Earnings Call
Mattel Inc /De/ (MAT)
Earnings Call Transcript - MAT Q4 2024
Operator, Operator
Hello, my name is Jessica, and I will be your conference operator today. I would like to welcome everyone to the Mattel, Inc. Fourth Quarter 2024 Earnings Conference Call. I will now hand the call over to Jenn Kettnich, VP of Investor Relations at Mattel. You may begin.
Jenn Kettnich, VP of Investor Relations
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 Fourth Quarter and Full Year 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. References made throughout this call to historical market share and market share rankings are sourced from Circana. 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-K 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, CEO
Thanks, Jenn. Good afternoon, everyone, and thank you for joining our fourth quarter and full-year 2024 earnings call. 2024 was another successful year for Mattel as we continue to execute our multi-year strategy to grow our IP-driven toy business and expand our entertainment offering. Our priorities for 2024 were to grow profitability, expand gross margin, and generate strong free cash flow. We did exactly that, demonstrating operational excellence in achieving all three objectives well ahead of expectations. Looking at key financial metrics for the full year as compared to the prior year, net sales declined 0.5% in constant currency. Adjusted gross margin improved 340 basis points, adjusted EBITDA increased $110 million or 12%, adjusted earnings per share increased 32%, and free cash flow was nearly $600 million. These results are particularly noteworthy considering the comparison against the success of the Barbie movie, which contributed approximately $100 million of operating income in 2023. Execution on our toy strategy was strong, and we grew global market share in key categories of dolls, vehicles, and games. We also made meaningful progress on our entertainment strategy across film, television, digital, consumer products, and live experiences. The optimizing for profitable growth program is tracking ahead of schedule with $83 million of savings achieved in the year out of our $200 million target by the end of 2026. We also continue to strengthen our balance sheet, ending the year with $1.4 billion in cash after repurchasing $400 million of shares. The global toy industry declined slightly in 2024 per Circana, performing better than anticipated and reinforcing our belief that the toy industry has strong fundamentals and will return to growth and continue to grow over time. In the fourth quarter, we grew top-line and achieved very strong profitability. Net sales increased 3% in constant currency, adjusted gross margin improved 200 basis points, adjusted EBITDA increased 6%, and adjusted EPS increased 21%. Top-line growth was driven by vehicles, action figures, and games, partly offset by a decline in Dolls and Infant, Toddler, and Preschool. We made significant progress in scaling our portfolio, optimizing our operations, evolving demand creation, and strengthening our franchise brands. We successfully relaunched catalog IP, strengthened our relationships with major entertainment partners and key retailers, and created innovative and inspiring product lines. Looking at full-year performance by category, vehicles grew meaningfully, driven by Hot Wheels, which achieved its seventh consecutive record year. Challenger categories collectively grew, led by double-digit growth in games with UNO achieving its highest year on record and significantly outpacing the industry and gains in action figures with strong WWE and Minecraft product offerings. Infant, Toddler, and Preschool was down as we continued to exit Power Wheels and certain product lines in Baby Gear in line with our strategy. Importantly, Fisher-Price returned to growth this year, driven by Fisher-Price Wood and Little People. Dolls was down primarily due to Barbie as we wrapped the movie in the prior year. Barbie was once again the clear leader in the dolls category and the number two property in the toy industry overall. Monster High increased for the second consecutive year since its relaunch. American Girl grew, reflecting the progress of its turnaround strategy, and Wicked and Disney's Moana 2 product performed well and resonated with consumers globally. We also made further progress with our entertainment strategy. In film, the Masters of the Universe worldwide theatrical release date of June 5, 2026, was announced. The film will start production this month in London. The Matchbox live-action movie was greenlit and is now in production, and Monster High and Bob the Builder movies began development. This brings the total number of announced Mattel films in development or production with major studio partners to 16. In television, Hot Wheels Let's Race Season 2 was a Top 10 TV show on Netflix in 27 countries. All three Barbie animated premieres ranked in the Top 10 on Netflix in multiple countries. And Barney's World ranked as a top five children's show on Max as part of a highly anticipated franchise relaunch. In digital games, Mattel 163, our joint venture with NetEase, continued to grow double-digits and exceeded $200 million in gross billings. In live events, the Hot Wheels Legends Tour completed 22 tour stops in 13 countries with attendance growing more than 40% over the prior year. 2025 is our 80th anniversary year. We couldn't be more proud of our mission to create innovative products and experiences that inspire fans, entertain audiences, and develop children through play. Our 2025 priorities are to grow the top and bottom line while increasing investment in our digital game self-publishing business to drive long-term