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Hasbro's Weak Earnings Show Challenges Remain

2018 was a challenging year for Hasbro (NASDAQ: HAS), and it ended on a sour note. The company reported results for the important holiday quarter that fell far short of expectations, dragged down by inventory left in the market due to Toys R Us going out of business.

For the fourth quarter, Hasbro's revenue fell 13% year over year to $1.39 billion. This missed the analyst consensus of $1.52 billion. The decline was broad-based, hitting all of the company's major toy segments and geographic markets. Net profit, adjusted for certain one-time items, came in at $169.6 million. This resulted in adjusted earnings per share of $1.33, far short of the average analyst estimate of $1.67.

Image source: Hasbro.

Ouch!

Metric

Q4 2018

Q4 2017

Year-Over-Year Change

Net revenue

$1.39 billion

$1.60 billion

(13%)

Operating income

$10.5 million

$271.1 million

(96%)

Net income

$8.8 million

($5.3 million)

N/A

Diluted earnings per share

$0.07

($0.04)

N/A

Data source: Hasbro Fourth-Quarter Financial Release.

It wasn't just the lack of a blockbuster film and the absence of the Toys R Us distribution channel that hit results. Hasbro also reported weakness in Europe, where it "addressed changing consumer shopping behaviors, a rapidly evolving retail landscape and reduced retail inventory." Hasbro also faced a softening economy in the U.K., the result of the country's decision to leave the European Union, also known as Brexit.

Global point of sales increased for both the year and the fourth quarter, excluding the impact of Toys R Us.

Revenue Source

Q4 2018

Q4 2017

Year-Over-Year Change

Franchise brands

$729.9 million

$796.3 million

(8%)

Partner brands

$272.9 million

$342.9 million

(20%)

Hasbro gaming

$267.4 million

$343.3 million

(22%)

Emerging brands

$119.0 million

$113.7 million

5%

Data source: Hasbro Fourth-Quarter Financial Release.

Franchise brands Monopoly and Magic: The Gathering both grew in 2018, while Dungeons & Dragons delivered another record year. This was more than offset by declines for the rest of the company's franchise brands.

Partner revenue also suffered, as the absence of movie tie-ins involving Disney's (NYSE: DIS) Star Wars, Frozen, and Princess lines took a toll on toy sales. Gaming also took a hit, as increases in Don't Step In It, Connect 4, and Jenga couldn't make up for declines in Pie Face, Speak Out, and the rest of the games portfolio.

Hasbro's emerging brands segment was the one pocket of growth last quarter, driven by new collectibles lines Lost Kitties and Yellies, as well as licensing revenue from the recently-acquired Power Rangers franchise.

To counter some of the impact of falling sales, Hasbro has increased its focus on reducing expenses. It has identified $70 million to $80 million in annual cost efficiencies to be achieved by 2020, with $50 million to $55 million expected in the coming year.

Future growth drivers

Hasbro also joined the growing list of companies seeking to profit from the rise of esports. In recent months, Magic: The Gathering Arena began beta testing the game's digital offering and announced the debut of the Magic Pro League, which will kick off with an event in March boasting $1 million in prizes.

During the earnings call on Friday, Brian Goldner, Hasbro's chairman and CEO, said the company plans "to make gaming a greater growth driver for Hasbro." Management will provide more details about the company's plans at the Toy Fair event next week.

A robust film slate featuring partner brands should provide another boost in the coming year, with Disney's Captain Marvel, Avengers: Endgame, Star Wars: Episode IX, Frozen 2, and Aladdin coming to theaters in the months to come. Franchise brands will benefit from the recent release of Bumblebee, the next installment in the Transformers saga.

Image source: Hasbro.

A look ahead

Hasbro announced that it will raise its quarterly dividend by $0.05 to $0.68 per share, an 8% increase. This will improve the company's already-generous dividend yield to just above 3%, based on the current stock price.

The company hasn't announced its outlook for the coming quarter or year, which Hasbro has historically provided at the annual Toy Fair event. For what it's worth, analysts are calling for revenue of about $746 million this quarter -- up 4% year over year -- and earnings per share of $0.16, a 60% improvement from the prior-year quarter.

The past year has been painful for the toy industry, with changing consumer habits, a shifting retail environment, and the loss of a major toy retailer all playing a role. Hasbro has been reducing inventory levels, diversifying its supply chain, and adding new distribution channels to mitigate the loss of Toys R Us. The company has also been streamlining its business and cutting costs in an effort to emerge as a leaner and faster-moving business.

While 2018 was a disappointing year, Hasbro has taken steps to deal with a variety of issues and looks ready to emerge as a stronger company in 2019.

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Danny Vena owns shares of Hasbro and Walt Disney and is long January 2020 $50 calls on Hasbro. The Motley Fool owns shares of and recommends Hasbro and Walt Disney. The Motley Fool is short shares of Hasbro. The Motley Fool has a disclosure policy.

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