Toy makers brace for tough holiday season

[October 21, 2008]  NEW YORK (AP) -- There will be toys for kids this holiday season, but the fight for parents' dollars looks to be a tough one for toy makers, who are facing rising costs amid the swooning economy.

Both Barbie maker Mattel Inc., the world's largest toy retailer, and rival Hasbro Inc. said as they announced third-quarter results Monday that price increases are helping to offset rising costs, but noted that they could be hurt by the severity of the economic downturn.

"There will be a Christmas and Mattel toys will be under the tree," Bob Eckert, Mattel's chairman and chief executive, said during a conference call with investors. "That said, I appreciate that some families may have to make choices this year when it comes to buying toys for their children."

Mattel still expects toys such as Elmo Live and the Barbie Diamond Castle dolls that are tied to a DVD movie to do well this holiday season. Hasbro is promoting toys such as the robotic animals Furreal Friends, but says it does not expect to sell as many higher-priced items as it does lower-priced ones such as action figures.

On Monday, Mattel posted a slightly higher third-quarter profit that still fell short of analyst expectations. Hasbro said its net profit declined, but said sales of its Star Wars, Playskool and Nerf toys helped boost third-quarter profit and sales above Wall Street expectations.

At Mattel, quarterly profit rose less than 1 percent to $238.1 million, or 66 cents per share, from $236.8 million, or 61 cents per share, last year. Analysts polled by Thomson Reuters had expected 71 cents per share. Sales rose 6 percent to $1.95 billion, boosted by sales of its Fisher-Price and American Girl brands. The benefit of a weaker dollar helped revenue by 2 percentage points. Analysts expected sales of $1.96 billion.

Mattel raised its prices for toys during the quarter and had lower recall-related costs compared with last year, but that was not enough to offset rising costs, notably from the cost of resin -- which is used in many toys -- higher Chinese labor rates, the stronger Chinese currency and product-testing costs. The company expects to raise prices again in 2009.

"Overall results appear to be somewhat underwhelming though we expected challenging conditions and continue to look to 2009 as a recovery year," Stifel Nicolaus & Co. analyst Drew Crum, who rates the company "Buy," wrote in a client note Monday.

Meanwhile, chief rival Hasbro said profit for the quarter ended Sept. 28 fell nearly 15 percent to $138.2 million, or 89 cents per share, from $161.6 million, or 95 cents, a year ago. Excluding a tax benefit in the year-ago quarter, net income would have risen about 5 percent.

Revenue at the Pawtucket, R.I.-based maker of board games such as Trivial Pursuit and Scrabble rose 7 percent to $1.30 billion. The results topped analysts' average estimates for profit of 86 cents per share on revenue of $1.27 billion.

Hasbro, which raised toy prices in September, said that for the full year, cost cutting and the price increases should offset higher costs related to resin, product testing and the stronger Chinese currency.

"Clearly it will continue to be a very challenging environment," said Chief Financial Officer David Hargreaves in a conference call with investors. While he said the toy industry is recession-resistant, "given the severity of what is now happening in the global economies, we do not believe we will be unaffected and we are adjusting our expectations and spending plans accordingly."

For Christmas, the company expects its brands including Littlest Pet Shop and Nerf to do well, in addition to Furreal Friends. But it also emphasized that most of its products cost $20 or less.

"The consumer is projected to spend less by many people than prior years this holiday but we want to be in a position where consumers spend more as a percentage on Hasbro brands," said Chief Executive Brian Goldner during a conference call.

Crum rates Hasbro as "Hold" and said, "Despite more challenging conditions we remain interested in the shares."

However, investors sent shares of both companies tumbling, perhaps because they wanted more specific guidance. Hasbro shares fell $2.15, or 7.1 percent, to $27.97, while Mattel shares fell 63 cents, or 4.4 percent, to $13.82.

[Associated Press; BY MAE ANDERSON]

AP Business Writer Betsy Vereckey contributed to this report.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.