Where the Toys Aren't

Rick Aristotle Munarriz, The Motley Fool
Updated

It's been an uneasy few days for the toy makers.

  • Mattel (NYS: MAT) simply met Wall Street's profit targets when it posted its third-quarter results on Friday, and it would have come up short if not for some aggressive share buybacks. Needham & Co. downgraded Mattel on the news.

  • Hasbro (NYS: HAS) followed with its quarterly financials on Monday. The second-largest playthings maker actually earned less than the $1.30 a share that analysts were expecting. Revenue also fell short of projections, and that was with a favorable foreign currency impact.

  • JAKKS Pacific (NAS: JAKK) reported this morning. The smaller toy company posted declines in net sales and profitability. Wall Street also overestimated JAKKS Pacific's bottom-line performance.

So where do we go from here?

The third quarter is a more important period than you may think, because it's when retailers begin loading up on hot toys ahead of the telltale holiday shopping season.

Toy manufacturers have been played up as recession-resistant in the past. Even in a dour economy, parents will forgo their own desires to make sure that their kids get the occasional plaything. Well? What's going on here?

Before one argues that the economy is bad all over, consider that Apple (NAS: AAPL) sold a record 4 million iPhone 4S devices over the weekend. Grownups are obviously still treating themselves. Have we reached the dawning of the Bad Santa Age?

This isn't a new revelation. Hasbro had consistently topped Wall Street's estimates for years. Now it has posted its third consecutive miss. The pros are overestimating the fallout here.

Are kids simply moving on to higher tech? Mattel doesn't hope so. This morning's Wall Street Journal reports that Mattel is nearing a deal to buy the company behind the popular Thomas the Tank Engine franchise.

We'll get a better read on edutainment tech when LeapFrog (NYS: LF) reports in two weeks, but the bigger fear is that even toddlers are gravitating to tablet apps and video games earlier than they used to in the past.

Unless this trend changes -- and fast -- it's going to be a blue Christmas for the traditional toy makers.

If you want to track the toy companies, consider adding a few to the free My Watchlist news alerts service:

At the time thisarticle was published The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of Hasbro, Apple, and Mattel, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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