So much for Hasbro (HAS) allegedly having a diverse flexible format supply chain and migrating its legacy supply chain out of China. Per Brian Goldner, “the threat and enactment of tariffs reduced revenues in the third quarter and increased expenses to deliver product to retail”. Needless to say, the stock sank 17% after reporting its Q3 results. I feel that management was remiss when they forecasted their ability to circumvent the tariffs and then used the tariffs as a scapegoat to justify the company missing its numbers on both top line revenue and bottom line profit.
With that being said, the company is in a solid state moving into the holiday season, historically their biggest quarter, with blockbusters and the holidays coming into fold. Hasbro has its Disney toy licensing deal (Marvel, Star Wars and Disney Princess lines) that should have a strong showing with Frozen 2 and the new Star Wars film debuting in Q4. Hasbro Studios (Transformers’ Bumblebee, My Little Pony, Power Rangers), E-Sports (Dungeons and Dragons and Magic: The Gathering), its legacy games (Monopoly and Nerf) and acquisition of Entertainment One earlier this year places the company in a position of strength. Hasbro is fully committed to returning value to shareholders via a combination of share buybacks and dividend payouts. Hasbro has a compelling future across its portfolio with many catalysts in the near and long-term time horizons. The Toys R Us fallout is now in the rear view while the company continues to layer-in growth initiatives.
Q3 2019 Earnings – Disappointing:
Hasbro missed on both EPS and revenue coming in at $1.84 (missing by $0.36) and $1.58 billion (missing by $130 million), respectively. The previous two quarters Hasbro beat estimates handily and the stock broke through the $120 per share threshold as a result. This quarter, the company lost momentum and is attempting to attribute this to the tariffs.
“Hasbro remains on track to deliver profitable revenue growth in 2019, behind innovation in gaming, toys and around Hasbro's Brand Blueprint. However, as we've communicated, the threat and enactment of tariffs reduced revenues in the third quarter and increased expenses to deliver product to retail," said Brian Goldner, Hasbro’s chairman and chief executive officer. "The team drove continued growth in the Wizards of the Coast gaming brands, MAGIC: THE GATHERING and DUNGEONS & DRAGONS, and delivered significant new holiday initiatives. To start the fourth quarter, we are seeing a strong consumer response to the global launch of Hasbro's line for Disney's Frozen 2 and Star Wars: The Rise of Skywalker as well as the U.S. launch of the new NERF Ultra."
"In addition, we are pleased with the progress toward completing our acquisition of eOne, including last week's overwhelming approval by eOne shareholders. We expect to close the transaction during the fourth quarter," continued Goldner. "The strategic opportunity to bring onboard the brands, capabilities and talent from eOne is compelling to our long-term prospects as a leading global play and entertainment company and we look forward to sharing more about our plans after the close."
“Hasbro's global teams are executing within a dynamic trade environment that is impacting the timing of revenues, driving incremental expenses and putting upward pressure on our underlying tax rate,” said Deborah Thomas, Hasbro’s chief financial officer. "We anticipate disruption throughout the remainder of 2019 as retailers work to manage costs and inventory and we are working to mitigate the impact on consumers this holiday season. Hasbro's financial position is strong and we ended the quarter with $1.1 billion in cash on our balance sheet."
Previously, Hasbro had guided that the company would migrate its supply chain out of China and circumvent any tariff related impacts. I think the company misjudged the tariff dynamics and will effectively manage this backdrop moving forward into Q4 and beyond.
Figure 1 – Highlights from Hasbro’s Q2 earnings
Disney Partnerships and Entertainment One Acquisition:
Hasbro recently acquired Entertainment One for $4 billion in an all cash offer in an effort to expand its story telling, TV, film and long term growth outlook. Notable assets include Peppa Pig and PJ Masks which will provide a pipeline of new band creation. This acquisition will unlock long-term value for shareholders. This acquisition will drive Hasbro’s position as a leading entertainment company by adding these global bands with proven success and strong financial returns.
Hasbro has licensing deal with Disney that provides exclusive rights to some of Disney’s most successful franchises such Marvel, Disney Princess line and Star Wars. The company's exclusive partnership with Disney has been highlighted in past earnings calls with strong demand for Avengers-related toys and success with innovation around Princess and Frozen dolls. Goldner sees the Disney relationship as continuing to boost its top and bottom-line numbers into that latter part of the year with Frozen 2 and Star Wars: The Rise of Skywalker coming into the fold in Q4 2019. Goldner also sees its Disney-related initiatives continuing on into 2020 and expects a tailwind for its business throughout next year. Disney’s box office dominance has dwarfed all other competitors securing roughly a third of market share in terms of box office gross. Now that the Fox acquisition has been approved, there’s potential for Hasbro to secure other Disney properties via the Fox integration.
Despite the Q3 miss, Hasbro is well positioned moving into the holiday season with blockbusters and the holidays coming into fold. Hasbro has its Disney toy licensing deal that should have a strong showing with Frozen 2 and the new Star Wars film debuting in Q4. Hasbro Studios (Transformers’ Bumblebee, My Little Pony, Power Rangers), E-Sports (Dungeons and Dragons and Magic: The Gathering), its legacy games (Monopoly and Nerf) and acquisition of Entertainment One recently places the company in a position of strength. The company has many growth catalysts on the short and long-term horizon via the diversity of its portfolio and partnerships, e-sports, new Power Rangers/Entertainment One acquisitions and Hasbro Studios. 2019 has shaped up to be an inflection point for the company as it places the Toy R Us bankruptcy in the rear view and propels its business into the future with partnerships, growth initiatives, acquisitions with durable and compelling brands.
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