Sector snap: Retailer caution may hurt toy maker results

After dealing with a sagging economy and recalls of millions of toys last year, toy makers shares have rebounded from year lows.

Shares of Hasbro Inc. have risen 41 percent since hitting a 52-week low on Jan. 22. Mattel Inc. shares have risen 27 percent since reaching a 52-week low on Jan. 15.

BMO Capital Markets analysts Gerrick L. Johnson said the shares benefited from seasonal trading patterns, an overall lift in the market and fourth-quarter results that weren't as bad as investors feared.

However, as first-quarter earnings approach, Johnson said retailers may have played it safe and operated with leaner inventories.

"We believe that there were pockets of elevated inventories at retail at the end of the fourth quarter, which could have affected retail appetite for new toys in the first quarter," Johnson wrote in a note on Tuesday.

Additionally, if retailers had to mark down toys to clear inventory, manufacturer margins could be hurt, Johnson said.

Johnson expects "Market perform"-rated Hasbro sales will fall 17 percent, up against difficult comparisons with the year-ago quarter, which included shipments of popular Spider-Man 3 products to retailers.

He expects Mattel's sales to edge down 1 percent, but said Mattel, which he rates "Underperform," has the greatest chance of disappointing investors because of leftover inventory at retail stores.

"Barbie and Elmo are two key lines, in particular, that were abundant on shelves after the holiday period," Johnson wrote.