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How Lego is taking on Barbie in toy sales

Nine-year old twin brothers Robbie and Zacky Keirstead had one wish for their last day of summer break: to go to the Lego store at Rockefeller Center.

Their mom granted that wish and the two brothers walked away from the store on Thursday with their fresh purchases,  including a $50 Lego Super Heroes set for Robbie, who has 20 Lego City sets in his collection.

“We have tons and tons,” said Zacky. “I have so many creative ideas. (With Lego) you can buy pieces and build them. There are all these different choices.”

Lego’s Rockefeller Center model

The Keirsteads’ passion for Lego is one reason why the Danish company’s first half sales growth of 11% outpaced its major rivals Mattel Inc. andHasbro, and allowed it to edge past Mattel to become the world’s No. 1 toymaker  for the first six months.

To be sure, Lego may hot hold the top spot through year- end –  Mattel generates a far bigger percentage of its sales in the second half during the key holiday season. Mattel’s $6.5 billion in sales last year is still almost two-fifths larger than Lego’s, according to FactSet data.

Still, Lego is a classic turnaround story, bouncing back from  two straight years of losses in 2003 and 2004 that sapped its cash reserves.

The family-controlled company brought in former McKinsey & Co. executive Jørgen Vig Knudstorp as CEO in 2004.

Knudstorp sold the theme parks business in 2005, and the company moved to use partners such as Warner Bros., the studio behind this year’s blockbuster “The Lego Movie,” to develop video games. His top priority was to refocus on the company’s classic brick toys. Sixty percent of its sales are from new products created by a team of more than 180 designers. Unlike its rivals, Lego makes over 90% of its products at four company-owned factories in Europe and Mexico.

Those moves have paid off. Sales and profit have risen each year since 2005. The company’s gross margin has widened to about 70%, compared to about 50% each for Mattel and Hasbro.

Lego has “a shot at being No. 1,” said Euromonitor toys and games analyst Robert Porter, who highlighted its significant edge over construction toys Mega Bloks, which Mattel is buying, and Hasbro’s Kreo line.

“It’s the entire narrative behind it. They are able to give the kids the story. They are very innovative. Mattel MAT  and Hasbro HAS  are losing market share.”

That narrative has kept loyal shoppers hooked well into their teens. At the Lego store in New York, Scottish native Mark McLean and his wife spent about $300 on Thursday on purchases including a $160 Star Wars set for their 16-year-old son back home.

“We’ve spent thousands of dollars” on Lego for him since he was a toddler, McLean said. “It’s everywhere in his bedroom.”

One major advantage is that Lego is private, said Porter. For instance, the company’s 2012 introduction of Lego Friends targeting girls took four years to develop. Mattel and Hasbro, which report earnings on a quarterly basis, can’t afford that time lag.

Their “shareholders aren’t gonna have the patience,” Porter said. “Lego is able to take the risks.”

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