Earnings Call Transcript - MAT Q3 2022

Operator, Operator

Ladies and gentlemen, thank you for being here. My name is Brent and I will be your conference operator today. I would like to welcome everyone to the Mattel Incorporated Fourth Quarter 2022 Earnings Conference Call. All lines have been muted to eliminate background noise. After the speakers finish their remarks, there will be a question-and-answer session. Thank you very much. Now, I will turn the call over to Mr. David Zbojniewicz, Head of Investor Relations. Please go ahead, sir.

David Zbojniewicz, Head of Investor Relations

Thank you, operator and good afternoon, everyone. Joining me today are Ynon Kreiz, Mattel's Chairman and Chief Executive Officer; Richard Dickson, Mattel's President and Chief Operating Officer; and Anthony DiSilvestro, Mattel's Chief Financial Officer. As you know, this afternoon, we reported Mattel's 2022 third quarter 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 Ynon, Richard, and Anthony to take questions. To help supplement our discussion today, we have provided you with a slide presentation. Our discussion, slide presentation, and earnings release may reference non-GAAP financial measures including adjusted gross profit and adjusted gross margin, adjusted other selling and administrative expenses, adjusted operating income or loss and adjusted operating income or loss margin, adjusted earnings per share, adjusted tax rate, earnings before interest, taxes, depreciation and amortization or EBITDA, adjusted EBITDA, free cash flow, free cash flow conversion, leverage ratio, net debt, and constant currency. In addition, we present changes in gross billings, a key performance indicator. Please note that we may refer to gross billings as billings in our presentation. Gross billings figures referenced on this call will be stated in constant currency unless stated otherwise. Our accompanying slide presentation can be viewed in sync with today's call when you access it through the Investor 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 indicator, is included in our earnings release and slide presentation, and both documents are also available in the Investor section of our corporate website. The preliminary financial results included in the press 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 from these preliminary results 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, including risks and uncertainties associated with the COVID-19 pandemic and the Russia-Ukraine war. We describe some of these uncertainties in the Risks Factor section of our 2021 Annual Report on Form 10-K and in our second quarter 2022 quarterly report on Form 10-Q. Our earnings release and the presentation accompanying this call 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, Chairman and CEO

