Last summer's slew of toy recalls has not faded from U.S. consumers' minds, and those memories are hurting the industry at its most important time of the year.
With the lack of a must-have toy such as last year's T.M.X Elmo from Mattel Inc, early reports of weak holiday store traffic and concerns over consumer spending, the industry was already hard-pressed to duplicate last year's resurgent performance.
Recent data show many consumers are spending less on playthings this holiday season because of the recalls, while others remain leery of products made in Chinese factories.
While weaker toy sales will probably be a drag on many major retailers Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research), Target Corp, Costco Wholesale Corp and Toys R Us all feature the category prominently the manufacturers have paid the brunt of the bill.
And investors have noticed. All of the industry leaders' shares have fallen at double-digit percentage rates since the recalls started.
The recalls have definitely had an impact on the way consumers shop for toys this year, said BMO Capital Markets analyst Gerrick Johnson. This year (shoppers) had no reason to get into the store and a reason to stay away.
Johnson, who has an underperform rating on the sector, said he expected the recalls to contribute to lower fourth-quarter sales and higher-than-expected inventory numbers for toy companies.
A recent MSN-Zogby poll showed that one in four U.S. shoppers would spend less on toys for the holidays this year as a result of the recalls, which were often due to potentially dangerous levels of lead paint or small parts that could get ripped off a product and create a choking hazard.
The poll also found 83 percent of Americans associated unsafe toys with China, where millions of recalled items were made.
Only 42 percent of respondents said they associated large manufacturers like Mattel, Walt Disney Co and Hasbro Inc with safe toys, while 43 percent did not.
With retail buyers now deciding on next year's purchases, Johnson said today's weak market for toys could lead to fewer orders for 2008.
The recalls even gave consumers an incentive to delay holiday toy purchases this year so they could be sure products were safe, Needham & Co analyst Sean McGowan said.
Such a late start is not, typically, a good sign, McGowan said.
David Silberman a recall-wary New York father of two simply chose not to buy toys as Hanukkah gifts for his young children this year because of safety concerns.
In our case and for other parents we know we chose to just pass the season without doing regular toys, said Silberman, who instead took his children to Disneyland.
It's a very scary thing, he added. ... This is the kind of time I would choose to shop in Lulu's a small store as opposed to K-Mart, because I don't trust the big vendors.
The recalls have also curbed demand for toy stocks, which are down across the board since Mattel's August 1 recall of 1.5 million Chinese-made Fisher-Price items, some of which featured popular preschool characters like Elmo and Big Bird.
From the recall through Thursday's close, Mattel's stock had fallen nearly 20 percent. Shares of Hasbro and Jakks Pacific Inc (JAKK.O: Quote, Profile, Research) -- which didn't issue any major recalls -- had seen respective declines of 16.3 percent and 10.5 percent.
RC2 Corp (RCRC.O: Quote, Profile, Research) has taken the heaviest hit. Its shares have fallen more than 30 percent since its June 13 recall of more than 1 million Thomas & Friends toys.
As time went on, people realized the recalls were a bigger issue than we originally thought, BMO's Johnson said. It has had an effect on everyone.