Toy company Mattel (NYSE:MAT) reported its third-quarter earnings today, and is gearing up for the big holiday period. While the quarter ended in September wasn't a sales blockbuster, that's typical. Customers just usually aren't out shopping in a big way for toys during the late summer.

Mattel did show signs of financial discipline and strength during the quarter, however. While worldwide sales rose 2% and domestic sales fell 4%, it tightened up its balance sheet and kept costs under control. Cash levels were up, and the company reduced it debt again. Days of sales outstanding, which measures the amount of time between when Mattel sells something and collects the cold hard cash, dropped from 74 to 66. That's a good thing, meaning that Mattel was paid faster.

Mattel also managed to rein in its expenses. Its selling, general, and administrative expenses used up just 15.5% of revenues, 7% better than the 16.9% of sales in last year's third quarter. That offset a slight decline in gross margins and a 5% increase in marketing costs.

With its financial house in order, Mattel is now readying itself for what it hopes will be a bountiful holiday season. Such products as its Swan Lake Barbie and Hokey Pokey Elmo recently made the coveted "Hot Dozen" list and are the company's leading contenders going into the gift-giving blitz.

Competitor Hasbro (NYSE:HAS) is also banking on a big holiday showing. We'll get to see how its third-quarter shaped up, and how it's preparing for the season, when it announces earnings on Monday, Oct. 20.

Hasbro was David Gardner's May 2003 Motley Fool Stock Advisor recommendation, and is up 40% versus the S&P's 20% gain since then.