But the profit exceeded Wall Street targets and Mattel said it would increase its previously announced share repurchase program by $250 million, sending its shares up 8 percent in early trading.
Mattel, which has been been trying to stem declining Barbie sales as girls are lured to rival Bratz dolls, reported fourth-quarter earnings of $279.2 million, compared with $284.3 million in the year-ago period. Earnings per share were 69 cents, compared with 68 cents a year earlier, due to a decrease in the number of shares outstanding.
The El Segundo, California-based toy maker said its earnings per share of 69 cents included a tax benefit of 11 cents per share.
Analysts, on average, had been expecting it to earn 49 cents per share excluding items, according to Reuters Estimates.
Despite the earnings upside," Bank of America analyst Gary Cooper remained cautious on the results.
"We believe the manner in which Mattel exceeded estimates by reducing marketing expenses is neither a long-term solution nor a good idea," Cooper said in a research note. (Mattel's) results continue to deteriorate as Barbie weakness was exacerbated by declines in Wheels and Entertainment categories."
Mattel's advertising and promotion expenses fell by 8 percent from the 2004 quarter.
Shares gained $1.24 to $16.02 in early New York Stock Exchange trading. As of Friday, Mattel shares had fallen almost 7 percent for the year, while shares of rival Hasbro were up almost 7 percent.
Mattel has been contending with slumping Barbie sales, increased competition from other toy makers as well as flashy consumer electronics, and rising costs.
"We're clearly disappointed with 2005," said Chairman and Chief Executive officer Robert Eckert on a conference call, adding, "The doll business clearly needs work."
Eckert said Mattel, which saw an 18 percent decline in U.S. Barbie sales in the fourth quarter, is "tweaking" its Barbie line for 2006 and will make more dramatic changes for 2007.
It also plans to raise its prices roughly 2 percent to 3 percent after Easter to offset higher costs.
Mattel said that in the quarter, net sales declined to $1.84 billion from $1.85 billion a year ago. Analysts had been expecting sales of $1.89 billion.
Worldwide gross sales for Barbie fell 11 percent, while worldwide gross sales in its Wheels business, which includes the Hot Wheels, fell 7 percent. Overall worldwide gross sales for the Mattel Brands Girls and Boys business unit, which includes Barbie and Hot Wheels, were $1.06 billion, down 6 percent.
Mattel is trying to bolster Barbie sales to counter the increasingly popular Bratz dolls, the edgy fashion dolls made by MGA Entertainment that come with large heads, pouty lips and clothing made to mimic runway fashions.
It has launched its "Worlds of Barbie" strategy, which incorporates music, consumer electronics, fashion and movies into the brand.
It has also rolled out the offshoot "My Scene" dolls, such as My Bling Bling Barbie, and added story-based Barbie lines, such as Barbie and the Magic of Pegasus.
Eckert said Mattel was entering the next chapter in its Barbie turnaround and would look to develop Barbie beyond its "Worlds of" strategy."
Investors and analysts are also waiting for Neil Friedman, who last year was promoted to president of Mattel's consolidated Mattel Brands and Fisher-Price Brands divisions, to outline a strategy for boosting sales of the iconic doll.
Mattel also said it elected Dominic Ng, chairman, president and CEO of East West Bancorp Inc., to its board.