Higher costs spur loss at Mattel

Mattel Inc. reported a surprise first-quarter loss Monday, saying sharp increases in production costs and litigation expenses -- some stemming from product recalls last year -- hurt its bottom line.

The toy maker, based in El Segundo, recorded a net loss of $46.6 million, or 13 cents a share, compared with net income of $12 million, or 3 cents, a year earlier.

It was the first quarterly loss in three years for the company, which Wall Street had expected to turn a 1-cent-a-share profit.

The shortfall spooked investors. Mattel’s stock slid more than 8%, dropping $1.78 to $20.

The results contrasted with those from competitor Hasbro Inc., which posted an unexpected profit.

Oil is a key raw material in many toy products, and record crude prices are driving up Mattel’s production costs. Rising inflation in China, where much of Mattel’s inventory is produced, also hurt, analysts said.

The company plans to hike prices in June.

“The price increases will help,� said Chris White of Wedbush Morgan Securities in Los Angeles. But barring a drop in crude prices, “they won’t completely offset the pressure that they’re feeling.�

Though commodity prices show little sign of easing, Mattel said it expected less of a jolt from the weakening U.S. economy. During a conference call with analysts, Chief Executive Robert A. Eckert said the toy industry “has historically held up very well� in tough times.

Eckert provided no specific earnings guidance for the remainder of 2008 but said there were positive signs for the second half, including toys tied to potential hit movies such as “Speed Racer,� “Kung Fu Panda� and a film based on its popular American Girl doll series.

“I haven’t seen anything early this year that causes me concern about this coming holiday season,� Eckert said.

Revenue in the first quarter dropped 2% from a year ago to $919.3 million. Sales of Mattel’s flagship Barbie doll line were down about 12% in the U.S. But higher sales overseas left them flat overall.

Sales of Fisher-Price toys, which account for about a third of Mattel’s revenue, fell 13% compared with a year ago, when the line benefited from strong sales of such toys as TMX Elmo, the company said.

Mattel said the increase in legal expenses was in part the result of litigation tied to last year’s product recalls. The company recalled millions of toys because of lead levels and other safety concerns.

Higher product-testing expenses also contributed to the rise in costs.

Pawtucket, R.I.-based Hasbro said growth in brands such as Transformers and Littlest Pet Shop helped it beat expectations, driving earnings to $37.5 million, or 25 cents a share, for the quarter. That was up from $32.9 million, or 19 cents, during the same quarter last year.

Sales increased 13% to $704.2 million.

The company expects toys tied to the upcoming movies “Iron Man,� “Indiana Jones and the Kingdom of the Crystal Skull� and “The Incredible Hulk� to boost sales later in the year.

Hasbro shares jumped almost 10%, gaining $3.10 to $34.65.

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