Thank you for joining our third quarter 2022 earnings call. The third quarter results reflect the resilience of our diversified portfolio and our success in executing our strategy. Despite significant inflation, foreign exchange headwinds, and a challenging macroeconomic environment, we achieved growth in net sales in constant currency and adjusted EBITDA. Looking at the third quarter financial highlights compared to the prior year, third quarter net sales were flat and up 3% in constant currency, making it the ninth consecutive quarter of growth. Year-to-date, net sales increased 10% and 13% in constant currency. Adjusted operating income was down 1%; year-to-date adjusted operating income was up 22%. Adjusted earnings per share was down $0.02; year-to-date, adjusted EPS was up $0.30, or 38%. Adjusted EBITDA increased $10 million, or 2%. Year-to-date, adjusted EBITDA was up $125 million, or 18%. According to The NPD Group, for the third quarter and year-to-date, Mattel was the number one toy company in the U.S. overall and number one globally in our leader categories: dolls, vehicles, and Infant Toddler & Preschool. Additionally, our power brands, Barbie, Hot Wheels, and Fisher-Price were each the number one property in their respective categories. Looking at gross billings in the third quarter in constant currency compared to the prior year, Mattel grew 3%; vehicles, action figures, and building sets all grew double digits, while dolls were flat, and Infant Toddler & Preschool declined in single digits. Geographically, our international segment grew double digits, partially offset by a mid-single digit decline in North America. Year-to-date, total company gross billings grew 13%. Total company point of sale was essentially flat in the third quarter, with growth in all international regions offset by a decline in North America. Our 2022 price increases have been successfully implemented, and while it is still early, we have not seen a meaningful impact on consumer demand. Adjusted EBITDA benefited from pricing actions and cost savings, which more than offset significant cost inflation. We're maintaining guidance for the full year 2022 net sales growth in constant currency of 8% to 10%. Yet, we do see a more challenging macroeconomic environment and increased volatility heading into the latter part of the year. As we expect higher pressure on gross margin, we're revising guidance for 2022 adjusted EBITDA down slightly to $1.05 billion to $1.1 billion, representing growth of 4% to 9% versus 2021. Anthony will cover our updated guidance in more detail shortly. In the fourth quarter, we have higher advertising and planned promotional activity, and we have secured more shelf space and omnichannel retailer support compared to the prior year. We also have greater holiday toy list representation and much stronger in-stock and inventory levels than this time last year. We expect point of sale to accelerate in the fourth quarter and to outpace shipping. Looking beyond this year, 2023 is shaping up well. This will be driven by strong cross-category innovation and the broadening of our portfolio, including the global rollout of Monster High, the return of Disney Princess and Frozen franchises, and the addition of Universal’s Trolls, as well as the global premiere of the Barbie movie, our first theatrical release. We plan to provide full year guidance for 2023 during our 2022 fourth quarter call. The year-to-date performance and full year outlook are in line with our strategy to grow Mattel's IP-driven toy business and expand our entertainment offerings. Mattel strengthened its position as a partner of choice for major entertainment companies. We recently extended our relationship with the Pokemon Company by signing a multi-year license renewal for building sets in all major markets. Mattel Creations continues to gain momentum as a highly curated direct-to-consumer experience, targeting the collector market, with exciting new products and international expansion. We continue to make progress on capturing the full value of our IP in highly accredited business verticals outside of the toy aisle. The Monster High live-action television musical movie premiered earlier this month and was the number one kids and family movie on Paramount Plus during its launch week. The movie reached over 4 million total viewers on linear and Nickelodeon networks. Following the strong performance, the sequel has just been greenlit. The Monster High animated series will launch just in time for Halloween. Pictionary premiered on Fox and CBS affiliates in September and is growing its audience week-over-week. A second season of the new animated preschool series Deepa & Anoop will premiere on Netflix in November, and we recently announced new seasons for Thomas & Friends, Polly Pocket, and Fireman Sam. The latest Barbie animated movie was just released on Netflix today, part of a new multiyear agreement with Netflix for exclusive content that will also include three original series. The Barbie theatrical film continues to generate audience excitement. Having completed principal photography this past summer, the movie is currently in post-production, and we eagerly anticipate its global release in July next year. We also expanded our presence on Roblox to include Barbie and Polly Pocket in the Livetopia virtual world, in addition to our Hot Wheels and Masters of the Universe standalone games on the platform. In the growing space of NFTs, we announced a digital art collaboration for Barbie with women's empowerment brand Boss Beauties for 15,000 one-of-a-kind NFTs to debut later this year on Mattel Creations. Mattel is being recognized for its achievements in workplace culture and employee well-being. Mattel was recently included among the world's best employers by Forbes, best workplaces for innovators by Fast Company, the 100 Best Companies by Seramount, and the Healthiest 100 workplaces in America. All in all, this was a good quarter for Mattel, with the ninth consecutive quarter of year-over-year net sales growth in constant currency. Year-to-date results show that we are successfully navigating a complex environment. The strategy to grow our IP-driven toy business and expand our entertainment offering is working. We look forward to the all-important holiday season and believe we are on track to achieve another growth year for the company. While we're seeing higher volatility related to macroeconomic challenges that may impact consumer spending, the toy industry has historically demonstrated its resilience during difficult economic times, and is forecast to grow for the full year and thereafter. We believe our fundamentals are strong. Mattel's portfolio is resilient and well-balanced with thriving brands that continue to drive increased consumer engagement and cultural relevance. There is product innovation in all categories, and we are entering new whitespace opportunities. Our partnerships with major entertainment companies are growing, and we are winning new key licenses. We are making progress on capturing the full value of our IP in highly accretive business verticals outside the toy aisle, with more opportunities in content, digital experiences, and consumer products. The balance sheet is healthy and about to become another growth lever. Our world-class leadership team and global organization are executing with excellence. We believe we're well positioned to further grow the business, increase market share, and create long-term shareholder value. Now, Anthony will cover the financial performance in more detail.