growth, in line with our capital allocation priorities to invest in organic growth. For the full year, we expect net sales to increase by 2% to 3% on a constant currency basis and adjusted EPS to grow by 2% to 6%. This includes the anticipated impact of new U.S. tariffs on China, Mexico, and Canada imports announced on February 1 and mitigating actions we plan to take, including leveraging the strength of our supply chain and potential pricing. There are several key drivers in 2025. Across our toy categories, we expect vehicles to grow with another record year for Hot Wheels, which includes the launch of our Formula 1 partnership, games to build on UNO's momentum with more innovation and cultural relevance, action figures to benefit from new product lines tied to the theatrical releases of a Minecraft movie in April and Jurassic World Rebirth in July. In addition to the global expansion of WWE. Infant, Toddler, and Preschool to expand distribution for Fisher-Price Wood across major retailers in the U.S. and internationally, and dolls to see improving trends in Barbie driven by optimizing demand creation, product innovation, and leaning further into momentum with adult fans. We also look forward to the launch of new products ahead of Disney's Snow White theatrical release in March and the second Wicked movie in November. 2025 will be an exciting year for our in-licensing toy partnerships as Mattel is strengthening its position as a partner of choice for major entertainment companies and sports franchises. As it relates to the toy industry, we expect it to be comparable to slightly up in 2025, primarily driven by the theatrical marketplace returning to a more normalized cadence. We believe Mattel is well-positioned to increase market share. In our entertainment business in 2025, we expect progress to continue on our two films in production and 14 announced films in development, more shows to launch on Netflix, including Hot Wheels Let's Race Season 3, Barbie's next animated special, and new seasons of Thomas & Friends and Polly Pocket. New episodes of Barney's World to premiere on Max and to expand our digital business with the goal of launching our first self-published digital game in 2026. 2024 was another successful year defined by profit growth, gross margin expansion, and strong cash generation. I am grateful to the entire Mattel team for their collaboration, innovation, and execution and for achieving these results. As we progress through 2025, we are well-positioned to grow and continue to successfully execute our multi-year strategy and create long-term shareholder value. I will now hand it over to Anthony to cover the financials and our detailed outlook for 2025. As you've heard, Anthony has decided to retire, and I would like to thank him for the important role he has played in steering Mattel to achieve its strongest financial position in many years. A search for his successor is well underway, but you're not hearing the last of him today. Anthony will stay in the CFO role until May 15 and continue as an adviser until August 15 to ensure a smooth transition. Anthony, over to you.
Anthony DiSilvestro, CFO
Thanks, Ynon. It has been an amazing experience for me at Mattel. It's a great company with a very promising future, and I look forward to supporting a seamless transition. In terms of Mattel's performance in Q4, as you just heard, we grew top-line and achieved very strong profitability. Net sales of $1,646 million increased 2% as reported or 3% in constant currency. Adjusted gross margin increased 200 basis points to 50.8%. Adjusted operating income increased 10% to $161 million. Adjusted EPS increased 21% to $0.35, and adjusted EBITDA increased by $15 million to $249 million. Looking at our full-year performance as compared to the prior year, net sales declined 1% as reported and 0.5% in constant currency. Adjusted gross margin improved 340 basis points to 50.9%. Adjusted operating income increased 15% to $738 million, more than offsetting the Barbie movie-related benefits in the prior year. Adjusted EPS increased by 32% to $1.62. Adjusted EBITDA increased $110 million or 12% to $1,058 million, and we generated $598 million of free cash flow. Turning to gross billings in constant currency by category, beginning with the fourth quarter. Overall, gross billings increased 3% driven by growth in vehicles and challenger categories collectively, partly offset by dolls as we wrap the Barbie movie benefits from the prior year and Infant, Toddler, and Preschool as we continue to exit certain product lines in the Baby Gear and Power Wheels segments. Total POS declined by low-single digits. Dolls gross billings declined 3% due primarily to a 13% decline in Barbie, partly offset by growth in Monster High. Vehicles had another outstanding quarter, growing 16%, driven primarily by Hot Wheels, which grew 17%. Infant, Toddler, and Preschool declined 4% due to the declines in Baby Gear and Power Wheels, partly offset by 4% growth in Fisher-Price, which benefited from Little People and Fisher-Price Wood. We are happy to see Fisher-Price grew and the turnaround strategy starting to bear fruit. Challenger categories collectively grew 6%, driven primarily by double-digit growth in both Action Figures and Games, partly offset by a decline in Building Sets. Turning to the full year, gross billings were comparable to the prior year with gains in vehicles and challenger categories overall, offset by declines in Dolls and Infant, Toddler, and Preschool. POS declined low single digits. Dolls gross billings declined 8% due primarily to the movie-related comparison in Barbie. Barbie gross billings declined 12%. Vehicles had an outstanding year growing 10%, driven by Hot