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Mattel Posts Profit Drop Despite Sales Gain

October 17, 2003|Abigail Goldman | Times Staff Writer

Will it be a jolly holiday for Mattel Inc.?

The world's biggest toy maker said Thursday that third-quarter profit fell 3.8%, as cautious retailers, uncertain how much parents and their kids would spend during the upcoming holiday season, kept their orders lean.

The results prompted concern among some in the industry, who said tough competition and rocky starts for key new toys could make the fourth quarter less than fun-filled for the El Segundo company. Still, analysts were pleasantly surprised by Mattel's modest gain in sales during the quarter.

"Since the beginning of this year, we have consistently said we expect 2003 to be challenging," Chief Executive Robert Eckert told investors in a conference call before the stock market opened. "And that has certainly been the case thus far."

Mattel said net income for the period ended Sept. 30 was $270 million, or 61 cents a share, down from $280.6 million, or 63 cents, a year earlier.

Excluding income related to an accounting change and one-time charges, the company earned $265.2 million, or 60 cents a share, up from $256.7 million, or 58 cents, a year earlier. Based on those results, the company met expectations of analysts surveyed by Thomson First Call.

Total sales rose 2.1% to $1.7 billion. As has been the case for most of the year, Mattel's strongest performance was outside the United States. Domestic sales fell 4% in the quarter, but international sales rose 16%, marking the company's 12th consecutive quarter of sales gains abroad.

Throughout the year, Mattel and other manufacturers of consumer goods have blamed less-than-stellar results on the weak economy and retailers' reluctance to relive last year's post-holiday glut of unsold products.

But Mattel, which is releasing a flood of new products in time for the holiday season and embarking on its largest-ever advertising campaign, acknowledged that some early reviews haven't been encouraging.

One of the company's biggest new products already has suffered a setback. Flavas, a line of hip-hop-themed dolls, had a prominent display this fall on the aisle ends at Target Corp.'s stores. After a few weeks, Target, a leading toy seller, took down its special display of the dolls, which were set to compete with the popular Bratz dolls made by North Hills-based MGA Entertainment Inc.

"The end-aisle display did not perform up to Target's expectations," Eckert told analysts Thursday. "It's too early to see how it will play out, but [Flavas] hasn't set the world on fire."

Overall, sales of Mattel's core boys' and girls' toys in the third quarter rose 3% worldwide, with a 15% gain in international sales helping to offset a 6% decline in sales at home.

Some toy industry experts say dolls won't be the only battle for Mattel this Christmas.

On the highly lucrative educational toys front, Mattel's new Fisher-Price PowerTouch Learning Systems will come up against critically acclaimed and already established toys from Emeryville, Calif.-based LeapFrog Enterprises Inc. During the third quarter, sales of Fisher-Price toys rose 2% worldwide.

And among toys for boys, U.S. sales of Hot Wheels and Tyco R/C toys have suffered from a resurgence in the popularity of action figures, particularly Transformer toys, made by Mattel rival Hasbro Inc.

Worldwide sales in the company's Wheels division fell 6% in the third quarter. Mattel's entertainment division also fell 6% worldwide, the company said, mostly because of flagging sales of Harry Potter, Max Steel and He-Man toys.

As for Barbie, worldwide sales gained 8%. Domestic sales of Barbie products, which were down 29% during the second quarter, were flat in the most recent period. The company said its latest incarnation of the doll, Swan Lake Barbie, is selling well, as is the latest in the Elmo line, Hokey Pokey Elmo.

"While nobody would question the long-term appeal of Mattel's brands, this holiday season is shaping up to be one that is perhaps more challenging than usual for them," said Sean McGowan, a toy industry analyst at Harris Nesbitt Gerard in New York. "I wish I knew why. Kids are getting more sophisticated and harder to predict."

Given Mattel's ability to boost revenue during what it has acknowledged is a rough sales climate, some analysts were encouraged by Thursday's results.

"My confidence has risen, based on what I heard them say," said Linda Bolton Weiser of Oppenheimer & Co. in New York. "People were very worried there would be no sales growth in the quarter and that Barbie would be down, and both were up.

"They're on track to report double-digit earnings growth and modest sales growth, and that's what I'd expect for this company over the long haul," she said.

Mattel shares fell 8 cents to $19.92 on the New York Stock Exchange.

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