To say 2007 was rough on the toy industry would be an understatement. Heading into the Christmas sales season many pundits and analysts were speculating that the one-two punch of massive recalls and a slumping dollar would knock the wind out of most toycos’ year-end P&Ls. At press time, the industry was still waiting. (Researcher NPD Group isn’t scheduled to release 2007 sales numbers until mid-February.) However, Mattel was the first to announce its 2007 Q4 results, and it looks like the dire pre-holiday predictions may have missed the mark.

Arguably, Mattel, which bore the brunt of the recalls, had the most to lose. But in a season where the National Retail Federation clocked a small 3% growth in US retail revenues for the last two months of 2007 – marking the lowest bump in holiday sales since 2002 – Mattel’s overall Q4 domestic sales dropped just 3%. And remarkably, the toyco’s worldwide net sales were up 4% to US$2.19 billion for the same period.

In fact, sales outside the US indicate it was business as usual, with Mattel’s girls brands charting a 19% jump, driven by High School Musical and Little Mommy product. Also the wheels category was up 15%, scoring double-digit increases in international and US markets, with Hot Wheels and Matchbox taking the lead.

As for the recalls, Mattel paid out US$42 million in charges and costs in Q4 related to the issue, which totaled US$110 million for the entire year. The effects of the recall were perhaps most noticeable in the performance of Fisher-Price Friends, a brand directly affected by the event – US sales dropped 23%, while international numbers were down 11%.

Additionally, Mattel CEO Robert Eckert said the US performance of Barbie was disappointing, including its two ’07 entertainment properties. And though worldwide sales of Barbie were up 4% in the fourth quarter, the gains were offset by continued softness in the US Barbie fantasy business and a sales drop in the MyScene line, which put US Barbie revs down 12% overall.

Looking forward, Eckert said this year the company will work at building a strong lineup of toys associated with feature films, including Warner Bros.’ Speed Racer and Dreamworks’ Kung Fu Panda.

However, it may be the case that the worst is yet to come. Eckert warned higher costs for commodities, labor and quality testing combined with the general economic downturn, will result in mid-to-high single-digit price increases in the fall. And the NRF is forecasting an unimpressive 3.5% increase in US retail sales for 2008.