Trying Times for Transformers Toymaker

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That's likely to make it a hard slog for Tomy in Japan, where the company has exclusive rights. (Hasbro (HAS) owns the Transformers' marketing license in the U.S. and other key overseas markets.) Though 300 million Transformers toys have been sold in more than 130 countries over the years, Japan has only accounted for 10% of sales.

No Earnings Transformation Expected

But that hasn't deterred Tomy. Ahead of the film's release, the company sold 16 different robot characters from the movie, and this month another two dozen will appear in stores worldwide. There is even a collaboration with Nike (NKE), called Free 7.0, which looks like a sneaker but contains a robot inside, and an Apple (AAPL) iPod version is expected soon. Eventually, 80 different products are slated for release.

Tomy says it hopes to do more than $50 million in Transformers sales this fiscal year, through March, 2008. That might be possible, but sales in Japan so far have been disappointing, according to Mizuho Investors Securities. Says Shoji Morita, an analyst at Okasan Securities: "In the U.S., there are many success stories of a hit movie leading to a hit toy. In Japan, however, hit products are always connected to TV anime or TV programs such as Pokémon and Gundam."

In fact, few expect the Transformers to help Tomy's earnings much. Tomy produces Transformers for U.S. toymaker Hasbro, but the Japanese company's profit margins from the arrangement are miniscule, and Transformers-related sales have amounted to less than 10% of the company's total.

But even if the Transformers flop, some analysts think Tomy will still get by. In the first quarter, Tomy's operating earnings swung to a profit of $500,000 from a $2.6 million loss a year ago, and sales rose nearly 15%, to $342 million. Etsuko Tamura of Mizuho Investors Securities says Tomy's Tomica trains and Barbie-look-alike Licca-chan dolls are big enough sellers to lift the company's profits this year. For the financial year, she projects operating profits will grow 57%, to $40 million. If only Tomy's stock price could show a similar recovery. "It's disappointing as we've had healthy revenue growth," says spokesman Wasahara.

See BusinessWeek's slide show for a look at some of Tomy's latest Transformers.

Tashiro is a correspondent for BusinessWeek based in Tokyo. Hall is BusinessWeek's technology correspondent in Tokyo
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