Anthony DiSilvestro, Chief Financial Officer

Thanks, Ynon, and good afternoon. As Ynon said, we achieved good results for the quarter in the midst of a challenging macroeconomic environment. We generated net sales of $1.756 billion, flat to the prior year, and up 3% excluding the negative impact of currency translation. Adjusted gross margin increased by 50 basis points as the benefit of pricing actions and cost savings more than offset cost inflation. Adjusted operating income was $398 million, declining 1% due primarily to an increase in advertising expense, mostly offset by the increased adjusted gross margin percentage. Adjusted EPS was $0.82, compared to $0.84 in the prior period, a decline of 2%. Excluding the one-time costs associated with the debt paydown in the prior year, interest expense was comparable to the prior year, while the adjusted tax rate increased two percentage points to 22%. Adjusted EBITDA increased $10 million, or 2%, to $473 million. Our year-to-date performance, which benefited from retailers' increasing inventories in the first half, had been very strong, with key metrics increasing double digits. Net sales grew 10% and were up 13% excluding the negative impact of currency translation. Adjusted operating income increased 22%, and adjusted EBITDA grew by $125 million, or 18%. Turning to gross billings in constant currency, the third quarter was up 3% and year-to-date was up 13%. Dolls were flat with growth in Monster High and Polly Pocket offset by a decline in Barbie and licensed properties. Barbie was down 3% after two full years of double-digit gains and the highest year on record. Year-to-date category gross billings grew 3%; vehicles increased 17% driven by Hot Wheels, which also grew 17%, achieving a record third quarter. Year-to-date category gross billings grew 25%. Infant Toddler & Preschool was down 6% due to declines in baby gear and newborn and infant products, partly offset by growth in Imaginext and Little People. Year-to-date category gross billings grew 7%. Challenger categories in aggregate increased 3%, driven by double-digit growth in action figures and building sets, partly offset by declines in plush and games. Year-to-date, Challenger categories gross billings grew 25%. From a geographic perspective, we achieved growth in three out of four regions. North America declined by 4%, following the first half in which retailers accelerated purchases. Gross billings year-to-date were up 12%. Consistent with gross billings, point of sale declined by mid-single digits in the third quarter. EMEA achieved another strong quarter of growth, with gross billings increasing by 8%. Point of sale was up low-single digits and outpaced the industry. Latin America had an exceptionally strong quarter with gross billings increasing by 23%, driven by growth in all reported categories and key markets. Point of sale was up mid-single digits. Asia-Pacific growth domains grew 11%, driven primarily by strong growth in Australia and Japan, partly offset by declines in China, which continues to be impacted by COVID-related retail closures. Point of sale increased double digits, primarily driven by gains in Australia. Quarter-end retail inventory levels were up in both dollars and weeks of supply as we head into the holiday season. Inventory is of good quality, and we are working closely with our partners to meet the anticipated acceleration in point of sale. Adjusted gross margin increased 50 basis points to 48.3% as pricing and cost savings exceeded significant cost inflation. Here are the components of the increase in gross margin. On the positive side, pricing, primarily the benefit of our midyear actions contributed 240 basis points; savings from optimizing for growth added 140 basis points, and other factors added 30 basis points. These gains were partly offset by the impact of cost inflation, a negative 330 basis points, and royalties, a negative 30 basis points associated with the high growth of licensed properties. Moving down the P&L, advertising expenses increased 8% to $128 million as we support our brands and drive demand. Adjusted SG&A expenses of $323 million were comparable to last year as salary inflation was offset by lower incentive compensation expense and incremental optimizing-for-growth savings. Adjusted operating income declined by 1% to $398 million, due to higher advertising expense, mostly offset by an increase in adjusted gross margin. Adjusted EBITDA increased by $10 million, or 2%, to $473 million. Year-to-date, adjusted EBITDA was up strongly by $125 million, or 18%. Cash from operations for the year-to-date period was a use of $275 million, reflecting the seasonality of the business compared to $256 million in the prior year. The increased use of cash was primarily due to higher working capital usage, mostly offset by higher net income, excluding the impact of non-cash items, which in the prior year included the release of the deferred tax valuation allowances. Free cash flow year-to-date was negative $402 million, compared to negative $371 million in the prior year. Capital expenditures increased to $127 million, compared to $115 million in the prior year period. On a trailing 12-month basis, we