Wheels die-cast cars, tracks and playsets, and RC. As Ynon mentioned, Hot Wheels achieved its seventh consecutive record year. Disney Pixar Cars and Matchbox also contributed to growth. Infant, Toddler, and Preschool declined 4%, primarily due to Baby Gear and Power Wheels reflecting our exit strategy, partly offset by growth in Fisher-Price. Fisher-Price grew 4%, benefiting from the launch of FP Wood and growth in Little People, partly offset by a decline in Infant. Challenger categories collectively grew 3% driven by games, which benefited from double-digit growth in UNO and Action Figures, partly offset by a decline in Building Sets. Looking at fourth-quarter gross billings by region. North America increased 1%, EMEA increased 10%, Latin America declined 5%, reflecting softness in Mexico, and Asia Pacific grew 10%, driven by strong growth in Australia. Looking at full-year gross billings by region, North America declined 1%, EMEA declined 2%, Latin America declined 1%, and Asia Pacific grew 10%, driven primarily by double-digit growth in Australia. We ended the year with retail inventory levels comparable to the prior year, both in dollars and weeks of supply. While comparable at year-end, retail inventory movements had a positive impact on gross billings growth in the fourth quarter, given we're wrapping a more significant seasonal decline in the prior year. We are beginning 2025 with retail inventory levels slightly elevated. Although the inventory is high quality, we expect it will be a headwind to our first-quarter performance. Adjusted gross margin was 50.8% in the quarter, an increase of 200 basis points as compared to 48.8% in the prior year period. The strong increase in margin was driven by several factors. Savings from optimizing for profitable growth added 90 basis points. Lower inventory management costs, primarily closeouts, and obsolescence added 90 basis points. Supply chain efficiencies, including fixed-cost absorption added 90 basis points, and foreign exchange and other factors added 60 basis points. These gains were partly offset by an 80 basis point negative mix impact as we wrap accretive benefits associated with the Barbie movie in the prior year and cost inflation which had a 50 basis point impact in the quarter. For the full year, adjusted gross margin increased 340 basis points to 50.9%. The increase was primarily driven by supply chain efficiencies, cost savings, lower inventory management costs, deflation, and other factors, which more than offset the prior year benefit associated with the Barbie movie. Moving down the P&L, in the fourth quarter, advertising increased 10% to $257 million as part of our plans to shift spending into the latter part of the year. Adjusted SG&A increased 2% to $418 million, primarily due to higher compensation expenses, partly offset by savings from the optimizing for profitable growth programs. For the full year, advertising decreased 3% to $507 million. Adjusted SG&A for the full year increased 5% to $1,493 million. Adjusted operating income in the fourth quarter was $161 million compared to $147 million, an increase of 10% driven primarily by higher gross margin. For the full year, adjusted operating income increased 15% to $738 million with adjusted operating income margin expanding 190 basis points to 13.7%. Adjusted EBITDA in the fourth quarter was $249 million compared to $234 million, an increase of 6%. For the full year, adjusted EBITDA increased 12% to $1,058 billion. Adjusted EPS in the fourth quarter was $0.35 compared to $0.29 in the prior year, an increase of $0.06 or 21%. For the full year, adjusted EPS increased by $0.39 or 32% to $1.62. In addition to the operating income improvement, EPS performance benefited from higher interest income, a lower adjusted tax rate, and higher earnings from our equity method investment in Mattel 163, as well as a lower share count from our share repurchase activity. Cash flow generation for 2024 was strong. Cash from operations was $801 million compared to $870 million in the prior year. The prior year benefited from lower working capital, primarily driven by a significant inventory reduction. Capital expenditures were $203 million, including $59 million for the acquisition of a new global design center to replace a leased facility. Capital expenditures in the prior year were $160 million. Free cash flow was $598 million compared to $709 million in the prior year. Consistent with our capital allocation priorities, we repurchased $400 million of Mattel shares in 2024, bringing the total since resuming the program in 2023 to $603 million. Taking a look at the balance sheet, this was another year of improving our financial position. We finished the year with a cash balance of $1,388 million compared to $1,261 million a year ago. The cash increase reflects our 2024 free cash flow net of shares repurchased. Total debt was $2,334 million, consistent with the prior year. Our portfolio is well-positioned with no scheduled maturities until 2026. Accounts receivable were $1,003 million compared to $1,082 million, a decline of $79 million. The decline was due to foreign currency translation and a reduction in days sales outstanding. Inventory at year-end was $502 million compared to $572 million in the prior year, a reduction of $70 million. Our inventory is at the lowest level in recent years. Debt-to-adjusted EBITDA finished the year at 2.2 times, excluding the benefit of our $1.4 billion cash balance. This compares to 2.5 times a year ago. The improved leverage ratio was driven by the growth in adjusted EBITDA. We continue to generate significant cost savings. Under our optimizing for profitable growth program, we achieved cost-savings of $24 million in