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Mattel defends actions leading up to recalls

With its reputation bruised by the second major recall of Chinese-made toys tainted with lead paint in a matter of two weeks, Mattel Inc. on Tuesday defended the measures it has taken to ensure the safety of its toys.
/ Source: The Associated Press

With its reputation bruised by the second major recall of Chinese-made toys tainted with lead paint in a matter of two weeks, Mattel Inc. on Tuesday defended the measures it has taken to ensure the safety of its toys.

“I am disappointed in what has occurred and what has transpired,” Robert Eckert, chairman and CEO of Mattel, the world’s largest toy maker, said in an conference call with the media Tuesday.

“No system is perfect,” he said. “We are continuing to test thousands of toys, and we could have additional issues.”

Mattel — which had cultivated an image of tightly controlling production in China — has increased its monitoring of Chinese factories and launched an advertising campaign in newspapers such as The New York Times and Wall Street Journal.

Still, with China offering the cheapest source of labor supply, Mattel, like other toy makers, continues to do business there.

Despite negative publicity, investors haven’t pummeled the stock. Shares of Mattel fell 57 cents, or 2.4 percent, to $23 Tuesday, on a day when broad market indexes fell. The stock is trading at its low end of its 52-week range of $21.52 and $29.71 per share.

Mattel’s worldwide recall involved 436,000 die cast “Sarge” cars related to the character from the movie “Cars” because it contained lead paint. It also extended a November 2006 recall of toys that contain magnets that can be swallowed by children; they included Polley Pocket dolls and Batman action figures. That recall now encompasses 18.2 million magnetic toys worldwide.

The recalls follow the actions taken by the company two weeks ago when it recalled 1.5 million products from its Fisher-Price unit worldwide. That recall, for lead paint, involved characters such as Dora the Explorer, Big Bird and Elmo.

The latest recall sparked fresh concerns over whether Mattel should have warned the public sooner.

The Consumer Product Safety Commission is looking into whether the Fisher-Price unit let the agency know as quickly as it should have its lead paint problems. And Mattel was questioned by the press again about the timing of its disclosures on the latest recall.

Company officials said Mattel discovered there may be a potential lead paint issue between the end of July and the beginning of August and notified the CPSC a few days later, after doing more testing.

The problem was discovered as part of a wide-scale investigation into all of its Chinese factories following the discovery of the Fisher-Price lead paint problem, the company said.

But Gerrick Johnson, an analyst at BMO Capital Markets, questioned why it took so long for Mattel to disclose the most recent recalls when the company incorporated a $30 million charge for recalled product in its second quarter filings with the Securities and Exchange Commission.

“You have to alert the public right away,” he said. “I think it’s a public relations nightmare more than anything else.”

In the Aug. 3 SEC filing, Mattel said that additional information became available in July on “other smaller product recalls and similar charges were recorded.”

In the conference call, Eckert said that the company was vague in its filing because it didn’t know which toys were involved and how many were affected.

Kathleen Waugh, spokeswoman at Toys “R” Us, the nation’s second largest toy seller, said that she was notified Monday night and the retailer immediately removed the affected products off the shelves.

“We are working with customers to understand the scope of the recall,” Waugh said.

The recalls will likely scare off many consumers this holiday season, putting a damper on Mattel’s sales into next year, Johnson said.

“If you wanted to know what the top-performing brands were over the last year, well, they were Elmo, Dora, Cars, and all of them are being subject to recall in some way or another, and all of them involve lead paint,” Johnson said.

“I think, on the margins, you’ll get some consumers who won’t buy those products,” he said.

The Mattel actions follow a string of other recalls of Chinese-made toys this year, ranging from Hasbro Inc.’s faulty Easy Bake Ovens to RC2 Corp.’s 1.5 million wooden railroad toys and set parts from its Thomas & Friends Wooden Railway product line, which contained lead.

As a result, Johnson lowered his revenue outlook for Mattel by $25 million in 2007 and $40 million in 2008. Johnson also cut his earnings per share estimates by 3 cents to $1.47 in 2007 and by 5 cents to $1.60 in 2008.

Still, Sean McGowan, an analyst with Wedbush Morgan Securities Inc., said that while Mattel may be experiencing some pain now, it will only gain long-term trust in the end as he believes it’s being honest about investigating any other problems.

About 65 percent of Mattel’s toys are made in China, but the toy maker has stood out among its rivals because it owns many of its factories there. About 50 percent of Mattel’s production in China is produced in company-owned plants. But Eckert noted that despite Mattel’s strict rules, he has recently seen violations among its subcontractors.

Until now, Mattel had focused testing on materials that went into the toys and had factories do sample testing of its products.

Now, the company is increasing its vigilance at the beginning of production and during production. Factories will be forced to test every batch of products before they are released to stores.

Mattel is also stepping up unannounced random testing of its Chinese suppliers and says it will tighten enforcement of rules that suppliers use certified paint.

In a conference call with reporters Tuesday, Eckert said the correct paint for the “Sarge” cars, was sent to a subcontractor, who apparently chose not to use it.