generated $303 million of free cash flow, compared to $320 million in the prior period. The decline is due to increased working capital usage and higher capital expenditures, mostly offset by higher cash earnings. Increased working capital requirements are primarily due to declines in current liabilities and growth in inventory. Free cash flow conversion for the trailing 12-month period was 27% compared to 33% in the prior year period. Taking a look at the balance sheet, cash balance was $349 million compared to $149 million in the prior year. Total debt was $2.574 billion, compared to $2.698 billion. Total debt net of the cash balance or net debt declined to $2.225 billion compared to $2.549 billion in the prior year, an improvement of $324 million reflecting our free cash flow generation over the last 12 months. Looking ahead, we intend to use available cash in the fourth quarter to repay the upcoming maturity of $250 million 3.15% notes. Accounts receivable declined by $56 million to $1.382 billion due primarily to the negative impact of foreign currency translation. Inventory was $1.084 billion compared to $854 million last year, an increase of $230 million or 27%. The increase reflects higher quantities as we accelerated seasonal production and the impact of cost inflation, partly offset by currency translation. This position has improved meaningfully relative to last quarter when inventory was up $360 million or 44%, and we expect the trend to continue to improve. The leverage ratio at the end of the third quarter was 2.3 times debt to adjusted EBITDA compared to 2.8 times in the prior year. The improvement is driven by the combination of growth in adjusted EBITDA and debt reductions. We continue to make progress toward our goal of achieving an investment-grade rating. We continue to generate significant cost savings. Optimizing for growth program savings were $29 million in the quarter, $24 million of which benefited cost of goods sold. Looking ahead, we continue to expect the program to achieve incremental savings of $80 million to $90 million in 2022 and total savings of $250 million by 2023 since launching the program in 2021. As Ynon mentioned, we are maintaining our guidance for full year 2022 net sales growth in constant currency of 8% to 10%. This is expected to be driven by Vehicles and Infant Toddler and Preschool categories, led by Hot Wheels and Fisher-Price and Thomas & Friends, respectively, as well as our Challenger categories in aggregate led by action figures. We now expect the Dolls category to decline slightly with Barbie and American Girl to decline low single digits. We are confident about the long-term growth trajectory of Barbie and American Girl. We now anticipate that currency translation will have a negative impact of three to four percentage points on net sales, reflecting the recent adverse movement in foreign currency rates. Adjusted gross margin is now expected to be approximately 47%, compared to 48.2% in 2021. This is modestly below our prior guidance from July and reflects the financial impact of managing higher inventory levels through the balance of the year. Adjusted EBITDA is now expected to be in the range of $1.05 billion to $1.1 billion, slightly below our prior guidance and up from a 2021 base of $1.007 billion, representing growth of 4% to 9%. The change from the prior guidance reflects the lower gross margin expectation and the impact of currency translation. We continue to expect, as a percent of net sales, SG&A to decline and for advertising to remain relatively flat. From our 2021 base of $1.30, adjusted EPS is now expected to increase to a range of $1.32 to $1.42 per share. We continue to expect an adjusted 2022 tax rate of 26% to 28% compared to 25% in 2021. Consistent with prior guidance, capital expenditures are forecast to be in the range of $175 million to $200 million, an increase from the prior year as we strategically invest to increase manufacturing capacity in our owned Dolls and Vehicles facilities, in which we have a significant competitive cost advantage. We are operating in a challenging macroeconomic environment with higher volatility, including inflation that may impact consumer demand. The guidance considers what the company is aware of today but remains subject to further market volatility, any unexpected disruption and other macroeconomic risks and uncertainties. With respect to our previously stated 2023 goals, given the increased volatility in the market, as well as the revised 2022 outlook, we are reevaluating our expectations and will provide annual guidance for 2023 on our 2022 fourth quarter earnings call. That said, we are confident in our continuing growth trajectory and expect top and bottom line growth next year. In closing, Mattel executed a good quarter, and we are very pleased with our year-to-date results with double-digit top and bottom line growth. We are improving our leverage ratio, and consistent with our capital allocation priorities, are making progress towards achieving investment-grade credit ratings. We believe we are well positioned to continue our growth trajectory. Thanks for your time today, and I will now turn it over to the operator for Q&A.

