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What Mattel's Earnings Mean for Holiday Retail

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There's not a lot to cheer.

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If Mattel (MAT) is an indicator, the kids don't come first in a recession.

The toymaker's third-quarter profit dipped 3.5% as consumers cut back.

Mattel's net income fell to $229.8 million, or $0.63 a share, compared with $238.1 million, or $0.65, for the same period a year ago. Sales fell 7.9% to $1.8 billion.

Still, Mattel's shares rose about 4.7%, to $20.49 in early trading Friday after the company's chief executive officer expressed optimism about holiday sales. But Barbie, introduced in 1959, faces stiff competition from other dolls, especially MGA Entertainment's Bratz line, and retailers are sharply discounting Mattel's lower-priced toys such as Elmo in an effort to lure shoppers.

"Maybe it won't be a terrible year, but I don't think I would describe it as increased confidence," Robert Eckert, Mattel's chief executive, told analysts. "I would describe it as the lack of new negative news every day at this time of the year is really helpful."

Despite the CEO's attempt to be upbeat, Mattel's weak third-quarter performance suggests the 2009 Christmas shopping season will be sluggish, making flat sales in the retail sector a minor triumph. Retail sales in November and December can represent as much as 25% to 30% of total sales, creating a make-or-break situation for some stores. Last year, holiday retail sales totaled about $245 billion.

This year's holiday shopping season plays out against rising unemployment and tight credit. In response, many retailers have cut inventory and reduced prices.

Retail Forward, a consulting and market research company, looks for flat sales this year following a decline of 4.5% in 2008. That ended a long winning streak, where retail sales had risen by at least 2% each year since 2000. Overall, analysts at Retail Forward look for a slow recovery in retail sales next year.

Retail Forward expects apparel and accessory sales to decline about 2% in the fourth quarter compared with a 9% drop last year. If so, that's bad news for department stores like Macys (M) and J.C. Penney (JCP).

Sales at home goods retailers such as Bed Bath & Beyond (BBBY) are expected to decline about 2% after a 7.4% drop in 2008. Building and home improvement retailers such as Home Depot (HD) and Lowe's (LOW) are expected to see sales decline about 2% during the holiday shopping season.
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No positions in stocks mentioned.
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