Hasbro boss: Fear the economy, not recalls

NEW YORK (CNNMoney.com) -- Hasbro CEO Al Verrecchia told analysts Monday that he believes the recent softness in retail spending, not the recent string of toy recalls, poses the biggest threat to crucial holiday toy sales.

"Every year, retailers and [toy] manufacturers get anxious about the holiday season," Verrecchia said during a conference call with analysts to discuss Hasbro's third-quarter results. "I think this year, the economy could have a more significant impact on toy sales than the recalls."

Hasbro's CEO told analysts Monday that consumer spending is a greater to retailers concern than are recalls.

A slackening of consumer spending in the gift-buying season could significantly hurt profits and sales for retailers and manufacturers, because November and December typically account for more than two-thirds of annual toy sales.

"You worry when you pick up the paper and analysts forecast that this will be the worst holiday season in five years," Verrecchia said, alluding to the National Retail Federation's estimate that 2007 holiday sales will grow about 4 percent, weaker than last year's 4.6 percent growth.

The retail federation blames the expected shortfall on the housing slump and mortgage crisis, saying low-to-middle-income consumers in particular may have less money to spend on gifts.

"But our products are selling well. Our retail sales are up double-digit all year," Verrecchia said.

To his point, Hasbro (Charts), the No. 2 toymaker after Mattel (Charts, Fortune 500), on Monday reported third-quarter profits and sales that solidly beat analysts forecasts.

For the quarter, Hasbro reported a profit, excluding one-time items, of $132 million, or 78 cents a share, on sales of $1.22 billion. Analysts, on average, had forecast a profit of 71 cents a share and sales of $1.13 billion, according to Thomson Financial.

Regionally, the company said North American sales jumped 10 percent and overseas sales surged 33 percent. Hasbro credited the better-than-expected performance to strong demand of its "Transformers" movie-related toys, Marvel-brand products and other brands including "My Little Pony" and "Littlest Pet Shop."

The DreamWorks/Paramount live-action movie based on Hasbro's Transformers franchise of action figures hit theaters July 3. Since the, Verrecchia said, the movie has grossed more than $700 million in global box office sales, making it one of the top performing blockbusters of 2007.

What's more, Verrecchia said the Dreamworks release of the "Transformers" DVD last week should also help pump up sales of Transformers products.

At the same time, he conceded that industrywide toy sales have been dented by the overall slowdown in retail spending.

As a result, he said Hasbro plans to spend more than it did last year on promotional activity tied to the holidays to generate buzz for toys.

"But are we also spending more because of the recalls? No," he said.

Unlike rivals Mattel and RC2 Corp., Hasbro hasn't suffered any product recalls this year. Mattel and RC2 each recalled millions of Chinese-made toys over the summer because of hazardous lead paint or defective design.

"People keep asking us why we weren't impacted given that we also manufacturer our products in China. It's because we already have very stringent safety standards in place," Verrecchia said.

Still, he said the toy industry needs to step up efforts to contain the fallout of the recalls on public perception of Chinese-made toys. China accounts more than 80 percent of the global toy supply.

"I think people need to realize that countries don't make toys, companies do. The recalls were company-specific problems," Verrecchia said. "And these recalls still represent a very small percentage of the $3 billion toys sold in the U.S. each year."