Toy recalls hit Mattel's bottom line

updated 6:16 p.m. ET Oct. 15, 2007

LOS ANGELES - Mattel Inc., which spent much of the past quarter dealing with fallout from massive toy recalls, said Monday that the impact could hurt sales during the quarter that includes the holidays, even though it saw its third-quarter profit slip only 1 percent.

The world's biggest toy maker said net income for the quarter ended Sept. 30 fell to $236.8 million, or 61 cents per share, from $239 million, or 62 cents per share, in the same period a year ago.

Latest-quarter results included charges of about $40 million related to recalls covering merchandise that contained small magnets or was tainted with lead paint.

Overall sales climbed 3 percent to $1.84 billion from $1.79 billion a year ago, with overseas sales aided by the weaker dollar.

Analysts surveyed by Thomson Financial had expected profit of 70 cents per share on revenue of $1.91 billion.

Mattel shares fell 23 cents to $22.22 on Monday.

"Despite the challenges the company faced during the third quarter, the business has performed fairly well, even with some supply chain disruptions that impacted our sales during the quarter," Robert A. Eckert, chairman and chief executive, said in a conference call with analysts.

"U.S. Barbie performance was soft and remains an area of focus, although a good portion of the decline in the quarter was directly related to the supply chain disruptions," he said.

Since August, Mattel has announced three separate recalls of some 21 million toys because of dangers to children from lead paint or from tiny magnets that can be harmful if swallowed.

The majority of the toys were recalled because they featured the small magnets.

"While product recalls clouded this quarter's results, the company's domestic business continues to underperform, a factor that we believe will continue to weigh on the stock," Lehman Brothers analyst Felicia Hendrix wrote in a research note.

During the conference call, Eckert acknowledged that retailers were anxious about the state of the economy and the impact the toy recalls may have on consumers as the crucial holiday season nears.

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