Operator, Operator

Your first question comes from Drew Crum with Stifel. Your line is open.

Drew Crum, Analyst

Okay, thanks. Hey, guys. Good afternoon. So on the last call, as it relates to point of sale, I think you indicated that point of sale in the second half would outpace the first half. Third quarter, flattish. Fourth quarter, if I heard you correctly, you're suggesting it will outpace shipment growth. With that in mind, can you still achieve that second half point of sale school? And then I have a follow-up.

Anthony DiSilvestro, Chief Financial Officer

Yeah. This is Anthony. I'll start. I mean as we look ahead, we expect fourth quarter point of sale to accelerate and to outpace shipping. Obviously, we're working closely with our retail partners to meet the anticipated acceleration. There are a number of reasons and demand drivers that are out there. We have increased advertising support in the fourth quarter, more promotional activity with our retailers. We have more shelf space and greater representation in toy lists. So a lot of reasons to believe in our expectation is that point of sale will accelerate.

Ynon Kreiz, Chairman and CEO

I'd also add that quarter-to-date point of sale is in line with expectations, and we are pleased with our performance. It's also worth noting that shoppers are returning to traditional purchasing patterns closer to the holiday season, so we expect to see point of sale accelerating and outpace shipping.

Drew Crum, Analyst

Got it. Okay, okay. Thanks, guys. And then just as a follow-up. You mentioned in your preamble, acceleration in ordering by the domestic retailers during the second quarter. Was there anything else to explain the divergence between the North American performance and international performance on gross billings during the third quarter? Thank you.

Ynon Kreiz, Chairman and CEO

Yeah. There were certain categories in the U.S. that performed disproportionately well, where we traditionally under-indexed, specifically plush and trading cards. However, I wouldn't look at the quarter in isolation. Year-to-date, we're up 12% in the third quarter. We've been number one in the U.S. for 28 consecutive years. We're also number one in our leader category, and our power brands are each number one in their respective categories. So we're very confident about our success in North America and believe we are well-positioned to continue the growth trajectory.

Operator, Operator

Your next question comes from the line of Eric Handler with MKM Partners. Your line is open.

Eric Handler, Analyst

Good afternoon, and thank you for the question. I was wondering if you could talk a little bit more about the state of retail, particularly in North America right now. Are you seeing increased market volatility? Do retailers cut back on orders at all? Are they reducing the amount of days inventory held at stores? Can you give us some perspective on what's going on, particularly also as you look at the various platforms, maybe mass merchants versus dollar stores versus online platforms? And then I have a follow-up.

