A retool is where an existing toy is altered from its original mold or form. This shouldn't be confused with a "redeco", where the toy is only painted differently or features a different color plastic to make the toy. With a retool, the difference could be as subtle as a hole that was filled in or as radical as a Frankenstein-like reassembly of a figure using different parts from different characters. A classic example of a retool within the 'G.I. Joe: A Real American Hero' toyline was the outfitting of the first wave action figures with swivel arms.
In the current toy market, retailers cannot rely on selling the same old toys. On the other hand, manufacturers are limited to what they can produce due the high expenses of making metal molds and toy development. Toy companies try to recover their investments by means of redecos and retools. For example, a Duke action figure might sell well, but still not make enough money to cover the expenses of developing and making that Duke figure. However, if that same Duke character was given a new paint job, it might make some more money. But, what if said Duke action figure was retooled, say, with the chest of a Snake-Eyes action figure and the legs of a Heavy Duty figure? Presto, a new(-ish) Duke action figure! The toy company makes more money, retailers make more money, and kids are happy.
There is also the reason of making figures for conventions. Unlike mass retail stores like Wal-Mart, conventions can't expect large numbers of people, so the number of figures has to be low. Since there's so much expense in creating original figures, it's only logical to rely on redecoed and retooled action figures to be offered either as an existing character or as a totally new character.