Mattel: Recalls are the least of its problems

NEW YORK (CNNMoney.com) -- Even though Mattel CEO Robert Eckert tried to pacify analysts on Monday by saying that "the recalls are behind us," in reality, those recalls are the least of its problems as the toymaker gears up for the critical holiday shopping season.

Mattel (Charts, Fortune 500), the No. 1 toymaker, reported lower third-quarter profits and sales which the El Segundo, California-based company blamed on charges associated with recalls of millions of its Chinese-made toys this past summer due to lead paint hazards and choking risks.

The company said profits slipped to $236.8 million, or 61 cents per share, from $239 million, or 62 cents per share on sales of $1.84 billion. Analysts has forecast a profit of 70 cents a share on sales of $1.9 billion.

In a conference call with analysts to discuss Mattel's results, Eckert said he was recently in China to ensure that the additional toy safety measures implemented at its factories and with all its vendors in the wake of the recalls were fully working.

'I can tell you that nothing is being shipped from China without being tested,' Eckert said, adding that almost all of Mattel's toy inventory shipped from China for the fourth-quarter, that includes the November-December sales months, had been tested.

As far as Mattel is concerned, Eckert said that the recalls were "behind us." "There will be a Christmas and I'm confident that this be the safest year for toys," he said.

However, Mattel still has plenty of other problems that could upset its toy chest this Christmas.

All the additional testing that Mattel's now conducting on its Chinese-made toys has delayed its shipments worldwide. This means some parents may not get some of the popular toys in time for Christmas.

That's bad news for Mattel, too, since the year-end holiday season accounts for two-thirds of annual toy sales. Mattel can't avoid delays which means lost sales this Christmas, something the company can't afford.

Jim Silver, editor of Toy Wishes magazine, said parents should grab the hottest toys as soon as they can because "they will be sold out by December."

Mattel's chief financial officer Kevin Farr, told analysts during the conference call that supply chain disruptions resulted in a one to two week lag of between 30 to 50 million shipment in the third quarter.

What's more, Brazil last month suspended licenses held by Mattel to import its goods into the country because of the recalls.

Unless those licenses are reinstated soon, Farr said loss of its business in Brazil could result in a 2 percent sales decrease in the fourth quarter.

"If that [situation] materializes, we will move our products to some of our other international markets," Eckert said.

Barbie's U.S. sales tumbled a stunning 19 percent last quarter even after Eckert told analysts earlier this year that the company was working hard to revitalize the brand and would deliver a sales improvement by fall.

This is a huge problem for Mattel since the Barbie brand accounts for more than 20 percent of the company's sales and over 30 percent of its total profits.

While Eckert called Barbie's performance a "disappointment", he also blamed the shortfall on the supply chain issues that lead to delayed shipments of key Barbie products from China.

What's more, Mattel is facing stiffer competition in the U.S. and overseas to Barbie from Bratz dolls, which are made by MGA Entertainment.

"We do need to work more on the Barbie brand," Eckert said, although he pointed out that Toy Wishes magazine picked "Barbie Girls", which is Barbie-themed MP3 player, to its annual Hot Dozen toys list for the holidays.

Additionally, overall sales at Mattel's other girls brands division also fell 10 percent because of weakness in sales of Polly Pocket dolls.

Mattel expanded its recall of some Polly Pocket dolls this year because tiny magnets inside the toys posed a serious risk to small children, if ingested.

Eckert told analysts that the recall has hurt consumer perception of the brand. He added that the company was addressing the problem by launching a "Polly Promise" campaign for the holidays. "We will offer significant coupons in stores and online. If there are any unsatisfied customers, we will refund the cost to the customer," he said.

For Mattel, its Fisher-Price playschool division has been one of its best-performing divisions in recent years.

However, Fisher-Price sales rose an anemic one percent worldwide last quarter. Mattel said its Dora the Explorer brand, which was one of the hottest brands a few year ago, had possible peaked and was experiencing a sales decline.

Also, last year, Mattel scored a hit with its T.M.X Elmo. This year, the company has yet to announce its "holiday" Elmo. Mattel sources say the company will debut its secret Elmo in early November, which is typically very late in the season for a new product launch.

Eckert said retailers are also worried that consumers this year will have less money to spend on toys.

To his point, Wal-Mart, the No. 1 toyseller, set the ball rolling on holiday price wars by chopping prices on some popular toys for the holidays much earlier than usual.

The National Retail Federation (NCR) estimates that total holiday sales this year will grow 4 percent, weaker than last year's 4.6 percent increase, as many more Americans struggle with less discretionary income tied to a housing slowdown and credit market crunch.

These two economic headwinds hurt low-to-middle income shoppers in particular, who also happen to be core shoppers at discounters like Wal-Mart (Charts, Fortune 500) and Target (Charts, Fortune 500).

"We call it the early fall jitters," Eckert said."Historically toys have sold well even during tough economic times. But we're optimistic that consumers will come back to toy aisles for the holidays."

Nevertheless, Mattel did promise that one thing will certainly happen next year - higher toy prices.

"We will moderately increase prices between January and April next year in different markets ," said Farr. He said the price rise was needed to offset higher raw material and production costs as well as rising wages in China.

Toy shortages expected for holidays

Mattel CEO contrite before Senate