Mattel's Second Recall

The playroom is becoming a dangerous place now that Mattel (NYSE: MAT  ) has announced a second recall of potentially harmful toys. The latest warning, from this morning, goes out to parents who have bought their kids a die-cast version of the Sarge vehicle from Disney's (NYSE: DIS  ) Cars film and includes a larger callback of 63 product lines of magnet-based toys, mostly from the Polly Pocket franchise.

The Sarge cars that were made in China have impermissible levels of lead paint. That's the same thing that tripped up Mattel when it recalled nearly a million Sesame Street and Dora the Explorer toys earlier this month. Lead paint can be toxic if kids ingest it by putting the toys in their mouths.

The playthings have small yet powerful magnets that can harm the intestines if a few loosened magnets are swallowed and bond together. Mattel addressed the problem earlier this year with an enhanced magnet retention system.

Obviously, this will create a financial hit for the company. The original recall was good for a $30 million whack at operating income, and this one involves millions more toys. However, the recall will also take a big whack at the Mattel brand.

Parents don't like to take chances. RC2 (Nasdaq: RCRC  ) announced a lead paint recall of some of its Thomas & Friends wooden toys two months ago, and it's hard to imagine that won't have an impact on future toy sales.

Think beyond the recall. Most parents aren't going to go through the hassle of filling out forms and requesting pre-paid mailers. If there is something that is potentially deadly in their house, it's going into the dumpster. The toymaker may not have to foot the bill in the near term, but good luck winning back the parent in the long run.

You can feel sorry for Disney or Dora parent Viacom (NYSE: VIA  ) because they'll lose licensing revenue, but just imagine what terms they will demand when it comes time to renegotiate with Mattel.

It's hard to tell how much blame we can pin on Mattel at the moment. Recalls happen all the time. The lead paint stems from Chinese contractors who often outsourced the painting to shoddier suppliers. The shocking suicide of the head of one of Mattel's contract manufacturers in China over the weekend only leads to more unanswered questions.

In the end, it all comes down to Mattel in the eyes and pocketbooks of consumers.

In a full-page ad appearing in several newspapers this morning, Mattel CEO Bob Eckert leans on his company's long safety record. "Nothing is more important than the safety of our children," he writes, pointing out that he is a father of four children himself.

However, there are still concerns that Mattel took too long to disclose the name of the errant Chinese factory that was at the heart of the first recall and to issue the voluntary recall in the first place.   

"I am confident that the actions we are taking now will maintain that trust," Eckert writes. He should probably check with frustrated parents to make sure that they'll still pony up that trust to begin with.

Disney is a recommendation for Motley Fool Stock Advisor subscribers and RC2 is a Motley Fool Hidden Gems selection. Free trials are available for both market-beating newsletter services.

Longtime Fool contributor Rick Munarriz wonders who will have the hot toys for the 2007 holiday season. He does own shares in Disney. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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