the quarter with $16 million benefiting cost of goods sold and $7 million in SG&A. For the full year, we realized $83 million of cost savings and are tracking ahead of schedule to achieve the program and savings target of $200 million by 2026. Turning to our guidance for 2025, we expect net sales in constant currency to increase by 2% to 3%. The key drivers of expected sales growth include continued momentum in vehicles and games, driven by Hot Wheels and UNO. In Dolls, the launch of products tied to the theatrical releases of Disney's Snow White and the second Wicked movie. In Infant, Toddler, and Preschool, the global rollout of Fisher-Price Wood, and in Action Figures the benefit of licensed movie properties Jurassic World and Minecraft. Foreign currency translation based on current spot rates is expected to have a negative impact of approximately 2 percentage points on our net sales performance. Adjusted gross margin is expected to be comparable to the prior year. Adjusted operating income is expected to be in the range of $740 million to $765 million with the increase primarily driven by net sales growth. Moving ahead, we will be guiding to adjusted operating income instead of adjusted EBITDA as we believe adjusted operating income is a more comprehensive profit metric for Mattel. The adjusted tax rate is expected to be 23% to 24% compared to 21% in 2024. Adjusted EPS is expected to be in the range of $1.66 to $1.72 compared to $1.62, an increase of 2% to 6%. As Ynon said, this includes the anticipated impact of new U.S. tariffs on China, Mexico, and Canada imports announced on February 1 and mitigating actions we plan to take, including leveraging the strength of our supply chain and potential pricing. The guidance is also inclusive of increased investments in our digital games self-publishing business to drive long-term growth, which are reflected in SG&A and in line with our capital allocation priorities to invest in organic growth. We continue to improve productivity and expect to achieve $60 million in additional cost savings during 2025 through our optimizing for profitable growth program. Free cash flow is expected to be approximately $600 million. Reflecting confidence in our strategy to create shareholder value, we are targeting $600 million of share repurchases in 2025, subject to market conditions. Together with the $400 million repurchased in 2024, this will fully utilize our total $1 billion authorization in just two years. The benefit of share repurchases is reflected in our EPS guidance. The guidance considers what the company is aware of today, but remains subject to market volatility, unexpected disruptions, including additional regulatory actions impacting international trade such as tariffs and other macroeconomic risks and uncertainties. In closing, we had a strong fourth quarter and exceeded expectations for the year on our key priorities to grow profitability, expand gross margin and generate free cash flow, and continued to strengthen our balance sheet. We look forward to growing the top and bottom line in 2025 as we execute our strategy. And with that, I will turn it over to the operator and we'd be happy to take your questions.
Operator, Operator
And our first question comes from Stephen Laszczyk from Goldman Sachs. Stephen, your line is open.
Stephen Laszczyk, Analyst
Hi, great. Thank you for taking the questions. Two, if I could. Maybe first for Ynon. Could you talk a little bit more about what's given you confidence in achieving that top line growth outlook for 2025 of 2% to 3%? You mentioned some of the opportunities, I think ahead in Vehicles, Games, and Action Figures. Could you maybe expand on that a little bit? And then I'd be curious what you're hearing from your retail partners on the demand side as we head into 2025, especially against a year in a holiday where it seems like inventory exited at somewhat elevated levels. Any thoughts there would be much appreciated. And then a quick one for Anthony, hopefully. Is there any more detail you can give us around the assumptions you're factoring into your guidance as it relates to tariffs and some of the factors and contingencies you're planning to put in place if they stay in place for the duration of the year, particularly around any headwinds to unit sales or margins that you're factoring in? Thank you.
Ynon Kreiz, CEO
Sure. Hi, Stephen. We anticipate several factors contributing to growth in both toys and entertainment. On the toy side, we're seeing ongoing momentum in vehicles and games, particularly with Hot Wheels, which we believe is set for another record year, and UNO, which just had its best year ever. Both brands are performing well with significant innovation, and we expect this trend to continue. In the Dolls category, we're introducing a product linked to the theatrical releases of Snow White with Disney and the second Wicked movie, and we also expect improvements in Barbie as it will be two years since the movie's release. In Infant, Toddler, and Preschool products, we're launching the Fisher-Price Wood line, which is gaining strong traction. In Action Figures, we plan to release products for two major films, Jurassic World and Minecraft, and we will further expand WWE globally, benefiting from their Netflix deal being rolled out worldwide. Additionally, on the entertainment side, we have positive developments with more shows on Netflix including Hot Wheels Let's Race Season 3, an animated special for Barbie, and new seasons of Thomas & Friends and Polly Pocket. Barney will also be gaining exposure on Max, and overall, we’re driving our businesses effectively. We have good momentum, strong execution, and are optimistic about our prospects for the year.
