Mattel Inc reported a smaller-than-expected quarterly profit as the impact of the weaker euro and disappointing cost-cutting efforts offset strong Hot Wheels sales and the boost the company got from its license for the Hollywood blockbuster Toy Story 3.

Shares of the No. 1 toymaker fell nearly 5 percent in premarket trading.

Net sales for the quarter rose 13.4 percent, but Mattel said growth would have been 3 percentage points higher if not for unfavorable foreign exchange rates, particularly for the euro.

But Wall Street seemed most disappointed by a cost-cutting program that seems to have lost steam. Selling and administrative expenses as a percentage of sales fell only marginally.

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

BMO Capital Markets analyst Gerrick Johnson also warned that the weak euro would weigh on Mattel's performance in the current quarter.

Mattel, whose brands also include 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.

Revenue of $1.02 billion was in line with Wall Street forecasts. Sales jumped 17 percent in the United States and rose 9 percent abroad, where currency woes curbed growth.

Mattel's gross margin rose by 2.9 percentage points to 48.1 percent of sales.

HOT WHEELS SHINE, AMERICAN GIRL WANES

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

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.

Looking ahead, Chief Executive Officer Robert Eckert said in a statement that he was encouraged by a strong product line as the company heads into the second half of the year.

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.

Bryan Stockton, president of the company's international unit, told last month's Reuters Global Retail Summit that Mattel was optimistic about demand for toys for the 2010 holiday season.

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

Mattel shares were down 4.8 percent at $21.90 in trading before the market opened.

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

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