October 15, 2007 / 10:17 AM / 12 years ago

Mattel posts lower profit on impact of recalls

NEW YORK (Reuters) - Mattel Inc MAT.N posted a lower quarterly profit on Monday, missing Wall Street estimates, due to charges and disruptions from its recent global recalls of potentially harmful toys made in China.

A customer looks at a Barbie toy at a store in Shanghai August 15, 2007. Mattel, the world's largest toy company, posted a lower quarterly profit on Monday, missing Wall Street estimates, on charges stemming from its recent global recalls of potentially harmful toys. REUTERS/Aly Song

The maker of Barbie dolls and the T.M.X Elmo said third-quarter profit fell to $236.8 million, or 61 cents a share, from $239 million, or 62 cents a share, a year earlier.

Excluding recall charges, Reuters Estimates said the company had earned 68 cents a share, compared with the average analysts’ forecast of 70 cents.

Mattel, the world’s largest toy company, recalled about 21 million toys earlier this year because of lead paint and hazards posed by small magnets. The company said the recalls resulted in a charge of about $40 million during the quarter and disrupted its supply chain.

“Excluding the effect of these costs and disruptions, results would have met or exceeded our estimate,” Wedbush Morgan Securities analyst Sean McGowan wrote in a research note.

McGowan, who has a “buy” investment rating on Mattel’s stock, said he expected the recall-related disruptions to be limited to 2007, with the company showing strong sales and earnings growth next year.

Third-quarter sales climbed 3 percent to $1.84 billion. Analysts were expecting about $1.9 billion, according to Reuters Estimates.

“Despite the challenges the company faced during the third quarter, the business has performed fairly well, even with some supply chain disruptions that impacted sales,” Chief Executive Robert Eckert said in a statement.

Mattel said it had slowed shipments of its Chinese-made toys during the quarter so it could conduct product testing.

Barbie sales in the United States tumbled 19 percent during the quarter and slipped 4 percent across the globe.

“U.S. Barbie performance was soft and remains an area of focus,” Eckert said.

Sales of Mattel’s girls and boys brands rose 6 percent, while Fisher Price sales increased 1 percent. The company’s Wheels business, which includes Hot Wheels and Matchbox toy cars, increased 9 percent.


Mattel said fourth-quarter sales might be 2 percent lower if its Brazilian import licenses were not reinstated soon. Latin America’s largest nation had suspended the import licenses on August 17 following the spate of recalls.

The fourth quarter is the most important time of year for toy companies because it encompasses the holiday shopping season.

According to market research firm NPD Group, the toy industry rings up nearly half of its annual sales during the quarter.

“Retailers are probably a little anxious about the impact of recalls,” Eckert said on a conference call. “But they’re at least as anxious about the overall economy and consumer plans for the holiday.”

Sterne Agee analyst Margaret Whitfield wrote in a research note on Friday that this past summer’s recalls were hurting toy sales, particularly those of Mattel’s Fisher Price line.

“The key Barbie products for the back half do not seem to be performing well at this early stage, which includes Island Princess and Barbie Girl, according to our research,” wrote Whitfield, who has a “hold” rating on the stock.

So far, this year’s holiday toy lineup lacks one dominant hot product like last year’s T.M.X Elmo, but Mattel is looking to change that with a newer version of the doll, which it expects to start selling in November.

Mattel’s shares were down 8 cents at $22.37 in morning New York Stock Exchange trade.

Reporting by Justin Grant

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