updated 4/21/2008 3:32:17 PM ET 2008-04-21T19:32:17

Barbie maker Mattel Inc., struggling with higher costs and a big drop in sales of its Fisher-Price toys following last year’s lead-related recalls, disappointed Wall Street on Monday with a $46.6 million loss in the first quarter.

Its chief rival, Hasbro Inc., had a surprise of its own, reporting a 14 percent profit increase that beat analysts’ expectations on strong growth in its Transformers and Playskool brands.

Shares of Mattel, the world’s biggest toymaker, fell while shares of No. 2-ranked Hasbro jumprf in afternoon trading.

Mattel, based in El Segundo, Calif., lost 13 cents per share in the three months ended March 31 compared with last year’s quarterly profit of $12 million, or 3 cents per share. Its sales fell 2 percent to $919.3 million from $940.3 million in the year-ago period, despite the benefits of a weak dollar that helped boost sales overseas.

Analysts surveyed by Thomson Financial had expected profit of a penny per share on sales of $926.6 million.

Chief executive Robert Eckert said commodities such as resin and oil, as well as labor cut into profit margins.

“Labor costs are increasing dramatically in China,” Eckert said. He said profits were expected to improve in the latter half of the year after a price increase in June.

Mattel’s suit against a former employee and MGA Entertainment Inc. over the Bratz doll line also drove up legal costs, which were expected to trend higher at least through the second quarter. Mattel says a former doll designer illegally sold designs for the doll to the privately held company.

Lehman Brothers analyst Felicia Hendrix said there were some bright spots, including a 10 percent increase in sales of American Girl products thanks to store openings in Atlanta and Dallas.

“While we believe these positives are notable in this overall disappointing quarter, we remain neutral on Mattel,” she wrote in a research note.

Mattel’s Fisher-Price brand, which was plagued by recalls for lead last year, was the company’s weakest category, with a decline in worldwide sales of 13 percent. By contrast, Hasbro’s Playskool brand was up 17 percent for the quarter, the company said.

Hasbro, based in Pawtucket, had no recalls for lead last year. It did recall about 1 million Easy-Bake ovens after reports of about 250 children getting their hands caught in the oven’s opening.

Hasbro said growth in brands such as Transformers and Littlest Pet Shop helped it beat expectations, driving earnings up to $37.5 million, or 25 cents per share, for the three months ended March

30. That was up from $32.9 million, or 19 cents per share, during the same quarter a year ago.

Analysts polled by Thomson Financial had forecast net income of 14 cents per share.

Hasbro’s sales grew 13 percent to $704.2 million from $625.3 million a year ago. International revenue rose 22 percent to $248.3 million, while revenue in the U.S. and Canada segment grew 6 percent to $428.5 million.

Chief Financial Officer David Hargreaves said Hasbro had some higher shipping and distribution costs due to the rising price of oil and gasoline, but he said the company anticipated those costs would reach just $5 million for the year.

Chris White, an analyst at Wedbush Morgan Securities, said in a note to investors Hasbro was defying the commodity-related pinch that was hurting other toy companies.

Hasbro’s boys brands grew 29 percent in the quarter. Hasbro Chief Executive Alfred J. Verrecchia, who will step down May 22, said the company was optimistic about the business for the rest of the year with strong shipments of toys tied to the upcoming “Iron Man” movie and shipments coming up for “Indiana Jones and the Kingdom of the Crystal Skull” and “The Incredible Hulk.”

Hasbro’s girls business was up 24 percent on the performance of brands like Littlest Pet Shop and Baby Alive. By contrast, Mattel’s girls and boys brands rose 5 percent, with sales of Barbie flat.

Verrecchia will be succeeded as Hasbro CEO by Chief Operating Officer Brian Goldner.

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