Mattel Inc reported a smaller-than-expected quarterly profit as lackluster cost-cutting and a weakening euro offset strong Hot Wheels sales and the boost the company got from merchandise tied to the blockbuster film Toy Story 3.

Shares of the No. 1 toymaker fell more than 8 percent, and S&P Equity Research cut its rating on the shares to hold from buy.

Mattel, whose other brands include Barbie and American Girl, reported a second-quarter profit of $51.6 million, or 14 cents per share, more than doubling year-earlier earnings of $21.5 million, or 6 cents per share.

The results missed analysts' estimates by 1 cent per share, according to Thomson Reuters I/B/E/S.

Mattel is on an ambitious cost-cutting campaign that allowed it to shave $12 million in the latest quarter, but the results fell short of Wall Street expectations. Selling and general expenses rose 12.2 percent over a year earlier, inflated by severance and advertising costs, but did edge down slightly as a percentage of sales.

The culprit seems to be costs, Barclays Capital wrote in a research note.

Mattel's gross margin rose by 2.9 percentage points to 48.1 percent of sales. It got some help from lower product costs and price increases, but Chief Financial Officer Kevin Farr said the benefit might not last through the end of the year.

We continue to expect input cost pressures in our gross margin beginning in the second half of this year, given the current commodity and labor cost environments, Farr said on a conference call with analysts.

Revenue rose 13.4 percent to $1.02 billion, in line with Wall Street forecasts, but Mattel said growth would have been 3 percentage points higher if not for the effect of foreign exchange.

Sales jumped 17 percent in the United States and rose 9 percent abroad, where they suffered as weakened currencies were translated into U.S. dollars.

BMO Capital Markets analyst Gerrick Johnson said he expected the weak euro to weigh on Mattel's performance for some time.


Sales rose 6 percent for Barbie and 11 percent for Hot Wheels, but were down 4 percent for American Girl.

El Segundo, California-based Mattel previously said customers had reacted well to its recent line of action figures based on popular World Wrestling Entertainment characters such as Triple H and The Undertaker.

Chief Executive Officer Robert Eckert said he was encouraged by Mattel's product line heading into the second half of the year, but warned that shoppers remain pressured, and retailers prudent when ordering merchandise.

I don't think retailers, anywhere that I'm aware of, are looking to rebuild inventories, Eckert said.

Mattel, which last year celebrated the 50th anniversary of the Barbie doll, expects its Video Girl Barbie, which has an embedded video camera, to be a big hit this fall.

Rival toymaker Hasbro Inc reports its second-quarter results on Monday.

Mattel shares were down 8.2 percent at $21.11 in morning trading.

(Reporting by Phil Wahba; Editing by Lisa Von Ahn)