Anthony DiSilvestro, CFO
And I can comment on Q1, and I'll come back to tariffs, Stephen. Yes, with respect to Q1 and how we're starting the year, POS is off to a good start, but there are a couple of factors that need to be considered with respect to gross billings in the quarter. The first is there is a later Easter holiday in 2025, and as a result, we would expect some modest shift of timing of shipments between Q1 and Q2. And also, as we stated, we ended 2024 with retail inventories slightly elevated. This inventory is high quality and we'll work through it in the first quarter. And importantly, we're guiding to top and bottom-line growth for 2025. Moving to the topic of tariffs. Taking a step back for a moment, over the past several years, we have been continuously optimizing and diversifying our manufacturing footprint. Today, we source products from seven different countries. And in 2025, we expect China will represent less than 40% of global production for our toys compared to an industry average of about 80%. And with the U.S. representing about half of our global toy sales, our tariff exposure in the U.S. related to China should be about 20% of global production. And with respect to Mexico and Canada, we currently source less than 10% of our toys from Mexico and have no sourcing from Canada. And by 2027, no single country is expected to represent more than about 25% of total global production or about half of that in terms of U.S. sales. Now with respect to the tariffs, our teams have been fully engaged in analyzing and planning for a range of scenarios. And in terms of the financial impact on Mattel, our 2025 guidance includes the anticipated impact of the new tariff based on what we know today and mitigating actions we plan to take, including those leveraging the strength of our supply chain and potential pricing.
Stephen Laszczyk, Analyst
That's great. Thank you very much.
Operator, Operator
Your next question comes from the line of Alex Perry with Bank of America. Alex, your line is open.
Alexander Perry, Analyst
Hi. Thank you for taking my questions here and congrats on a strong quarter. And Anthony, congrats on your retirement as well. I guess, just first, I sort of wanted to follow up on that last line of questioning. In terms of the top line, how is sell-in positive for 2025 if you're tracking at low-single-digit declines in POS as the exit run rate in 4Q? And then you said retail inventory is slightly elevated. Is the expectation that POS turns positive? And I guess, what is driving the optimism there? Is that all based on the visibility you have on the improved content play? And then just back to the first quarter, Anthony, how much below that sort of full-year 2% to 3% growth should we be thinking about for the first quarter? Thanks.
Anthony DiSilvestro, CFO
Yes. So, Ynon went through some of the key drivers, right, in terms of our expectation around 2% to 3% net sales growth in constant currency. So I don't need to repeat those; we believe there is enough drivers, we believe we are well-positioned to outpace the industry and gain market share in 2025, right? We have a lot of innovation coming. We have a lot of activations coming. Again, we're very confident we can achieve that guidance. In terms of the flow of the first quarter, right, we talk about retail inventory levels. We ended the year with retail inventories comparable to the prior year. So a little bit of a headwind as we go into Q1, and that's why we mentioned that in terms of the first quarter outlook and also the timing of the Easter holiday. But beyond that, we expect to achieve growth balance of the year and achieve our guidance.
Alexander Perry, Analyst
Makes sense. And then just back to the tariff mitigation strategy, you guided '25 ahead of expectations, inclusive of the impact of tariffs. Any help on what you're actually doing to mitigate? Are there certain parts of the portfolio that you think you have the elasticity to raise prices on? Are you cost-sharing with suppliers? And then maybe just any like EPS or quantification of what's embedded in the guide in terms of a bottom-line hit from the tariffs, especially as it relates to Mexico and Canada since those are now delayed?
Anthony DiSilvestro, CFO
Yes. I mean, I understand the question, but without getting into specifics on our end, because there are many puts and takes to this. As we said, our guidance does include a range of assumptions, not just around tariffs, but on other items like cost inflation and mix and production and many assumptions, right? And certainly against the tariff, we have a range of mitigating actions. We don't want to necessarily disclose our playbook, but they are in response to the tariff. They do leverage the strength of our global supply chain and they also include potential price increases. And look, we do work closely with our retail partners here to achieve the right balance and always keep consumers in mind when we consider pricing actions.
Alexander Perry, Analyst
Perfect. All very helpful. Best of luck going. Oh, sorry, go ahead, Ynon.
Ynon Kreiz, CEO
Alex, I just to add the point on supply chain that Anthony touched on, which is this has been a strategy that we've implemented since 2018. It was a proactive strategy to diversify and build a geographically balanced supply chain infrastructure that will allow us to be better positioned for different eventualities. It wasn't about any one particular country, and it wasn't even necessarily about tariffs. It was just about making sure you have a resilient, flexible, well-diversified supply chain system. And between our own factories and third-party factories operating out of seven different countries, we have a lot of flexibility in the model. And this would be our first quarter call, how do we leverage our capabilities there? And of course, we have other mitigating actions we can take, but feel good about the plan factoring in what's been announced and other potential changes as well.
