Mattel Recall Darkens Sunny Outlook For Toy Makers

Even during the typically slow summer months, toy manufacturers were doing well before the widespread recalls.

NEW YORK (AP) — Before two separate recalls of Chinese-made toys forced Mattel Inc. into the headlines this month, the nation's largest toy makers had much to celebrate.
During the typically slow summer months, Hasbro Inc. has gotten a boost from toys tied to the popular ''Transformers'' and ''Spider-Man 3'' movies. Hasbro also announced a licensing agreement with video game maker Electronic Arts Inc. this month.
Mattel was continuing to benefit from the surprisingly strong sales of toys based on the Pixar Animation Studios movie ''Cars,'' which was released in summer 2006.
Mattel also anticipated refreshing the appeal of its iconic Barbie dolls among the iPod generation, with the release of a Barbie-inspired handheld MP3 player. In addition, the company had extended its license with DC Comics in June.
Based on a consumer survey conducted by NPD Group, a retail information company, retail toy sales increased 3 percent to more than $8 billion in the first six months of 2007, compared with $7.8 billion in the first half of 2006.
But Mattel's announcement on Tuesday that it would recall millions of toys — including ''Sarge'' cars from the popular ''Cars'' line — due to safety concerns has darkened the industry's sunny outlook. The move was the company's second recall of Chinese-made toys with excessive levels of lead paint this month.
In the U.S., Mattel recalled 265,000 toy cars due to lead paint concerns and more than 9.3 million toys with tiny magnets that could be swallowed by children. Worldwide, the Mattel recall totals 18.6 million toys, including 18.2 million magnetic toys and 436,000 die cast toy cars.
Earlier this month, the company pulled 1.5 million Fisher-Price toys — also due to concerns about lead paint.
The recalls largely have failed to spook Mattel investors. Mattel had eased some concerns with its announcement that the cost of the second recall already was included in a previously announced $30 million charge.
Wedbush Morgan Securities analyst Sean McGowan said Mattel's reputation could even improve as a result of the recall. The analyst noted the company spotted the excess lead paint and other safety hazards because of heightened testing. ''I think they're actually going above and beyond for the consumer,'' he said.
McGowan compared Mattel to Johnson & Johnson, which was praised for its aggressive response to Tylenol tampering in 1982. The company pulled 22 million bottles of Tylenol from stores nationwide and introduced tamperproof packaging.
But analysts also note that this week's news points to a larger problem among Chinese manufacturers that could lead to longer-term headaches for both Mattel and Hasbro. Mattel's announcement on Tuesday involved the third Chinese supplier of toys with excess lead paint since June.
Bank of America Securities analyst Michael Savner noted that 80 percent of the industry's toys are manufactured in China.
The first case occurred in June, when RC2 Corp. recalled 1.5 million Chinese-made wooden railroad toys and parts from its Thomas & Friends Wooden Railway product line because of lead paint.
''If you have three, I have a feeling there are a few more out there,'' said BMO Capital Markets analyst Gerrick Johnson of the problem suppliers.
Mattel Chief Executive Bob Eckert conceded in a media conference call on Tuesday that stepped up oversight and testing by toy makers could lead to more — not fewer — recalls.
''Even more embarrassing than having a quality control or safety issue would be for an outside entity to discover it before the toy makers do,'' Johnson said in a research note.
Johnson was more pessimistic than McGowan about the recall's damage to Mattel. He said he is skeptical that the $30 million charge previously announced by Mattel will cover the costs associated with the latest recall.
Johnson also thinks the recall of the ''Sarge'' truck from Mattel's popular ''Cars'' line will be a blow to the company. The analyst reduced Mattel's estimates and advised investors to watch and wait.
Savner also lowered Mattel's estimates and reduced its target price after the recall. Noting that holiday sales might be hurt, Savner said he will maintain a ''cautious view'' of Mattel shares.
Despite the views of analysts, any damage to toy makers will be determined on an individual basis, parent-by-parent.
In a research note, Johnson recounted watching a Target shopper refuse to buy a Fisher-Price toy that was made in China for his daughter. ''This sort of scenario may not happen often,'' Johnson said, ''but still represents marginal sales lost by the toy maker.''
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