Lewis Galoob Toys Inc.

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Lewis Galoob Toys Inc.

500 Forbes Boulevard
South San Francisco, California 94080
U.S.A.
(415) 952-1678
Fax: (415) 583-4996

Public Company
Incorporated: 1968
Employees: 241
Sales: $220.0 million (1995)
Stock Exchanges: New York
SICs: 3944 Games, Toys & Children’s Vehicles; 3942 Dolls & Stuffed Toys

Lewis Galoob Toys Inc. is among the ten largest toy companies in North America. This California-based company produces and distributes a variety of promotional toys and games including the Micro Machine line of toy vehicles and Sky Dancer dolls.

Company Origins

Lewis Galoob Toys was founded in 1957 by Lewis and Barbara Galoob as a small distributor of toys and stationery; the company was incorporated in 1968. Galoob’s first toy success was the reintroduction of a battery-powered Jolly Chimp that banged cymbals and nodded his head when activated. This classic toy, along with such stationery items as photo albums and calendars, brought in modest but steady annual sales in the low six figures during the 1960s and early 1970s. In 1970 company founder Lewis Galoob became too ill to continue as president, and his 21-year-old son, David, dropped out of the University of Southern California to take over the family business. David Galoob, whose previous business experience had consisted of selling waterbeds from the back of a truck, began to look for products with the potential to transform the small firm into a top toy producer. In partnership with his brother, Vice-President Robert Galoob, David aggressively pursued new product development, and thereby transformed the company into a $1 million business by 1976.

First Growth in the 1970s

Lewis Galoob Toy’s first breakthrough product was introduced in 1976 when the company purchased the rights to an inexpensive line of radio-controlled, battery-operated cars and trucks. In the era of the ’ ’monster truck’’ rally and the revival of stunt driving, the toy vehicles charmed American kids, and the line of products became one of the company’s mainstays for the next twenty years. By 1978 these sturdy little cars had generated sales of nearly $5 million. During the mid 1970s product licensing became an important factor in the toy business as producers sought new ways to predict and harness the desires of young consumers. Galoob made its first major entry into this market when the company bought the license to manufacture Smurf toys. These elfin creatures made popular by an animated television series served as Galoob’s main entry into the girl’s toy category during the 1970s and early 1980s.

The late 1970s were a time of experimentation for Galoob, as management sought the direction that would allow the company to break into the top echelon of toy producers. “We kept trying to get a handle on the company,” David Galoob told Forbes in a 1985 interview. After a number of unsuccessful products, including an electronic crap game called “Strobe-Dice,” Galoob found its entry into the mainstream through the unlikely medium of a toy license for a television phenomenon called “Mr. T.” A bejewelled strong man and his crime-fighting cohorts, the A team, Mr. T had inexplicably captured the imagination of kids around the world, and in 1983, thanks almost exclusively to Mr. T dolls, Galoob posted sales of $28 million. The Galoob brothers decided that Mr. T sales provided the capital they needed to become a major factor in the toy industry, and in 1984 they took the family business public with an IPO of 1.25 million shares.

Major Successes in the 1980s

With the large influx of capital from Mr. T and the public offering, Galoob was able to expand its own new toy line and to intensify advertising and marketing efforts. In spite of a complete collapse in sales of the fad-driven Mr. T toys, total sales nearly doubled in 1984. With such products as The Animal, an off-road vehicle with claws to climb over rugged terrain, and Sweet Secrets, the first girl-oriented transformable toys, Galoob sales broke the $100 million mark by 1985. One of the most promising toys of the 1985 line-up became a debacle in the following year as Baby Talk, an electronic talking doll, was one of many casualties of the electronic toy glut of 1987. These high-tech toys had seemed to be the wave of the future in the mid-1980s as toy companies scrambled to compete with Nintendo video games. High costs and technical glitches, however, disenchanted parents and kids alike, and electronic toys led an industry-wide slump in 1987. Galoob’s entries into this category included a number of talking dolls as well as a $125 talking board game called Mr. Game Show, whose snide patter and high price tag became a symbol of the unmarketability of these products. The failure of Galoob’s electronic toys, as well as serious production delays caused by the shift of toy production to the People’s Republic of China, caused sales to decline 40 percent in 1987, and the company posted a net loss of almost $25 million.

The boom and bust cycle experienced by Galoob is inherent in a fad-driven industry like toys, but, where established companies like Mattel could fall back on such long-time favorites as Barbie or Hot Wheels, Galoob was faced with continually developing new hit products just to stay in business. It was clear that the company had to produce a toy with staying power if investors were to be wooed into sticking with the company. Although 1987 was a disastrous year financially for Galoob, it also marked the introduction of the product that was to stand the best chance of becoming a perennial favorite. From the company’s first success in the mid 1970s, the toy vehicle category had produced results more often than any other type of toy, and Galoob looked to this category for a new hit. In the early 1980s Galoob purchased the license for a line of miniature toy vehicles from a Wisconsin lawyer-cum-toy-inventor who had tinkered with the idea in his garage. Dubbed “Micro Machines,” these cars were modeled on a much smaller scale than traditional toy vehicles, while retaining much of the detail that boys looked for in these toys. Although industry buyers were sceptical, a tremendously successful advertising campaign featuring fast-talking actor John Moschitta came through for Galoob, and the smallest-ever line of toy vehicles became Galoob’s best-selling product in its 30-year history. By 1988 sales of Micro Machines contributed $60 million to Galoob’s $140 million in revenues; the following year the line’s sales had climbed to $135 million out of $228 million in total revenues.

