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Pink Slips for the Elves? Toy Sales Buckle After Early Rush

Source: Toysrus.com

Santa's shop at the North Pole isn't as busy as you would expect this time of year.

After an early frenzy of shoppers socking toys away for the holidays on layaway, the brief glimmer of hope for a turnaround in the beleagured toy industry has vanished.

Toy sales were down about 5 to 6 percent through the end of the third quarter, according to BMO Capital Markets toy industry analyst Gerrick Johnson. He expects sales will continue their negative trends in the coming weeks.

"The season got off to a nice, strong early start," he said. But recent sales have shown that the early burst of buying reflected sales being pulled forward into September and early October as parents took advantage of layaway programs to buy holiday gifts.

In recent weeks, sales have been "decidedly negative," Johnson said. "To be 5-to-6-percent down at this time of year is pretty dramatic," he said.

If sales decline between 2 to 3 percent in the fourth quarter, when the industry rings up about 55 percent of its sales, sales will shake out at a decline of about 3.5 percent for the year, which would be the worst year for which Johnson has data. His records go back to 1980.

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One issue has been the dearth of innovative toys. At the moment, the closest thing to a hot holiday toy may be a doll for preschoolers called Doc McStuffins that is based on a popular show on Disney Junior about a 6-year-old girl who can "fix" toys.

The Doc McStuffins doll is "on the verge" of being a hot toy, and it can be hard to find at the store, Johnson said. But some of the hot toy contenders, including Hasbro's Furby, saw early interest, but it wasn't sustained at that pace.

Since it can take 18 months to two years to develop a toy, Johnson put the blame on the poor economy, which limited the amount of investment and risk toymakers were willing to make on new toy ideas.

"In the toy business, safe usually means boring," Johnson said.

But it isn't all bad news, there are pockets of strength, according to Johnson. Playmates' eenage Mutant Ninja Turtle franchise is doing well, but other types of active figures are selling poorly, he said.

Girls fashion dolls such as Mattel's Barbie and Monster High dolls continue to be strong sellers. And the construction category continues its streak of strong sales gains, helped by the popularity of its Friends construction sets for girls. That category may get a further boost late in the season from Mega Bloks' Barbie construction sets, a new product line from Mega Brands hat will be released on Dec. 12.

Sales of tablet computers designed for children are "very hot," Johnson said. He added, he was told by an unnamed industry executive that the tablet market is way bigger than anyone ever anticipated. This segment includes LeapFrog's LeapPad 2 and VTech's Innotab 2, which are targeted primarily to younger children, as well as tablets such as TechnoSource's Kurio and Toys 'R Us' abeo, he said.

"It's primarily a lack of cool toys," Johnson said, summing up the industry's woes, not the economy.

The last time the industry had a true toy craze was in 2009, when Cepia cored a hit with its Zhu Zhu plush robotic hamsters. (Read More: Top Holiday Toy Crazes of All Time)

-By Christina Cheddar Berk, CNBC.com News Editor

Questions? Comments? Email us at consumernation@cnbc.com. Follow Christina Cheddar Berk on Twitter @ccheddarberk.

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