MAT Mattel Inc

Hasbro Inc.'s (HAS) first-quarter earnings fell 71%, missing analysts' estimates, as the toy maker spent more on product development and saw double-digit sales declines in its games and puzzles, girls and preschool categories.

Boys' toys jumped 25%, led by popular Beyblade battling tops whose demand continues to exceed Hasbro's supply, and international sales rose 15% and operating margin improved though the division reported a modest operating loss. The boys category was also helped by initial shipments of Transformers ahead of the third motion picture in the series, due for release this summer, and the company is pleased with early sales of products to the "Thor" comic-book movie slated for next month.

However, U.S. and Canada sales dropped 8% from the year-earlier period, hurt by further weakness in its games and puzzles business following a disappointing holiday quarter last year, and girls and preschool also recorded sharp declines. Operating margin in the U.S. and Canada shrank nearly four percentage points, crimped by the increased product development, higher cost of sales and higher selling, distribution and administration costs.

The company's product development costs rose 14% and it booked $3.12 million for program production costs, a new expense related to the October launch of its Hub children's television channel with Discovery Communications Inc. (DISCA). Hasbro's bottom line had been improving in the past few quarters as overall economic conditions stabilized and after the company reined in expenses.

Overall, the games and puzzles, girls and preschool categories posted sales declines of 12%, 13% and 18%, respectively. Preschool sales, which declined to $68.2 million from $83.6 million year over year, now include some brands previously included in the boys segment and accounted for about $4.7 million in the first fiscal quarter last year. A Hasbro spokesman couldn't immediately specify the brands shifted to preschool.

On a conference call to discuss the results, executives admitted that inventory levels, up 77% to $401.3 million versus the prior year, are somewhat higher than they'd like and the Pawtucket, R.I., concern would like to work through its inventory faster than it currently is. That said, the world's second-largest toy maker is encouraged that retailers, at least in the U.S. where it has more visibility, appear to have wound down some of their inventory glut and have lowered their toy inventory positions since last year's first quarter.

Further, Chief Operating Officer David Hargreaves said having high inventory of products like board games and its iconic Play-Doh modeling clay isn't a concern, as these products will sell as they have for decades so there's no worry the inventory needs to be written down. Chief Financial Officer Deborah Thomas noted that some of the higher inventory is attributable to vendors in places like China, who want to spread their manufacturing out more over the course of a full year, and to aid that effort Hasbro has agreed to take more of that inventory onto its books before it might have in the past.

Hargreaves also said that Hasbro hopes to sell even more toys through Wal-Mart Stores Inc. (WMT), given Wal-Mart's recent announcement that it would add or bring back 8,500 product offerings into each store, among other initiatives designed to address concerns it no longer always has the broadest selection for the lowest price. Wal-Mart had narrowed its offerings in recent years, and customers were becoming disappointed that the world's largest retailer had strayed from late founder Sam Walton's strategy.

Hasbro reported a profit of $17.2 million, or 12 cents a share, down from $58.9 million, or 40 cents, a year earlier. The year-earlier quarter included a tax gain of 14 cents a share. Revenue slipped to $672 million from $672.4 million. International segment revenue rose 15%, while U.S. and Canada revenue fell 8%. Analysts polled by Thomson Reuters had most recently forecast earnings of 17 cents a share on revenue of $660 million.

Companywide operating margin fell to 7.3% from 10.3%.

Shares of Hasbro were recently down 47 cents at $45.32 Thursday morning, and are up 15% during the past year. Larger rival Mattel Inc. (MAT), which is scheduled to report its first-quarter results Friday morning, was up 18 cents at $25.61, and is up more than 10% over the past 12 months.

-By Maxwell Murphy, Dow Jones Newswires; 212-416-2171; maxwell.murphy@dowjones.com

-Melodie Warner contributed to this article.

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