With the spectacular results from Micro Machines, as well as a very successful line of crawling baby dolls called Bouncin’ Babies, by the end of 1989 Galoob seemed poised to enter the next decade as one of the premier toy producers in the country. Net income had risen to a record $18.9 million, with cash on hand of over $25 million. In spite of these impressive statistics, Galoob was unable to escape the boom and bust cycle that is the scourge of the toy industry. 1990 proved to be the worst year that the toy industry had seen in over a decade. With the country in economic recession, consumers were unwilling to spend as much on toys, and nervous retailers began to cancel orders. Galoob’s Micro Machines were already overstocked at many retailers because of smaller than expected sales in the 1989 Christmas season, and buyers balked at ordering more inventory. Bouncin’ Babies sales had also all but dried up, and none of the newly introduced girl’s toys provided comparable financial returns. By the end of the year Galoob had posted a disastrous net loss of $29 million, and development costs of unsuccessful products had eaten up most of the 1989 surplus. To make matters worse, the Federal Trade Commission charged Galoob with making deceptive advertising claims about a number of its toys, and although Galoob denied any wrongdoing, a settlement was reached with the FTC and the ads were pulled.

Recovery in the 1990s

Faced with plummeting share prices, and with no hit product in the wings, Galoob management was quick to implement a long-term recovery plan with 1994 targeted as the earliest date by which the company could return to profitability. Crucial to this strategy was the development of core brands that could be extended and renewed each year and thereby provide a steady and reliable source of income. In addition, new product development costs were to be reduced in order to lower the breakeven point for products, as well as to cushion the company from the effect of unsuccessful introductions. Following the predominant corporate trend of the 1990s, Galoob also undertook considerable reduction of personnel costs by laying off 17 percent of its workforce. In 1991, in what some analysts called a forced ouster, David Galoob resigned, leaving Lewis Galoob Toys with no Galoob in management and ending an era for the family business. Mark Goldman, who had been the company’s Chief Operating Officer since 1987 and who was perceived to have a more cautious management style, took over the presidency of the troubled firm.

Micro Machines, Galoob’s most successful product to date, was chosen as the key brand to be developed under the new management plan. In the course of the next four years, the Micro Machines concept was extended to five independently marketed thematic play sets featuring more than 155 vehicles in 40 collections. In addition, licensed entertainment properties such as the Power Rangers and Star Wars were applied to the Micro Machines vehicle lines and play sets. Annual sales of Micro Machines, which had dropped to only $43 million in 1991, climbed steadily back up, reaching $113 million by 1994.

Entertainment licensing was vigorously pursued by Galoob in the early 1990s in an attempt to ensure a continuous flow of toy lines based on entertainment properties. Already in control of the valuable Star Wars and Star Trek licenses, Galoob also acquired the rights to Starship Troopers and Jonny Quest, and signed an ongoing agreement with Twentieth Century Fox for new entertainment licenses.

Company Perspectives

The Company’s strategies in selecting and developing products are to focus primarily on lower priced, extendable product lines, to capitalize on current trends in the toy industry and popular culture, and to expand and diversify its product categories.

Galoob’s first serious entry into the video game market contributed significantly to the company’s recovery in the early 1990s. The Game Genie, an adaptor for the Nintendo video game system, allowed players to manipulate attributes in a game that did not normally have built-in variability. Players could give certain characters extra lives, extra strength, speed, or weapons and move from one level to another more easily. Galoob had purchased the rights to the Game Genie from a Canadian inventor in 1990, but before major production could begin, Nintendo of America sued the company for copyright infringement, claiming that the adaptor would make their games less challenging and thereby reduce sales. Nintendo was successful in obtaining a preliminary injunction preventing Galoob from selling the product while the lawsuit was in litigation, but Galoob ultimately won the suit as well as a $16 million settlement for lost sales. The Game Genie was an initial, though transient, success, bringing in $65 million in 1992. This revenue was critical in easing the difficult transition of the early 1990s, but the rapid pace of change in the video game market made such a product inherently unstable and sales dropped to only $4 million by 1994.

Although the development of the Micro Machines brand, the Game Genie, and a lower-risk management style were instrumental in restoring Galoob to fiscal health, it was ultimately another runaway hit toy that propelled Galoob back into the favor of Wall Street. In 1993 Galoob purchased the rights to a flying doll from AGE Entertainment, and the following year the company introduced Sky Dancer, a fairy-like doll whose styrofoam wings lofted her into the air when propelled from a pullstring launcher. Sky Dancer was one of a handful of new girls’ toys to be introduced by Galoob that year, and Galoob management was optimistic about the doll’s potential. “If it brings in $25 million in 1995, as I expect it will, that’ll be a big percentage of our business,” CEO Mark Goldman said in a Christmas 1994 New York Times article on the doll. By the following month the company had raised this estimate to $40 million, and by April 1995 Sky Dancer had become the No. 1 selling girls’ toy in America, with final sales for 1995 topping $70 million. Galoob’s stock price, which had been mired at around $6 for over a year, more than doubled over the last half of 1995 thanks in large part to the excitement generated by the Sky Dancer phenomenon.

A renewed Micro Machines line and soaring Sky Dancer sales pushed Galoob’s 1995 net income to $6 million on sales of $220 million. In addition, international sales, which had been slowly gaining momentum through the 1990s, now took off, rising 35 percent in just one year. With Galoob firmly in recovery, analysts began to speculate about the company as a candidate for acquisition. As Lewis Galoob Toys entered the last few years of the century, the company appeared to have transformed itself from a hit-dependent young toy company to a more solidly based mainstay of the industry. The toy business and its young customers, however, are notoriously fickle, and it remained to be seen if Galoob could continue to satisfy their ever changing appetite for new toys.