Please ensure Javascript is enabled for purposes of website accessibility

RC2 Can't Be Too Safe

By Rich Duprey – Updated Apr 5, 2017 at 5:31PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Gifts the toy maker gave after the first recall are also found to have too much lead.

After selling tainted toys, RC2 (NASDAQ:RCRC) decided to sincerely apologize by distributing gifts to its customers. It appeared to be a good move to help salvage the Motley Fool Hidden Gems recommendation's good reputation, but it ended up backfiring.

Problem is, the company began handing out the toys without thoroughly checking them. Turns out some of them also had too-high lead content, and now they're being recalled.

The company says it is embarrassed and wants to make it up to customers. Yet I'm not sure if its apology is truly the best approach to the situation, because it's planning to offer another gift. I mean, do parents really want another RC2 product in their child's hands after all of this, even if it's free?

As angry as parents must be right now with the toy maker, I can't help but wonder if HIT Entertainment, the company that licenses the Thomas & Friends name, will pull the license from RC2 for damaging the Thomas name. Of course, so many other toy makers are experiencing similar issues that there really aren't many alternatives right now. But I'm pretty sure the company has used up most of its lives, running the risk of completely killing both the reputation of its toys and the brands licensed to them.  

Many brands have initiated new testing procedures to protect their names. Disney (NYSE:DIS) has added an extra layer of testing, while Wal-Mart (NYSE:WMT) is trying to restore confidence in the toys it sells with more tests as well.

Considering that 80% of the toys sold in the U.S. are made in China, parents considering a purchase this holiday season have limited options if they're  thinking of looking for something "safe." Even Mattel (NYSE:MAT), the world's largest toy maker, has had three recalls. It took a different approach to apologizing recently by saying it was sorry to the Chinese to help save face for the country. And Hasbro (NYSE:HAS) has issued recalls in the recent past as well.

Mattel has been quoted as saying the holiday season will be just fine for it. Yet RC2 ran out of steam after its first recall was a lot more substantial than anyone had anticipated, and the cost of a second recall, even if it's far more limited than the initial one, will take a toll because Thomas makes up more than 10% of its annual revenue.

It will be interesting to see the long-term effects the recalls have on all of these toy makers' brands, especially now that the holiday shopping season is beginning. On one hand, parents are probably nervous about purchasing potentially hazardous toys for their kids. But then again, parents always strive to get their kids what they want. So I imagine it will be hard for them to deny their children the Thomas train they've been begging for.

RC2 is a recommendation of the market-beating Motley Fool Hidden Gems newsletter service. Ride the rails with a 30-day free trial.

Fool contributor Rich Duprey owns shares of Wal-Mart but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. Disney and Hasbro are Stock Advisor selections, and Wal-Mart is a recommendation of Inside Value. The Fool has an untainted disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.