Mattel: More Tribulations in Toyland

Recalls have hurt the image of some of the company's best-selling toy brands just a few months before Christmas

by Ben Steverman

A third round of recalls from Mattel (MAT) has alarmed parents worried about lead paint in their children's toys.

But so far Mattel's investors have mostly just shrugged. After a the latest round of recalls were announced on Sept. 5, Mattel stock actually rose 1 cent, or 0.05%, to $21.98 on Sept. 6.

Since Aug. 2, when it was first announced that lead paint was detected in Mattel toys made in China, the stock has slid slightly. But the impact has been far less than the hit it took in late July after a poorly received earnings report and a broader market correction.

Investors may be betting that the toy recalls will barely make a dent at the world's largest toy maker, with almost $6 billion in total revenues each year.

Late on Sept. 5, Mattel announced the recall of 11 product types around the world, sold under the Barbie and Fisher-Price brands. Almost 850,000 toys are being recalled worldwide.

The firm didn't say how much it would cost to pull back those items, nor how much it was spending on an extensive review of its toy production methods. Also, the firm may have to boost spending on lawyers, advertising and future production controls. But, as the very important holiday season approaches, the damage to Mattel could be far more serious than these expenses.

"Unfortunately for Mattel, most of these recalls are in very important product lines," says Gerrick Johnson, an analyst at BMO Capital Markets. The Aug. 14 recall affected 436,000 toys based on the Pixar film Cars. "Cars has been phenomenally popular," he says. Tuesday's recall included Barbie-branded toys and the Fisher-Price Geotrax line. Though no Barbie dolls were affected, the Barbie brand is very important to Mattel. In a somewhat slow year for the toy business, Geotrax sales were small but were "showing growth," he added.

The worry is that Mattel's premiere brands are being tainted just ahead of the holiday season. "It's really kind of amazing how it's happened in all their biggest product lines," Johnson says.

Mattel is trying to deal with the fallout by aggressively testing its toys for problems. It says it has devoted more than 50,000 hours to investigating the issues. "We apologize again to everyone affected and promise that we will continue to focus on ensuring the safety and quality of our toys," chairman and chief executive Robert Eckert says.

Recalls aren't new for the toy business. But this summer the recalls have sped up as worries spread about the safety of toys manufactured abroad. It began when RC2 Corp. (RCRC) pulled back various toys in its Thomas & Friends Wooden Railway brand. The popularity of those toys added to the alarm for parents, and set toymakers scrambling to identify and prevent similar safety issues.

Mattel is "doing the right thing by testing very aggressively," Johnson says. So far, it has caught its safety issues before others do, and that's a plus, he says.

However, it will have to suffer with negative publicity, at least until the next toy recall puts another popular toy in the spotlight. Though Mattel may have identified all or nearly all of its problems, Johnson expects more lead paint to be found on other toys. "I don't think we're done," he says.

Steverman is a reporter for BusinessWeek's Investing channel.