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As Holiday Nears, Mattel Tries to Polish Image

It is the most important season of the year for Mattel as the company faces a difficult crisis.

Mattel's headquarters in El Segundo, Calfornia.
Nick Ut
Mattel's headquarters in El Segundo, Calfornia.

The company is taking a $40 million charge for recalling 21 million toys. That translated to a hit of $.08 a share in earnings, bringing EPS in at 61 cents and missing street expectations of 70 cents (even when you factor out the charge). While overall sales rose 3 percent to $1.84 billion, domestic sales were down, in part because the supply chain came to a halt due to safety checks.

And it's not over yet. The company says more customers are returning toys than expected. Brazil still hasn't reopened its market to Mattel, and the company says if that situation isn't resolved, it will impact the current quarter.

On the conference call, CEO Bob Eckert says new safety measures in China are working, and testing continues.

"It's important to emphasize that nothing is being shipped from China or anywhere else, before it's been tested," Eckert told analysts. "We've tested just about everything we expect to ship for the holidays."

Three different recalls due to small magnets or lead paint have customers wondering whom to blame. Mattel blames itself, even apologizing to the Chinese government for overreaching in its indictment of toy manufacturing. Most people praise the company for coming clean and doing everything it can to get toys back.

Donna Balancia, a mother from Indialantic, Fla., says it appears from the Mattel website that her daughter has three different sets of Polly Pockets on the recall list. She went online and filled out the forms, but hasn't gotten any further information on what to do. So they're holding onto the Polly Pockets.

"We had to take several toys off her birthday wish list, and that's very difficult when you have a child who really wants something," Balancia said.

Mattel's CEO says the company manufactures 800 million toys a year. That means only 2.5 percent of toys are affected by the recalls, and only a fraction of that deals with lead paint.

Sean McGowan of Wedbush Morgan says his research with toy retailers shows "there's been an almost insignificant change in behavior" in buying, though he does think the bad press for Mattel could help Lego, which is not made in China.

Don Mays from Consumer Reports blames the "speed-to-market mantra" for short-circuiting the testing and inspection process.

"They're (Mattel) doing the right thing, but they're really making amends for some very bad business practices in the past," he says. "For example, they entrusted the testing of toys that came out of China with lead paint to the very factory that was producing those toys. And that was sort of a matter of the fox guarding the hen house."

Regardless of today's comments, the company is facing a growing number of lawsuits from shareholders like the Sterling Heights Police & Fire Retirement System in Michigan, a pension fund alleging Mattel withheld safety concerns as insiders sold shares. According to the fund's lawyer, Jay Eisenhofer, "shareholders lost billions of dollars worth of value on their holdings in Mattel as a result of this."

Mattel has been through recalls before, but the stakes have never seemed higher. Nor has the CEO ever seemed more concerned.

Eckert is the father of four who believes trust in the Mattel brand is paramount. And even he doesn't seem to have all the answers.

When asked by a Congressional panel last month how the company would dispose of the potentially dangerous toys it is recalling, Eckert promised those toys won't end up in a landfill. He also hopes they don't end up on Ebay.

"It's a big concern of mine, if someone were to take a toy of mine that's not safe for children and donate it to the Salvation Army, that to me is wrong. And I don't know the answer to how to prevent that, but I believe we should work and figure out a way to do that.

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