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Hasbro's Shares Gain 2.4% in 6 Months: More Room to Run?

Zacks Equity Research logoZacks Equity Research 8/21/2018 Zacks Equity Research

Hasbro, Inc.’s HAS varied product launches, partnerships and major theatrical releases, along with an increased focus on gaming, posit the company for growth amid soft consumer demand.

In the second quarter of 2018, Hasbro’s earnings and revenues surpassed analysts’ expectations. In fact, earnings topped the Zacks Consensus Estimate in three of the trailing four quarters, with an average beat of 8.1%. Meanwhile, both top and bottom lines recorded year-over-year decline due to the liquidation of Toys “R” Us in the United States, and other global markets.

Nonetheless, a supreme gaming portfolio and various ventures to drive the top line are encouraging. The company’s shares have gained 2.4% in the past six months, slightly outperforming the industry’s collective growth of 1.9%.

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Product Launch & Partnerships Bode Well

To revive sales amid a stringent demand condition, Hasbro continues to invest in innovation. It entered a five-year agreement with Paramount to enhance storytelling and content capabilities. Along with Paramount, the company is planning to posit some of its brands like M.A.S.K., ROM, Visionaries and Micronauts out in the market. Hasbro further invested in Boulder Media — the company’s animation studio, and increased digital capacities to drive sales.

Hasbro also announced several partnerships during the second quarter, all of which indicate its efforts to diversify revenues beyond retail sales and expand the customer base. After partnering with Quidd and acquiring Power Rangers, the company declared its multi-year partnership with the comedy duo Rhett & Link, which is expected to boost the popularity of Hasbro’s games.

On the product innovation front, Hasbro launched several social games. Among those, Dungeons & Dragons was particularly successful. With the launch of DROPMIX, the company further strengthened its digital gaming revenues. It plans to launch Black Panther, beyond the home entertainment window for holidays, including product in the MARVEL LEGENDS series for Black Panther. Additionally, the company plans to launch Hero Vision, coming around Avengers: Infinity War. Assembler Gear, modular and customizable role-play system, and other entertainment products from Marvel are also lined up.

Strong Gaming Portfolio

Hasbro has a supreme gaming portfolio and is refining gaming experiences across a multitude of platforms like face-to-face gaming, off-the-board gaming and digital gaming experiences in mobile. In the second quarter of 2018, Hasbro’s gaming revenues increased 14% year over year, driven by robust performances of DUNGEONS and DRAGONS, JENGA, DUEL MASTER, and DON’T STEP IN IT. Gaming revenues increased in both international, and Entertainment and Licensing segments. Given a strong product line up and a greater focus on entertainment backed products, Hasbro’s Entertainment and licensing segment is poised for growth. In the second quarter, Entertainment and licensing segment revenues grew 26% year over year to $64.7 million, backed by improved consumer products. Moreover, the segment's operating profit margin improved 680 basis points (bps) from the prior-year quarter.

Meanwhile, last year, Hasbro announced the launch of a gaming subscription service named Hasbro Gaming Crate. Given the latest craze for board games, if Hasbro becomes successful in creating an exclusive set of games, which is available solely via subscription service in the interval of every three months, it is expected to entice consumers and fare well against the competitors in the future.

Toys ‘R’ Us Ado to Continue

The U.S. toy industry dealt a heavy blow when the country’s largest independent toy seller, Toys "R" Us filed for bankruptcy last September. Adding a nail to the coffin, Toys “R” US said that it was liquidating its U.S. operations, leaving toymakers like Hasbro, Mattel MAT and JAKK Pacific JAKK in a mess as those used to derive a considerable portion of their revenues from sales to Toys "R" Us. Although retailers like Amazon AMZN have come to the rescue of these toymakers, those currently don’t have shelf spaces as big as Toys “R” Us, which is a concern.

Meanwhile, despite testing waters with new distribution methods, development of digital-play components and exploration of ventures with other industries, Hasbro is unable to revive sales. In fact, owing to the liquidation, sales of Hasbro declined 7% year over year in the second quarter of 2018. We believe that the effect of this liquidation will linger further as Toys “R” Us was the last major chain, fully dedicated to selling toys.

High Costs Hover

Although Hasbro’s initiatives to boost sales would aid profits in the long-term, costs related to those initiatives would hurt the company in the near term. Hasbro's cost of sales, as a percentage of net revenues, decreased 50 bps to 37.4% in the second quarter. Meanwhile, selling, distribution and administration expenses, as a percentage of net revenues, increased 160 bps from the prior-year quarter. Overall operating margin declined 60 bps year over year in the last-reported quarter.

Hasbro currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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