Hasbro Inc., maker of Nerf foam toys and Transformers action figures, missed Wall Street's second-quarter profit estimates because of higher costs and weakness in its preschool, girls and games businesses.
The second-largest U.S. toy company has been spending more to boost its overseas presence and its licensing business, and to develop its new television channel, the Hub.
"As those play out, you should be able to generate significant operating leverage, but it seems like over the near term, they are going to weigh on results a little bit," said MKM Partners LLC analyst Eric Handler.
Like many companies, Hasbro is dealing with the rising cost of plastics, packaging paper, freight and labor.
Hasbro said sales of its latest Transformers toys were down in the United States and up internationally in the quarter versus 2009, when the second Transformers movie came out.
The news came after larger rival Mattel Inc beat quarterly profit and sales estimates on strong sales of its Barbie dolls and "Cars 2" toys.
Hasbro shares fell 2 percent and Mattel shares fell 1 percent on Monday.
Handler picked Hasbro over Mattel, heading into the biggest selling season of the year, citing valuation and new product launches under the Nerf and other marquee brands.
"There is a lot of... new levers that Hasbro will have at its disposal this holiday season," he said. "Right now, Mattel is fully valued."
He has a "buy' rating on Hasbro and a "neutral" on Mattel.
This year, Hasbro began marketing toys based on movies such as "Transformers: Dark of the Moon" and "Thor." It is also making products based on "Captain America: the First Avenger," which is set to debut in theaters this week.
In the third quarter, the company will introduce its Kre-O construction brand internationally and add Sesame Street-branded toys to its preschool business.
Sales in the company's boys segment rose 96 percent to $460.4 million while those in games and puzzles, girls toys and the preschool unit fell by double digits.
In the second quarter, Hasbro's net profit rose to $58.1 million, or 42 cents a share, from $43.6 million, or 29 cents a share, a year earlier. Excluding items, earnings were 33 cents a share, missing the analysts' average estimate of 39 cents, according to Thomson Reuters I/B/E/S.
The company promised investors a "meaningful" rise in 2011 sales and earnings.
Net revenue rose 23 percent to $908.5 million, beating the analysts' average estimate of $854.8 million.
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