Mattel Has Toys in the Attic

There's a problem at Mattel (NYSE: MAT). More than one, actually. The toymaker posted sluggish third-quarter reports this morning, but that's just the tip of iceberg.  

Investors were braced for a dicey showing after the company's embarrassing string of product recalls, but they didn't brace themselves hard enough. Net sales rose by less than half of what analysts were expecting, inching a mere 3% higher to $1.84 billion. Earnings clocked in at $0.61 per share. Even if you tack on a tax-adjusted $40 million operating income hit related to hauling back the toxic playthings, earnings would still barely make Wall Street's $0.70-per-share target.

Companies miss all of the time. The rub here is that Mattel is coming up short in areas that had little to do with the recalls. The American Girl line is running flat. Barbie took a 4% hit on the top line.

Barbie's dip is frustrating. Mattel seemed to be doing so well with its BarbieGirls.com website launch earlier this year. The online community drew 2.75 million registered users during its first two months. Mattel released a Barbie-styled digital music player over the summer to unlock premium areas within the free site.

The moves weren't supposed to threaten established digital-media-player makers like Apple (Nasdaq: AAPL) or SanDisk (Nasdaq: SNDK). Mattel just wanted to breathe new life into the brand. But that approach isn't working.

As bad as things seem, the situation gets worse once you take a deeper look at geographic trends within the numbers. Mattel's net sales figure consisted of a 10% spike in international sales and a 2% decline domestically. However, more than half of the overseas gains came from favorable currency translations.

The recalls sting, but Mattel isn't the only company to have problems with unacceptable levels of lead paint in their toys. RC2 (Nasdaq: RCRC) had a springtime recall of some of its Thomas & Friends wooden toys following similar concerns. 

If consumers are associating the Mattel brand with questionable quality, that impression may stick, even if other leading toymakers like Hasbro (NYSE: HAS), LeapFrog (NYSE: LF), and JAKKS Pacific (Nasdaq: JAKK) eventually stumble, too.

But what if the problems run deeper than a tainted brand? What if Mattel is simply out of touch with stateside consumers? After all, the company's Hot Wheels and Matchbox toys -- painted die-cast vehicles that would normally stir up worry if the lead paint fears were brandwide -- posted double-digit percentage gains during the period.

Mattel's got problems. That's the problem.