Ynon Kreiz, Chairman and CEO

There's no secret that there is a volatile environment and macroeconomic challenges that could affect consumer demand. But with all that, the toy industry has historically demonstrated its resilience during challenging economic times. It has grown year-to-date, and according to your monitor, they continue to expect the industry to grow at 5.5% CAGR through 2026. We expect consumers to spend the same or more this coming Christmas or the holiday season relative to last year. We are seeing purposeful brands and quality toys resonating with consumers now more than ever. We believe that important big brands and quality products will end up winning the season. This is what we're focused on. This is where we excel, and as Anthony mentioned, we expect to have more advertising and promotion in the quarter, more shelf space, better representation on the holiday toy list, and in-stock inventory. So we believe we are well-positioned for the coming season and continue to grow next year in 2023, both top-line and bottom line.

Eric Handler, Analyst

Okay, and then for Anthony. I imagine it's been a little frustrating waiting for the investment-grade credit rating upgrade. Can you sort of give us an update on where that stands? What sorts of credit ratings may be waiting on? Once you do get that upgrade, what are some of the immediate things you could sort of do because of that?

Anthony DiSilvestro, Chief Financial Officer

The first comment to make is we continue to make really good progress in improving our balance sheet and our leverage ratio. We finished Q3 at 2.3 times debt to adjusted EBITDA, and that's down from 2.8 times in the prior year. Our capital allocation priorities have been to invest in organic growth and to get our leverage down and maintain a target range of 2 to 2.5 times, and we've done that. As we look at an investment-grade rating, it is an important milestone for Mattel. With a stronger balance sheet, we will have the flexibility to consider other priorities such as M&A and share repurchases. So we continue to make progress and have ongoing dialogue with the rating agencies and continue to deliver against improving that balance sheet and reducing leverage.

Ynon Kreiz, Chairman and CEO

To add to Anthony's comments, as we said, we do see our balance sheet and capital structure becoming another growth lever. We've focused on improving it significantly. We also talked about repaying another $250 million in notes before the end of the year. We're continuing to strengthen our position and turning our balance sheet into another lever of growth.

Operator, Operator

Your next question comes from the line of Linda Bolton-Weiser with D.A. Davidson. Your line is open.

Linda Bolton-Weiser, Analyst

Barbie, I think you had said before that it was kind of like the higher price point items like the Dreamhouse-type items that were most impacted. Is that still the case? Or is there something else that has spread a little bit more in terms of the weakness in Barbie?

Richard Dickson, President and COO

Linda, it's Richard. You cut out on the first part of the question, but I did catch the second part, which might sum it up. So I'll answer it from a Barbie perspective in total. We're very confident in Barbie's long-term growth trajectory. Clearly, she's the number one global doll property. We continue to execute in line with our playbook. Year-to-date, Barbie gross billings were up 3% in constant currency, which is an excellent achievement when we compare it to 2021, which, as you recall, was the highest year on record. As expected, Barbie did see a modest decline in the third quarter and more specifically on higher price point items like the Dreamhouse, which you mentioned and which we shared last quarter. The brand, however, continues to be on the forefront of cultural conversation. We've driven the biggest style trend in fashion recently with the Barbie Core Trend. We're looking forward to 2023. We have a strong innovation pipeline and continued expansion of brand experiences across multiple platforms. This includes a new slate of content with Netflix as well as the highly anticipated Barbie theatrical movie release for next summer. It's also important to note that Barbie has doubled in size over the past five years and remains the number one global toy property overall for the last two years, which speaks to the strength of the brand.

Linda Bolton-Weiser, Analyst

Okay. And then sticking with Dolls for a minute. In terms of your Monster High sell-in, your shipments into the channel, in terms of what was planned for the second half, what percentage of that was roughly done in the third quarter? And then what percentage would be done in the fourth quarter in terms of the sell-in?

