updated 1/31/2008 5:03:51 PM ET 2008-01-31T22:03:51

Mattel Inc. posted a 15 percent gain in fourth-quarter profit, even though it entered the crucial holiday season in the shadow of negative publicity over its recalls of millions of Chinese-made toys tainted with lead.

The company said Thursday that tax gains and strong international sales of Hot Wheels and other toys helped offset the cost of the recalls.

Still, the world's largest toy maker warned that it expected to rack up additional costs in 2008 as a result of the recall problems.

"There're going to be sizable legal costs this year," Robert A. Eckert, Mattel's chairman and chief executive, said during a conference call with Wall Street analysts. "We have a lot of litigation around the world on things related to product recalls, and we've got a significant case coming to trial this year."

Mattel began recalling toys last August due to concerns that lead paint levels might exceed U.S. safety standards.

The El Segundo, Calif.-based company reported that its net income grew to $328.5 million, or 89 cents per share, in the October-December period from $286.4 million, or 75 cents per share, in the prior-year quarter.

The latest period included charges of about $42 million related to the company's recalls of the tainted toys, and tax benefits of $47.3 million.

Sales rose 4 percent to $2.19 billion from $2.11 billion during the year-ago period, with all of the increase attributable to the weaker dollar's positive effect on international sales.

Analysts surveyed by Thomson Financial expected earnings per share of 73 cents on sales of $2.13 billion.

The company also approved an additional $500 million stock buyback.

Mattel shares gained $2.07, or 10.9 percent, to $21.01 Thursday.

Mattel posted global sales increases during the quarter across all but one of its toy divisions, the American Girl unit.

Favorable currency exchange rates overseas helped boost Mattel's international sales by 18 percent, but U.S. sales fell 3 percent.

The company's Girls and Boys Brands unit posted worldwide sales of $1.35 billion, up 9 percent from the same quarter in 2006.

Worldwide sales of Other Girls brand toys jumped 19 percent.

Barbie losing popularity
The toy maker continued to struggle with lagging demand for Barbie brand products.

Global sales of the brand rose 4 percent overall but declined 12 percent domestically, primarily due to weaker sales in the fashion dolls' entertainment-related products such as "Barbie Magic of the Rainbow" and the "MyScene" dolls line.

For the year, Barbie sales were up 1 percent worldwide but slipped 15 percent in the United States.

"U.S. Barbie performance was a disappointment," Eckert said. "In 2008, we're going to continue to focus on core reality offerings ... but we need to improve the performance of the entertainment side of Barbie, and I think we'll do that."

Sales for the company's Wheels division, which includes the lines of Hot Wheels and Matchbox toys, jumped 15 percent.

Hot Wheels-brand toys helped drive sales for the unit, posting a 21 percent jump in global sales.

Mattel's Fisher-Price Brands division posted global sales of $840.4 million, a 4 percent increase. U.S. sales slipped 3 percent.

Sales of toys in Mattel's American Girl unit dropped 2 percent to $241.6 million.

For 2007, Mattel posted a profit of $600 million, or $1.54 per share, compared with a profit of $592.9 million, or $1.53 per share in 2006.

Net sales totaled $5.97 billion in 2007, up 6 percent from $5.65 billion in the prior-year period.

The company's "Sesame Street" toy line, which includes the popular Elmo dolls, was among its best sellers in 2007, in addition to the still-robust toys from the "Cars" movie.

Looking ahead, Eckert said the company expects to face higher costs this year for commodities, labor and product testing, along with "the general sentiment of worsening economies."

The toy maker has also been seeing cost increases from its vendors. As a result, Mattel will raise its wholesale prices for fall 2008 products by mid-to-high single digits, management said.

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