Alexander Perry, Analyst
Perfect. All very helpful. Best of luck going forward.
Anthony DiSilvestro, CFO
Thank you.
Operator, Operator
Your next question comes from the line of Megan Clapp with Morgan Stanley. Megan, your line is open.
Megan Clapp, Analyst
Thank you very much. Congratulations to Anthony as well. We will certainly miss you. I'm going to try asking this question again, perhaps in a more direct way. For the first quarter, could you help us understand how much we can expect sales to decline? There are many factors to consider. If I look at the numbers, POS was down in the low single digits in the fourth quarter, and your shipments increased by 2%. That results in a 5-point difference. If I calculate the sales based on this, it suggests we might face a headwind of over 10 points in the first quarter. Is that estimation too high? It would be great if you could clarify how much the first quarter should be down and what that means for margins as well.
Anthony DiSilvestro, CFO
Yes, let me address your comments about the Q4 gross billings compared to POS and clarify that this isn't a concern for 2025. I'll explain the difference between gross billings and POS in the fourth quarter. Retail inventory levels generally follow a seasonal trend, rising in the third quarter before the holiday season and falling in the fourth quarter as products are sold. The change in inventory build and decline year-over-year affects our gross billings. Last year, we experienced a more pronounced decline in the fourth quarter compared to this year, which explains the difference between gross billings and POS. This situation is more related to last year rather than this year and won't impact 2025. However, our inventory levels are slightly high, so we expect a small correction in Q1, which we see as a minor headwind. Another potential challenge is a timing change with a later holiday season. While we're not providing specific guidance for Q1, we anticipate being below our full-year run rate due to these two factors.
Megan Clapp, Analyst
Okay. You usually discuss the first half and the second half of the year. I understand that providing guidance by quarter can be challenging. Can you share any insights on your expectations for the first half and the second half?
Anthony DiSilvestro, CFO
Yes. We've been in that more normal, 35%, 55% range and there is no expectation that will change in 2025.
Megan Clapp, Analyst
Okay. As a follow-up, you mentioned increased investments in digital. Is that classified as operating expenses or capital expenditures? I didn't catch whether you provided guidance on capital expenditures. If you could provide that guidance, it would be great as well.
Anthony DiSilvestro, CFO
Sure. What we're talking about on the self-publishing side, so these are initiatives we've talked about before to capture more of the upside, right, and drive a long-term growth, right? And again, these are self-publishing efforts. They'll be recorded in the SG&A line, not CapEx. And I can tell you, CapEx for 2025 would be comparable to 2024 levels.
Megan Clapp, Analyst
Okay. Thank you.
Ynon Kreiz, CEO
You're welcome.
Operator, Operator
Your next question comes from the line of Chris Horvers with JPMorgan. Chris, your line is open.
Chris Horvers, Analyst
Thanks and good evening, and congratulations to Anthony. I wanted to follow up on the gross margin. I know there are many factors at play, especially with the tariffs. Can you provide an overview of what drives gross margin? It appears that the efficiencies for growth have exceeded expectations, which should offer a good advantage as we approach 2025, alongside your sales growth plans. Is it possible that fixed cost absorption is countering the impact of tariffs, leading to a flat gross margin? Please discuss the factors influencing gross margin overall.
Anthony DiSilvestro, CFO
Sure. Happy to do that. The first comment I'll make is the performance of 2024 up 340 basis points to 50.9%. So we're working off a higher-than-expected base. But when you think about 2025, I would bucket it in terms of some headwinds and some tailwinds. Headwinds, the first one would be cost inflation, right? So in the fourth quarter and after a number of quarters of deflation, we actually saw some inflation, and we expect that to continue into 2025. That's a combination of labor cost inflation and some inflation on logistics. The other headwind would be the tariffs themselves. Then in terms of tailwinds, there is really three: the mitigating actions we're going to take against those tariffs, plus a little bit of scale benefit or fixed-cost absorption. And the third would be cost savings from our optimizing for profitable growth program. We were off to a great start on that program. This is the one we announced at the beginning of 2024. We achieved $83 million of savings in 2024 and are guiding to an additional $60 million of savings in 2025, and the majority of those will benefit cost of goods sold. But when you put all those factors together, that supports the guidance of comparable performance on gross margin year-over-year.
Chris Horvers, Analyst
Got it. And then just as we think about the tariff impact and the ability to execute pricing, I guess, presumably there will be a lag to that. So is it sort of embedded in there sort of more headwinds earlier and then recovery later in terms of how the gross margin sort of shape will look?
Anthony DiSilvestro, CFO
Yes. There is a little bit delay to both actions. We have to run inventory through the balance sheet or the lag there. So without getting into too much detail, we're confident that we can execute these actions. And when you consider our gross margin holistically, we plan to hold our margin year-over-year.
Chris Horvers, Analyst
Got it. Thanks very much.
