Mattel Inc.'s (MAT) third-quarter earnings fell 3.5% amid weak international Barbie sales, a lack of entertainment-inspired toys and unfavorable foreign-exchange rates.

But the world's largest toy maker said its own inventories and those at retailers are in much better shape than a year earlier, offering hope for the fourth quarter as retailers continue to stock shelves for the holidays.

Several of Mattel's core brands have positive momentum in sales at retailers, and Mattel's level of promotional support to retailers is roughly the same as a year ago, Chairman and Chief Executive Robert A. Eckert said in a conference call Friday.

Eckert expects many parents to face hard choices regarding presents for their children in light of high unemployment and economic uncertainty. But toys have historically sold better than other products over the holidays, even in tough economic times.

"There will be a Christmas, and Mattel toys will be under the tree, and we'll likely sell more toys than anyone else," Eckert said.

Mattel shares, which have outpaced broader markets in expectation of decent results, recently gained 5.2% to $20.60 and helped drive other toy makers higher. The stock is up 42% the past year. Shares of Hasbro Inc. (HAS) which reports results on Monday, rose 2% to $29.27, and Kids Brands Inc. (KID) shares were 3.0% higher at $6.18.

Mattel reported third-quarter earnings of $229.8 million, or 63 cents a share, down from $238.1 million, or 65 cents, a year earlier. Revenue fell 8% to $1.79 billion.

Analysts polled by Thomson Reuters had forecast earnings of 63 cents on $1.78 billion in revenue.

Sales slid as Mattel's major business unit was hurt by foreign-exchange rates, particularly within Barbie products, and by a 15% drop in sales of toys tied to movies and television programs.

Weakness in entertainment, which also includes Mad Gab, UNO and other games, was mostly because last year's results were boosted by toys related to hit movies including "The Dark Knight" and "Kung Fu Panda."

U.S. Barbie sales were flat despite continued strength in sales at retailers and retail inventories that appear to be "very tight," Chief Financial Officer Kevin Farr said. But more than half of the 12% international decline in Barbie sales was from unfavorable foreign exchange rates.

Fisher-Price sales slid 6% and American Girl rose 4%.

Farr said the company is on track to achieve net cost savings of $180 million to $200 million by the end of 2010. Cost-cutting moves have included eliminating 1,000 jobs in November and reductions in the number of items in Mattel's product lineup.

Efforts to lower the number of stock keeping units, or SKUs, will increase next year, meshing well with moves by some retailers to shrink space devoted to toys, Eckert said Friday. Analysts have said such efforts by Wal-Mart Stores Inc. (WMT) and others should benefit larger manufacturers such as Mattel. Eckert said many Mattel products generate only a small amount of sales and profit for the toy maker, so both Mattel and retailers will benefit from greater efficiency.

Cost savings and earlier price increases helped gross margin improve to 51.3% from 46.2%. Margin also improved because oil and other commodities were cheaper when Mattel was buying raw materials to make toys for the current season.

Inventory declined 19.3% on the 8% sales decrease, and accounts receivable fell 15.3%, indicating solid working capital management, Wells Fargo analyst Timothy Conder said in a note to clients.

In addition, it appears concerns that price-focused promotions by toy retailers, especially Wal-Mart, aren't hurting Mattel's results.

Mattel executives said that while some retailers are choosing to use promotional dollars from the toy maker to compete on price, its overall level of help for promotions is about the same as last year.

Mattel recorded a $5 million reserve in the quarter for product liability lawsuits but said it has appropriately reserved for future payments under a proposed settlement to a class-action lawsuit related to a 2007 recall of millions of toys that contained lead.

Parties haven't disclosed the amount of the claims-based settlement, announced Wednesday but not yet approved by the court. But Mattel said it has accrued $21 million in total for the case, which it believes is enough in combination with payments from its insurer.

-By Mary Ellen Lloyd, Dow Jones Newswires, 704-948-9145; maryellen.lloyd@dowjones.com

(Nathan Becker contributed to this story.)