Mattel's lower earnings imply this holiday season won't be child's play

It's getting ugly in the toy aisle this holiday season -- and it could stay ugly into next year. Mattel Corp. (MAT) just reported its third-quarter sales, and profits were down. The company blamed the lack of popular movie-based toys, tight inventory management among retailers, and the weak economy.

Mattel's earnings were $229.8 million, down 3.5 percent below the same period last year, and net sales were down 8 percent to $1.79 billion. That matched analysts' expectations to the penny, thanks to cost-cutting, since Mattel reported sales of some of its most popular toys were down. Sales in the girls and boys toys division were down 10 percent, led by an 8 percent drop in sales of Barbie toys. Sales of toy cars such as Tyco and Hot Wheels were down 3 percent and the Fisher-Price brand of preschool toys sold 6 percent less than last year.
Ironically, the one bright spot was the one area where Mattel competes with retailers: the American Girl brand of dolls, which was up 4 percent thanks to the opening of new American Girl stores in Boston and Minneapolis last year.

Also, advertising and promotion expenses during the quarter were down 12 percent from a year ago. That's important to toy stores, because some of that is cooperative advertising, where the manufacturer shares some of the cost of promoting the sales of those toys; and all of it, of course, helps drive traffic to stores.

This comes at a time when retailers are fighting hard for every penny of the season's sales, and there are signs that unlike last year, when consumers spent most of their limited gift budgets on the kids, this year they are looking to beyond the toy aisle to areas such as apparel. So far, we have $10 toys at Wal-Mart Stores Inc. (WMT), pop-up stores at Toys R Us and the return of the toy department at Sears Holdings Corp. (SHLD).

But those toys were all ordered months ago; in fact, toy retailers are now shopping for next year's holiday season. The stuff you're going to buy this year was picked last year, during the worst of the economic panic. That may account for why there is no blockbuster Cabbage Patch Kid or Tickle Me Elmo equivalent in stores this year. Cepia's interactive robot hamsters, Zhu Zhu Pets, and Bakugan Battle Brawlers from Spin Master have turned up in a couple of hot-toy lists, but there are no must-haves so far.

That's where the lack of a popular movie toy becomes a liability: Those toys are an easier sell, especially if the movie is a hit. The Star Wars franchise is still cranking out new toys decades after the first movie came out, and Toy Story remains one of the most popular toy lines with kids.

It will be interesting to see what rival Hasbro Inc. (HAS) has to report when it posts its quarterly earnings Oct. 19. Hasbro has the franchise on action-movie toys this year, with both Transformers: Revenge of the Fallen and G.I. Joe: The Rise of Cobra -- movies that, not coincidentally, are based on Hasbro Toys. It also doesn't hurt that it owns the market for board games with Milton Bradley and Parker Brothers, and classic toys such as Play-Doh, which tend to do well in downturns, when people find themselves wanting to get back to basics.

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