Anthony DiSilvestro, CFO
You're welcome.
Operator, Operator
Your next question comes from the line of Arpine Kocharyan with UBS. Arpine, your line is now open.
Arpine Kocharyan, Analyst
Hi. Thank you. A strong set of results. Congratulations. To just maybe ask one more question somewhat related to tariffs. Do you expect major shifts in FOB at all given tariffs typically that could be as much as, 40%, 50% of annual shipments? Could there be any sort of surprises there in terms of what retailers could do given the changing landscape of tariffs? Any color there would be great. And then I have a quick follow-up.
Anthony DiSilvestro, CFO
Yes. Arpine, I would say, it's really too early to say. We obviously work very closely with our retailer partners and we'll figure this thing out.
Arpine Kocharyan, Analyst
Thank you. I believe this is the first time we have seen that we will surpass Barbie in volume for annual results, which indicates amazing diversification. The growth of Hot Wheels has been remarkable and continues to exceed expectations. Could you discuss the factors driving this for 2025, including your plans for entertainment and any updates on the Hot Wheels movie?
Ynon Kreiz, CEO
You're asking specifically about Hot Wheels. It has truly been an impressive execution of a comprehensive strategy, with a wide range of products, various lines, and different implementations, all while building strong relationships and emotional connections with fans globally and expanding our audience even further. Achieving seven consecutive record years is a significant accomplishment, and we are aiming for another record year. We continue to innovate and forge new partnerships, such as with F1 and Ferrari, launching a range of die-cast cars this year. The diversity of our product range is noteworthy, from our Hot Wheels Basic Car priced at $1.25, which is the number one selling toy in the industry, to the $700 Daniel Arsham collector set. We also continue to evolve beyond the toy aisle, with the successful TV show Hot Wheels Let's Race expanding its distribution. Additionally, we are further broadening the Hot Wheels Legends store, which recently concluded its seventh year with the highest attendance ever, showing a 125% increase year-on-year and impressive media reach. These are all exciting developments. Furthermore, the upcoming movie, produced by J.J. Abrams at Warner Bros, is progressing well, and while I can't share too much, the project is improving, and when it releases, we anticipate a new level of excitement and momentum.
Arpine Kocharyan, Analyst
Great. I have one more quick question. Aside from the year-over-year changes in ASP, could you discuss the pricing actions you plan to take for 2025, if any?
Anthony DiSilvestro, CFO
Yes. So we haven't given any specifics around pricing actions, that's something that's one of the potential actions related to the tariffs. And again, as we said, we're going to be working closely with our retail partners here to find the right balance on that front.
Arpine Kocharyan, Analyst
Got it. Thank you. Congratulations again.
Ynon Kreiz, CEO
Thank you, Arpine.
Operator, Operator
Your next question comes from the line of Eric Handler with Roth Capital. Eric, your line is now open.
Eric Handler, Analyst
Good afternoon. Thank you for the question. Anthony, just you gave good perspective on the puts and takes for gross margin. I wonder if you could do the same for operating expenses? And then also with regards to the guidance, are buybacks assumed as part as one of the drivers in the bottom-line expectations?
Anthony DiSilvestro, CFO
Yes. So let me start with the buyback. We've been very active on the buyback front. We resumed repurchases in 2023. We did $200 million, we did $400 million in 2024. Now we're accelerating to a targeted level of $600 million in 2025. And we have built-in the benefit of that in terms of the lower share count and the benefit to EPS. So that's in there. And with that $600 million, we would have repurchased close to 20% of our market cap and fully utilized the $1 billion authorization in just two years. In terms of the middle of the P&L, we're not giving specific guidance, but I don't think you'll see levels materially different from the current year.
Eric Handler, Analyst
Okay. Thank you. And Ynon, you've talked a long time about wanting to build up entertainment. You said entertainment at scale can be very profitable. Can you give us some perspective and you listed a whole bunch of things that impacts your entertainment line, but how big is this entertainment bucket right now? And where do you think that can go over the next several years?
Ynon Kreiz, CEO
Thank you, Eric. We previously discussed that we haven't provided a detailed breakdown between toys and our entertainment strategy. However, we remain optimistic about the progress we've made and believe that entertainment at scale can significantly enhance our financial profile. One current example is our investment in mobile games. This initiative allows us to invest in self-publishing while maintaining a capital-light approach, which means it doesn’t alter our risk profile. We believe this strategy offers substantial potential returns in an exciting and expanding industry where brands are vital. Our focus is on leveraging our brand strength to create added value beyond our traditional toy business. Our portfolio stands out due to the strength and quality of our brands, which hold heritage value and encompass a diverse array of franchises across various genres and demographics that are relevant and impactful. We are now implementing this strategy on a larger scale. Previously, the question was whether our brands could resonate outside of toys, and then whether we could successfully execute our entertainment strategy, which had been a challenge for Mattel in the past. We now have clear evidence of success in several areas, including movies, digital products, consumer products, and theme parks. The new question is whether we can achieve this success at scale, and that is exactly what we are working on. You can expect to see more developments in this area in the upcoming years.
