Why Mattel Matters Less This Holiday Season

Earns Mattel
Alan Diaz/AP

Barbie, the perennial favorite toy this time of year, might be a bit glum this holiday season. In a sign of the times, the doll has seen her popularity slip. Before 2014, she was No. 1 on toy wish lists for more than a decade running, according to the National Retail Federation's annual Holiday Top Toys Survey. Her crown has now been taken by rivals.

Her maker, Mattel (MAT), has had a tough year. Other Mattel offerings haven't exactly been flying off shelves in the run-up to the holidays. Why is the company falling behind?

Frozen Sales

One big reason Barbie's taking a hit is because this year, she's got some serious competition -- the main characters of the smash 2013 Walt Disney (DIS) film musical "Frozen."

Sisters Elsa and Anna are the star attraction of Disney's ubiquitous-in-toy-stores Princess line of dolls. They and the rest of the Frozen franchise are also the top choice of the nearly 6,600 parents surveyed for the NRF poll, knocking Barbie off her throne for the first time in the survey's 11-year history.

%VIRTUAL-pullquote-The company's struggles are not all the cheerful blonde's fault.%It's been quite a tumble. In Mattel's most recently reported third quarter, gross sales of the Barbie line dropped a steep 21 percent on a year-over-year basis, to $353 million.

The company's struggles are not all the cheerful blonde's fault, though. None of her fellow product categories has been doing well lately -- the "other girls" segment (meaning girl-targeted products that aren't Barbie) advanced by only 1 percent over that time frame.

The "wheels" division (including the small-scale toy-car line Hot Wheels, plus its onetime rival Matchbox) accelerated weakly by 4 percent.

And those were the better performers. Mattel's entertainment wing saw a Barbie-like decline of 23 percent, and the Fisher-Price line of infant and toddler products sank by 16 percent.

These are not new developments. The third quarter was the fourth straight quarter of falling overall revenues for the company.

Royalty Has Its Privileges

The future doesn't look especially bright, either. At the moment those popular-like-royalty "Frozen" dolls (as well as the rest of the Princess line) are manufactured by Mattel under license from Disney, but the clock is ticking fast -- the entertainment giant chose Hasbro (HAS) to be its next licensee for Princess, starting in 2016.

For Mattel, that's going to hurt -- the company takes a cut of around $300 million per year from sales of the various Princesses.

That'll leave a hole in net sales, which for the first nine months of this year were already down by 8 percent, to just over $4 billion. It'll also likely hit net profit, which really needs a lift. That line item tumbled by a worrying 35 percent (to $349 million) over the same period.

Stalling Vehicles

Toys are a trendy market, of course -- kids always want the most popular items of the season. As a hit movie that strongly resonated with young girls, "Frozen" remains durably popular more than a year after its release.

The same can't be said of other Disney titles, like the two animated films in the recent "Planes" series, or the pair of "Cars" movies (both made by Disney's Pixar unit). In the latter case, it's likely because the most recent one was released in 2011. Mattel's got plenty of toys connected to both franchises; not surprisingly, those lines saw year-over-year sales drops in its third quarter.

Meanwhile, Mattel's 2013 attempt at reviving a toy set and TV show from its recent past -- sci-fi action franchise Max Steel -- hasn't lit the world on fire. In its third quarter, products associated with the brand saw an 8 percent year-over-year decline in sales.

Blasted by Rivals

A lack of innovation could be blamed for Mattel's woes. The many current Barbie offerings, for example, aren't too much of a departure from what the company's been selling for years.

Contrast that with a toy series like Hasbro's Nerf, for example. Over the decades this has evolved from a simple foam sphere to versions of basketballs and footballs to a line of weapons powered by foam ammunition. The latter has been on the market for decades, yet is still expanding in clever directions; last year, Hasbro introduced the Rebelle Heartbreaker Bow, a Nerf bow-and-arrow set aimed at girls.

That demographic is the one that used to be owned by Mattel. If the company is going to reverse its declines, it'll have to either get more imaginative with its products or connect with more successful entertainment franchises to score hits.

If not, it risks sliding further down those holiday wish lists it dominated not so long ago.

Motley Fool contributor Eric Volkman owns shares of Walt Disney, but will almost certainly never own a Princess doll. The Motley Fool recommends Hasbro, Mattel, and Walt Disney. The Motley Fool owns shares of Hasbro and Walt Disney. Try any of our Foolish newsletter services free for 30 days. Check out The Motley Fool'sone great stock to buy for 2015 and beyond.