Lewis Galoob Growing Big By Thinking Small : Toys: The company’s miniature cars and dolls have become top sellers. Now it is striving to become a major player.

Big success has come in small packages for Lewis Galoob Toys Inc.

The South San Francisco firm’s tiny vehicles have been zooming off store shelves. Micro Machines have ridden onto Toy and Hobby World magazine’s monthly lineup of fast sellers all year, consistently finishing in the top 10 places and frequently in the first, second or third slots.

David Galoob says the company is headed toward being a major player in the toy business in the 1990s. Analysts are impressed with its progress so far.

Galoob provided an early look at next year’s toys Friday in a tour of the company’s New York showroom.

“Miniature has worked for Galoob and we believe that it can work again,” the president and chief executive officer said in an interview. The company is named for his father, who founded it more than three decades ago and died in 1971.

Many of the new toys that Galoob will roll out next year continue the small-size theme that has helped the company stage a strong comeback from a 1987 industrywide slump. Galoob lost almost $25 million that year but returned to profitability in 1988 by earning more than $6 million.

New models of the thimble-sized Micro Machines will be added to the hundreds already available. Some will have a magnifying lens in place of a sun roof so that children can peer into the tiny interior. New play sets are being added to the carwash and service station already on the market.

Ultrasmall vehicles inside regular-sized Micro Machines will be brought out in 1990. A motorized train and track set also will be unveiled.

The existing collection, which appeals to children’s acquisitive instincts, includes commonplace and fancy cars from diminutive Rolls Royces to souped-up Dodge Vans. The line also has ambulances, fire engines, trucks, boats, tanks, planes and trains.

One 1990 addition to Galoob’s miniatures for girls is Secret Places, a series of dolls in rooms with furniture and appliances. New offspring of the successful Bouncin’ Baby miniature doll line will make their debut.

Galoob started thinking small in 1987 when consumers soured on high-priced, high-tech toys.

Keeping prices down--a package of five Micro Machines can be bought for under $10--proved wise over the past two years when so much money was being spent on home video games. Children and their parents haven’t had much left over for other toys after buying Nintendo games.

“We were able to live and compete very well with the video game onslaught,” Galoob boasts.

Retail analysts say Galoob is one of the only companies that has kept coming up with creative products despite the competitive challenge of video games.

While industry leaders like Hasbro Inc. and Mattel Inc. turned to classics like G.I. Joe and Barbie, Galoob has established a new category of miniature collectibles. In the process, Micro Machines have whizzed past Mattel’s Hot Wheels and Universal Matchbox Group Ltd.’s matchbox cars to become the most popular collectible vehicle line in the world.

The company expects to have $200 million in sales this year, up from $140 million in 1988. It has managed to do it with less money to spend on research and development than its larger competitors, such as No.1 Hasbro, which analysts estimate will have $1.5 billion in 1989 sales.

“It really is a challenge for us to compete with those gentlemen that have bigger dollars at their disposal,” Galoob said.

After previewing next year’s toys, analyst Paul Valentine of Standard & Poor’s Corp. said he upgraded his investment opinion on Galoob to a strong buy from neutral. “I was very impressed with what they had,” Valentine said.

Besides the miniature items, one of Galoob’s 1990 toys is a stuffed animal with battery-powered, illuminated eyes that small children can take to bed as a night light. A talking doll that moves her lips also is waiting in the wings and will sell for about $60.

How well Galoob does outside the miniature category could determine whether it can make the transition to a big-time toy firm.

Analyst Walter Kirchberger of PaineWebber Group Inc. said the verdict is still out on whether Galoob has done enough to diversify and protect itself if Micro Machines fall out of favor. Micro Machines will account for more than half of Galoob’s 1989 business, which was the case in 1988 as well.

It will be tougher for Galoob to impress Wall Street next year because the company will face a much higher tax rate, eroding after-tax earnings.

“For earnings to be up in 1990, sales will have to be up quite a bit,” Kirchberger said.

Through three quarters of this year, Galoob has earned about $14 million, up more than three-fold from a year earlier, while sales totaled about $170 million, up 80%.

Galoob manufactures 85% of its toys in China. The company is trying to spread out to other Asian nations and was planning to rely more on Thailand and Indonesia even before the June uprising in China, David Galoob said.

Growth in the next decade will come partly through acquisitions and Galoob says the company has put aside $40 million for the purpose.