy and controlled in line with our capital-light orientation and capital allocation priorities.

Your next question comes from the line of Chris Horvers with JPMorgan.

I wanted to follow up on the tariff question. If refunds come through and you're shipping product in the back half of the year at a lower tariff rate, how do you think retailers will behave? Do you expect to regain the gross margin rate, or do you think retail partners will look for price reductions given how important the category is to driving traffic to stores?

I wouldn't speculate on what future tariff rates will look like. It's early days, but we are in constant conversations with our retail partners. We want to see how the refund process works out. Also keep in mind that we do not set retail prices—the retailers do. We work closely with them on a variety of issues, and this is one of them.

Got it. I wanted to clarify the POS comment. Quarter-to-date it's flat to slightly down and that includes an Easter headwind. How do you think about it on a year-to-date basis? As you think about the shipping strength you're seeing now, you're lapping some deferred retail orders from last year and you have Masters of the Universe and Toy Story—can you give insight into how much of the Q2 improvement is comparison-driven versus organic uptick?

I don't want to get deep into POS as we do not guide on POS, but I can tell you our gross billings are coming in strong for the second quarter. Last year we started to see disruption due to tariff uncertainty. This is a combination of what we are comping from last year and our strong portfolio and innovation. So it's both comparison and our underlying strength.

To add, we said in the prepared remarks that U.S. retailer ordering patterns are stabilizing. This is an important comment. Over the last four quarters the shift in ordering patterns was a headwind for us. We believe U.S. retailers' ordering patterns are stabilizing and, in line with that, we expect our North America region to grow in the second quarter.

Your final question for today comes from the line of James Hardiman with Citi.

I want to make sure I understand. Revenues were better than you anticipated in Q1, but gross margins compressed more than we modeled. Maybe walk us through the buckets on Slide 12—the bridge—and how those performed relative to expectations. How do those trend as we move through the year? FX looks like it was a headwind and you expect it to flip to a tailwind—any thoughts on timing? And inflation seems unrelated to Middle East developments so far. As we think about Q2 and beyond, any help on how those buckets look from a gross margin perspective?

Remember, we previously said Q1 gross margin would be down. The decline was due to the expected gross incremental cost of tariffs, as shown in the bridge, unfavorable foreign exchange and inflation. The inflation impact, by the way, is unrelated to the Middle East because it hasn't hit our P&L. Going the other way we had tariff mitigation actions, including our optimizing for profitable growth savings, which partially offset those headwinds. Also keep in mind Q1 is a small quarter, so small dollar shifts can cause big swings in margin percent. For the year, we are on track to achieve our full-year adjusted gross margin guidance of approximately 50%, and this includes an expectation of sequential improvement in Q2, although we expect it will remain below 50% in Q2 and then improve in the second half to reach the full-year guidance.

Okay. And then a similar question on OpEx: advertising and promotional expense was up about 32%. It sounds like there was some timing that affected that number. Any thoughts about how to think about the trend for the remainder of the year and the timing of incremental investment spend?

For SG&A, it increased $19 million primarily due to the strategic investments that we talked about. We do not guide line-by-line for the year, but this includes the incremental investments we discussed. There's also some timing associated with A&P tied to the shift in the Easter holiday. We are tracking to our expectations for the pacing of our investments.

We don't have another question. Thank you, everyone, for joining us today and for all your questions. Just to say in closing, we are closely monitoring macroeconomic developments. Clearly a lot of things are going on and we are watching how things pan out. Yet we have a lot to look forward to this year. Our outlook reflects the momentum of our strategy to grow our IP-driven play and family entertainment business and we are excited to continue to execute the strategy for the rest of the year. We appreciate the time. Thanks again for joining the call.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.