Richard Dickson, President and COO

We can't share the percentages, but what I can tell you is that we're incredibly happy and encouraged with the performance that we've had to date on the relaunch of Monster High. We launched it with a live-action television musical movie, which premiered this month. It was also the number one kids and family movie on Paramount Plus during the week of its launch, reaching over 4 million total viewers on linear Nickelodeon networks. Following that strong performance, we've greenlit a sequel. We have 26 episodes of the Monster High animated series launching on Friday, October 28 on Nickelodeon, just in time for Halloween. We have new kid-targeted products hitting shelves that will coincide with the content releases. It's really off to a spectacular start. We're looking forward to continued roll-out of Monster High in North America this year and internationally in 2023.

Linda Bolton-Weiser, Analyst

Can I just sneak in one more? Do you have a target for your own inventory balance roughly at the end of the year?

Anthony DiSilvestro, Chief Financial Officer

As we look at our inventory level, we finished the third quarter up $230 million to 27%, and we're making improvements sequentially. Q2 was up $360 million or 44%, and we expect that trend to continue and improve through the balance of the year. We believe that our year-end inventories will be modestly above prior year levels.

Operator, Operator

Your next question comes from the line of Megan Alexander with JPMorgan.

Megan Alexander, Analyst

Hi, good afternoon. Thanks for taking our question. Maybe just a quick follow-up on Drew's question earlier. Can you clarify what's implied in the fourth quarter guide from a point of sale standpoint? You said quarter-to-date is in line with expectations, so does that mean it's accelerated versus the third quarter and it's positive now? Or are you expecting a further acceleration from here? I think it makes a lot of sense that consumers are shifting their spending back to more traditional patterns, but you've also highlighted increased volatility multiple times. So just trying to reconcile what may sound like more caution on the consumer spending outlook with an expectation that point of sale accelerates from here.

Anthony DiSilvestro, Chief Financial Officer

It's a little early to talk about quarter-to-date point of sale performance in any detail. What we did say is that we expect point of sale to accelerate in the fourth quarter and outpace shipping. And remember, that's in the context of shoppers returning to traditional buying patterns, where they buy closer to the holiday season. There are many reasons to believe that point of sale will accelerate based on advertising, promotional activity, shelf space, and the circulars and toy lists that are out there. So again, we're very confident in the statement about point of sale accelerating in the fourth quarter.

Megan Alexander, Analyst

That's helpful. And then maybe a question on '23. You talked about expecting top line and bottom line growth. Can you spend a little bit of time just talking about some of the puts and takes on the margins? Are you seeing costs sequentially improve? Should we anticipate that gross margin will be a tailwind in '23 if sales are up? And then on the SG&A side, do you still have cost savings there? Are there other levers to pull if the top line comes in weaker than you had previously expected?

Anthony DiSilvestro, Chief Financial Officer

With respect to 2023, again, we're going to provide guidance on our fourth-quarter call. But in terms of inflation, you saw in the P&L, it had a significant impact in Q3, 330 basis points. However, we're seeing some improvement in market prices for ocean freight and materials, though we are continuing to face pressure on wage rates. Overall, we expect inflation to moderate as we go into 2023. It's premature to discuss our overall gross margin. We're shaping up well for next year. We have significant drivers like the global rollout of Monster High, the return of Disney Princess and Frozen franchises, and the Barbie movie, which we believe will all positively impact our business.

Operator, Operator

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

Arpine Kocharyan, Analyst

Hi, thank you. Thanks for taking my question. Could we go back to Barbie for a second? There's a lot of skepticism around whether Barbie can grow next year. I guess, what are your thoughts around that? You obviously have never had such a big box office event for the brand at the same time. It's not animation, which can be a bit tricky. I know it's very early at this point. But as you think about the brand and what's in store for 2023, do you see that growing from these record levels?