Fred Wightman, Analyst
Hi guys, thanks for the question. I just wanted to ask on the industry outlook. You've been pretty emphatic and pretty consistent that you would expect that to grow in '25, but if you look at the language in the release and the slides today, you're saying comparable to slightly up. So I'm wondering what maybe is giving you a little bit more caution versus your prior outlook?
Ynon Kreiz, CEO
We have maintained a positive outlook for the industry, and as we approach 2024, initial expectations indicated a potential high single-digit decline based on other industry insights. However, we are pleased to note that the industry has stabilized, with a slight decline of less than 1%. This outcome is favorable compared to earlier projections. We firmly believe that the toy industry has strong fundamentals and will see a return to growth in the long term. Toys remain a significant part of consumers' lives, and retailers are prioritizing them strategically. Toy shoppers tend to attract more traffic, spend longer in stores, and usually have larger purchases. Historically, toy point-of-sale figures have grown, even amidst declining birth rates. The industry's growth stems from both pricing and unit sales, which is a healthy state for us. The trend of adult collectors is also proving to be sustainable. Therefore, we anticipate the industry will remain stable or experience slight growth. With the return of theatrical movies and a robust slate of upcoming releases, like Snow White, Minecraft, Jurassic World, and Wicked, we believe these factors contribute positively to the industry. This generates an overall beneficial environment, not just for toys tied directly to these films but also for the industry at large. We are confident that we are well-positioned to enhance our market share and outperform the industry. I hope this provides a clearer picture of our perspective on the industry and where we see opportunities ahead.
Fred Wightman, Analyst
No, that's super helpful. And then just one more quick one. Could you give us a little bit of a color on how you're thinking about Mattel Brick Shop, maybe what the opportunity for that could be? How quickly that could ramp, and maybe what that means for some of the other construction brands that you guys have? Thanks.
Ynon Kreiz, CEO
Yes. This presents another exciting opportunity for Mattel as we utilize our design capabilities, strong supply chain, and global commercial platform. We haven't revealed the specific product we are launching yet, but we plan to do so in May. You can always expect top-quality and engaging product execution from Mattel. It's important to note that we are relying on the Mattel brand and the trust and relationships that fans have with it. This initiative will fall under the Mattel umbrella brand rather than the mega-brand, and it will be driven by our talented team. We are thrilled about this opportunity to create another growth driver for the company.
Linda Bolton-Weiser, Analyst
Yes. Hello. So I was curious about on the mitigating actions that you're taking to offset the tariffs and you're alluding to your supply chain strategies and your competencies there. I'm wondering if in some weird kind of way, the tariffs could be like a blessing in disguise because if you have competitors who can't leverage their supply chain and don't have the advantages that you have, that maybe you can be able to kind of be more competitive against your competitors. And in some ways, tariffs could help your positioning in the industry. I'd be interested in your thoughts on that.
Ynon Kreiz, CEO
Thank you for the question, Linda. We believe that our supply chain is a competitive advantage, and we have worked diligently to ensure it remains so. In the past, it could have been seen as a handicap, but we now view it as a strong asset. During market disruptions and challenging conditions, we distinguish ourselves through our ability to manage complexities effectively. For instance, during COVID, while supply chain issues impacted many industries, ours became one of our key advantages, and we continue to leverage it in various ways. This isn't solely about cost; it also encompasses quality, service levels, and our collaborations with retailers. We ensure that the right products are placed at the right time and in the right quantities across the 500,000 retail stores that sell our products, not to mention the additional online retail and e-commerce channels. We are continually enhancing our supply chain, which has been instrumental in achieving this year's improvements in gross margin and profitability. It's an advantage we intend to build upon as we work closely with our retail partners to grow and expand our business. Okay. Thank you. Thank you everyone for your questions. This was another successful year for Mattel as we continue to execute our multi-year strategy. Looking to 2025, we are excited to celebrate Mattel's 80th anniversary and are well-positioned to continue to grow profitability and capture the full value of our IPs. Before we conclude today's call, on behalf of all of us at Mattel, I would like to express our sadness for those impacted by the devastating wildfires in our headquarters city. Mattel has been working extensively with non-profit partners to support children and families in need, following this unprecedented crisis. Our hearts go out to all those who have been affected, including our L.A. base team members and all of our partners, and our support is ongoing. Thank you. Thank you, everyone. And now I will turn the call back over to the operator.
Operator, Operator
Thank you again for joining us. This does conclude today's conference call. You may now disconnect.