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Hasbro Inc.'s (HAS) third-quarter profit rose a better-than-expected 8.8% on higher margins and as the company's line of entertainment-related toys continued to buoy sales during the economic downturn.

The No. 2 toy retailer behind Mattel Inc. (MAST) saw particular strength in products for boys, especially those based on movies like Transformers and G.I. Joe, and said early indications for October, the first month of its fourth quarter, were solid. If the early trends continue, Hasbro should be able to show revenue growth for the year, Chief Executive Brian Goldner said.

Hasbro reported earnings for the period ended Sept. 27 of $150.4 million, or 99 cents a share, up from $138.2 million, or 89 cents, a year earlier. Revenue fell 2% to $1.28 billion but gained 2% minus currency changes.

Analysts had forecast earnings of 93 cents on $1.32 billion in sales. Gross margin rose to 57% from 55.9%.

The company said third-quarter earnings were cut three cents a share because of investments in its joint venture with Discovery Communications and Hasbro's virtual studio. Hasbro expects up to a five-cent impact this quarter and 25 cents to 30 cents next year.

Shares of Hasbro were recently down 1.17, or 4%, to $28.35.

Hasbro executives said during a conference call that toy retailers are still working down their inventories and the environment for toys remains promotional. Two of the nation's biggest toy sellers, Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT), are already taking major price cuts to try to move merchandise.

There was also some concern that early indications of fourth-quarter strength may not continue through the holiday season for Hasbro and other toy makers. "It is still early in the game," said Margaret Whitfield, retail analyst at Sterne, Agee & Leach.

During the third quarter, sales dropped in Hasbro's U.S. and Canada operations as well as its international segment. Entertainment and licensing revenue rose.

Hasbro bought back 1.1 million shares for $30.2 million over the period.

Last week 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.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com