Richard Dickson, President and COO

Arpine, thank you for the question. We're incredibly confident in Barbie for a host of reasons, particularly the last five years of proof. It's doubled in size over the past five years, which is quite an achievement. We have strong innovation, Netflix slates, and franchise initiatives. We're excited about the highly anticipated Barbie movie release next summer, which will generate significant interest. All things considered, we are confident in the long-term growth trajectory of Barbie. It's been the reigning number one doll of all time, consistently performing well. Our category structure supports our overall doll category, and we're confident that all our brands can thrive together.

Arpine Kocharyan, Analyst

Great, thanks. Most of my questions on margin have been answered. I was hoping you could talk a little about Monster High and sizing that opportunity. It's a significant brand and certainly north of $500 million and very high margin. What are your targets after the initial launch as a near-term goal thinking about March 2023 versus what this could be in two years or three years?

Richard Dickson, President and COO

Monster High is an incredible property within Mattel's treasure trove of brands. We've taken a very strategic approach to the relaunch. We started with our Mattel Creations Collector Drops, which have been highly successful, and we coordinated with Nickelodeon to create a live-action musical movie. We've already seen a strong start in North America, and we're excited for its continued rollout internationally. While we can't provide specific targets, it's a significant opportunity, and we believe it will be a top ten property in the fashion doll ranking.

Operator, Operator

Your next question comes from the line of Andrew Uerkwitz with Jefferies. Your line is open.

Andrew Uerkwitz, Analyst

Hey, thank you for taking my question. Can you quantify a little bit of the different pieces affecting inflation regarding what's the biggest pieces versus the smallest pieces?

Anthony DiSilvestro, Chief Financial Officer

So the negative impact of inflation was 330 basis points in Q3 and 410 basis points year-to-date. The primary driver is the increase in ocean freight rates, which had the biggest impact. This is followed by increases in materials, primarily resins and zinc, and the balance being an increase in labor costs in key supply chain markets.

Andrew Uerkwitz, Analyst

Got it. That's helpful. Thank you. One more question on the entertainment side. Can you quantify the impact of initiatives around entertainment in correlation to sales? Or is a lot of these initiatives more focused on customer awareness and brand strategies?

Ynon Kreiz, Chairman and CEO

We believe that we can capture full value from our IP in an accretive manner that contributes meaningfully to our overall sales and business. While there is a halo effect on toy sales, the goal is to build standalone, profitable business units. We have many active projects, including multiple series and specials in development, which reflects our commitment and the strong traction we are seeing in the market.

Operator, Operator

Your final question comes from the line of Fred Wightman with Wolfe Research. Your line is open.

Fred Wightman, Analyst

Can you discuss the incremental pressure on gross margin coming from managing higher inventory levels? What steps are you taking? Where are these higher inventory levels? Your sales allowances as a percentage of gross sales were lower year-over-year. What inventories need to be managed and how?

Anthony DiSilvestro, Chief Financial Officer

To discuss the inventory situation comprehensively, we accelerated production to improve service levels and reduce supply chain risk. Retailers also increased inventory levels to meet expected growth. By the end of Q3, inventory was up $230 million, 27%. We expect this trend to continue to improve. Our overall inventory is current, but elevated levels require management. We anticipate increased discounts and promotions, which will negatively impact Q4 margins.

Ynon Kreiz, Chairman and CEO

In summary, this was a good quarter in the midst of a challenging macroeconomic environment. We believe our fundamentals are strong, and we are very confident about our multi-year growth trajectory. Our strategy is working, and we operate as an IP-driven, high-performing toy company. We look forward to the holiday season and believe we are on track to achieve another growth year for Mattel. Thank you, again, and appreciate your interest in the company.

David Zbojniewicz, Head of Investor Relations

Thank you, Ynon. And thank you, everyone, for joining the call today. A replay of this call will be available via webcast beginning at about 8:30 PM Eastern Time today. The webcast link can be found in the Events and Presentations section of our Investors section of the corporate website, corporate.mattel.com. Thank you for participating in today's call.

Operator, Operator

This concludes today's conference call. You may now disconnect.