Lego rebuilds image, profits

BILLUND, DENMARK — A Lego brick is a Lego brick is a Lego brick.

Except when it's a Lego Star Wars pajama set, a Lego Indiana Jones video game, a range of warrior-heroes based on Polynesian mythology or indeed any number of the other lucrative tie-ins from Disney to Harry Potter that now form the backbone of Scandinavia's most prominent toymaker.

"We believe we have brought new energy and creativity and imagination to the world of 'Star Wars' by making it Lego," Lego CEO Jorgen Vig Knudstorp said at the company's headquarters in Billund, Denmark.

Lego controls the construction-toy rights to licensed properties such as "Star Wars," "Indiana Jones" and "Toy Story," whereas its rivals operate in the less overtly edifying sphere of games, dolls, action figures and vehicles.

"We take the virtues of Lego and the virtues of 'Star Wars' and create something more optimal out of it. A great example is the Lego Star Wars game, which has been immensely popular. Here you have a category where many parents perceive it as not really creative and not very good for their children, but when it becomes Lego the parent says, 'OK, now I feel comfortable, since it's Lego plus Star Wars.' It has the benefits of both worlds. Two plus two suddenly becomes five."

The recipe is clearly working. In the first half of the year, when cash-strapped, jobs-worried consumers sent global toy sales down 5 percent, Lego increased its sales 23 percent to about $842 million.

Profit before tax jumped 64 percent.

The feeling among industry observers is that the firm's second-half results, due in March, will be just as impressive.

"Considering their stellar results so far this year were achieved in a lousy economy and up against difficult growth comparisons from a year ago, I'd say the future should be even better," said Sean McGowan, an analyst at Needham & Co.

But the future wasn't always so bright.

There was a period around the turn of the millennium when, after more than 50 years of unbroken sales growth, this iconic, mild-mannered, privately held Danish toy firm had lost its way.

It may have succeeded in putting, on average, five plastic bricks into the homes of each and every one of us on the planet, but it also was trying to be all things to all comers by moving away from products that exemplified the creative, open-ended imaginative play on which it cut its teeth.

In 1998 the firm posted its first loss. Profitable licensing agreements with Hollywood buoyed the business for a few years, but when another loss in 2004 signaled a more sustained slump, it was time to start rearranging the bricks.

Enter Knudstorp, a former kindergarten teacher and McKinsey consultant tasked with halting a sales decline, reducing debt and focusing on cash flow — all classic turnaround stuff.

But Knudstorp did more than just cut jobs and outsource manufacturing to far-flung places like the Czech Republic and, more recently, Mexico.

He simplified the management structure, sold off the Lego theme parks for some $500 million and generally washed his hands as much as possible of some of the distracting Lego lifestyle fodder — watches, clothing, dolls.

He also, perhaps most importantly, reacquainted the nearly-80-year-old firm with its roots in the workshop of its carpenter-founder Ole Kirk Christiansen while simultaneously becoming more fussy about whom the company signed licensing pacts with.

Much of the previous diversification was stopped, and the company set about re- familiarizing itself with its core products.

In other words, he came back to the brick.

"The heritage is extremely important," Knudstorp said. "One of the things we have learned is that we are really helped in markets where we have been there for generations. Many kids can easily get frustrated with the Lego experience. We call it 'Fun, but hard fun.'

"The real quality and uniqueness of the Lego brick is that it has universal appeal and everybody gets it, and I can of course take absolutely no credit for this because I was not even born when it was invented."

"The 'retro' aspect is definitely powerful," said Needham's McGowan. "What dad with a 10-year-old son doesn't have fond memories of Lego?"