Mattel's 'Cars 2' Success Junks Hot Wheels

EL SEGUNDO, Calif. ( TheStreet) -- Mattel ( MAT) has the success of Cars 2's Lightning McQueen and related toys to thank for its stellar earnings, but at the expense of "cannibalizing" its evergreen car toy brands Hot Wheels and Matchbox.

Lightning McQueen toy by Mattel

The much-anticipated release of the Cars 2 movie, complete with twice the number of characters and an international spy theme, certainly helped Mattel race past Wall Street's profit expectations for its latest quarter. Retailers Wal-Mart ( WMT), Toys R Us and Target ( TGT), which account for around 50% of all toys sold in the U.S., picked up a lot of inventory to meet anticipated demand of the anthropomorphic toys. As a result, Mattel booked a 41% surge in gross sales for its entertainment unit. ( Green Lantern toys and accessories are also counted in that category.)

In fact, nearly every toy unit in Mattel's arsenal showed year-over-year improvement in the recent quarter, including Barbie sales growth of 12%, Fisher Price up 4% and American Girl sales higher by 13%.

The only category to show a year-over-year decline was Mattel's Wheels business, which includes Hot Wheels, Matchbox and Tyco R/C brands. Sales in that category fell 2% in the latest quarter.

Mattel's Wheels unit "was cannibalized by Cars 2," said Richard Gottlieb, CEO of New York-based toy consultancy group Global Toy Experts. Mattel essentially took a toy product category -- cars -- that's been "evergreen for generations without depending on movies and promotions to boost sales and moved some of that business into a product category that's driven by the last great movie format."

That means Mattel now runs the risk of increasing its own costs -- it sets a precedent that toy lines need a movie and promotions built around it -- and of "losing a generation of car enthusiasts" since the movie sequel itself was critically panned, Gottlieb said.

He offered the example of Hasbro's ( HAS) G.I. Joe, a toy soldier that's been popular with kids for decades. After the release of a G.I. Joe movie in 2009, the toy evolved into a promotional product based on the movie. Gottlieb said that "Hasbro risked moving a product category from what should be a high margin evergreen category to one that is promotional, based on the success of the latest movie, with higher risk and higher cost."

Gottlieb conceded that the promotional concept of Cars 2 started with the original movie in 2006, and that it was possible the line of toys could have become evergreen since sales in the category actually increased in the years immediately following its release despite there not being a sequel till now.

Making an expensive movie sequel now all but solidified the Cars brand as being reliant on the success of the line's latest film.

Gottlieb said he agreed with an analyst he spoke with recently, who mused: "Mattel should never produce a Barbie movie."

Mattel shares were 2.2% higher at $27.37 at midday on Friday.

-- Written by Miriam Marcus Reimer in New York.

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