Dive Brief:

• Toymaker Mattel has warned that its fourth quarter gross sales will decline by a percentage in at least the mid-to-high single digits from the year ago period, due to a ​negative impact by "key retail partners" moving toward tighter inventory management and by underperforming brands, according to a Securities and Exchange Commission report filed Monday. 

• The company also warned that negative trends in top line performance for the balance of the year could mean further gross margin deterioration from higher inventory write-downs and discounts offered to clear inventory.

• Fitch has also downgraded Mattel, citing its weak operating performance and negative cash flow generation, along with "execution missteps," including an inability to adapt to industry challenges, such as evolving consumer behavior and, more specifically, Toys R Us' bankruptcy, according to a note from Fitch analyst David Silverman emailed to Retail Dive.

Dive Insight:

Shares in Mattel took a hit when Toys R Us filed for bankruptcy in September, as investors worried about how the toymaker's sales would fare in light of the retailer's troubles in the lead up to the critical holiday season.

"The timing of all of this could not have been worse, as the company is in the process of building holiday inventory," Toys R Us CEO Dave Brandon acknowledged in the bankruptcy filing, adding that Toys R Us generates 40% of its annual revenue in the weeks before Christmas.

While the retailer's troubles have inevitably trickled down to Mattel, the toymaker has struggled with other difficulties of its own. Many of Mattel's top brands, which include Barbie, American Girl, Mega and Thomas & Friends, have declined in popularity in recent years as video games have captivated children at younger and younger ages.

"Children are increasingly digitally oriented and marginally less interested in traditional toys. …Hasbro has more successfully responded to these changes through brand storytelling, creating digital experiences and revenue streams to support its portfolio's customer relevance and create additional sales opportunities," Silverman wrote.

Mattel's revenue has steadily declined in recent years in contrast to competitors like Hasbro. Sales fell from a peak of $6.5 billion in 2013 to a projected $5 billion for 2017, according to Fitch. Despite cost-cutting efforts, many of Mattel’s expenses are set to rise, the company also said.

Advertising and promotion expenses in the full year 2017 are expected to be slightly higher than full year 2016 on a gross dollar basis, and other operating expenses for Q4 (excluding severance) are expected to be higher than the year-ago quarter, according to the filing. As a result, Mattel expects its fourth quarter operating income margin to be significantly lower than a year ago, the company said.

This story is part of our ongoing coverage of the 2017 holiday shopping season. You can browse our holiday page and sign up for our holiday newsletter for more stories.