How Hasbro Is Winning the Toy Game

Hasbro (HAS 0.49%) surprised the market Tuesday with its second-quarter earnings in just the way that shareholders like to be surprised: Its net revenue rose 9%, well outpacing analysts' consensus 6% estimate -- and that was with a currency exchange headwind that cut 2% off the top-line gain.

In this segment from MarketFoolery, host Chris Hill and Motley Fool Asset Management's Bill Barker talk about the more obvious drivers of that growth, like its Avengers: Endgame merchandise, and the calendar impact from putting the Toys R Us bankruptcy further in the past. They also discuss less obvious tailwinds, such as its moves to diversify sourcing away from China, its margin improvements, and the staying power of Hasbro's deep catalog of classic game and toy brands.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on July 23, 2019.

Chris Hill: Shares of Hasbro up 9% this morning after second-quarter profits came in much higher than expected. Avengers: Endgame is the biggest hit at the box office, and Hasbro has the licensing deal for the Marvel characters. I think you can pretty much draw a straight line between those two facts to see why their stock is doing as well as it is.

Bill Barker: You can draw that line. There are a number of different elements, all of which seem to be going right. One is that Hasbro is beginning to source more from outside China, which is something the market wants to hear because the trade war with China continues. Any additional options other than building everything in China becomes more valuable. As they have taken a little time to get that ramped up, nevertheless, their margins are still improving. They're going about this in a way that is friendly to the bottom line.

As much as the Avengers highlight was brought up, the partnership revenue was up about 3%. Of course, that's comparing to last year. There are blockbuster movies coming out from Disney all the time. Hasbro is fortunate to be the recipient of, more or less, the merchandise for all of them. Frozen coming up, Star Wars later in the year, all the Marvel stuff. They're always lapping something pretty good. So that wasn't as much of the driver as lapping a couple of problems. One, Toys R Us being a big problem last year, and having gotten more or less past that. And, the China situation, on top of increased demand for a lot of their product.

Hill: You say they're the recipient. Let's be clear. They're the recipient of these licensing deals because they pay The Walt Disney Company hundreds of millions of dollars for the right to license.

Barker: Yes. And those deals are working out very well for them, not only right now, but in the recent past and in the slightly more distant past. Disney has cornered the market on blockbusters at the moment. The rest of the year is shaping up to look just as good. Revenue worldwide up 11% adjusted for foreign currency. 9% when you don't make that adjustment. Eleven percent growth for this company is pretty good.

Hill: Absolutely. I was a little surprised, maybe I shouldn't be, when I went to Hasbro's website, I was not surprised to see right there at the top there, they're promoting Marvel characters. Spider Man tied into the latest movie, Far From Home. But then, you scroll down, and they're highlighting their other brands, including board games. I was not aware that Hasbro owned Trivial Pursuit. Classic board games, Trivial Pursuit, Cranium, Risk. Like, there you go. I don't know who they're marketing to there. I feel like the board game -- I'm probably going to get in trouble with David Gardner with this -- industry is a niche industry. Maybe it's just, there are good margins on the board games. They have a long shelf life. Once you make them, they probably don't cost much. I don't know. I'm really showing my ignorance about board games here.

Barker: Yeah, and I won't be much less ignorant, but hopefully somewhat less ignorant. It's s an easy act to follow, is my point. Monopoly, classic board game, one of Hasbro's brands. Magic the Gathering, Play Doh, were all highlighted as some of their franchise brands. These things have staying power for many, many decades, and can translate into things that are not strictly the board game that you are thinking of, but also into esports in some ways. Magic the Gathering, a better translation of that than Monopoly. Again, probably we should hand this show over to Dan, who can do more justice to this topic than we can. What is the Magic the Gathering status for e-games with you? Esports, esports. Let's elevate this to where the terminology is being used now.

Boyd: Well, esports, as we know, is getting bigger and bigger as time goes on. Hundreds of millions of people tuned in to watch the largest esports tournaments or shows or whatever you want to call them. That's only growing. As far as physical board games and stuff, are you asking me to speculate on the future? One, I'm not qualified for that. Two, I can't imagine that selling more and more copies of Monopoly or Trivial Pursuit is going to bring Hasbro to the heights of Apple or Google or something.

Hill: Yeah, no, if you're a Hasbro shareholder, don't be looking to the board game section of the business to be the growth driver.

Barker: No, but the board game section of the business has brands that extend into different realms, whether its Monopoly and being able to use that brand to sell more things at McDonald's or whatever --

Boyd: Who's buying board games now?

Barker: But the value created by the board game, which can then be extended into other places. Aren't they making a Monopoly movie? I mean, you can see the plot, immediately.

Boyd: Wasn't Wall Street from the 80s, that movie with Charlie Sheen, basically a Monopoly movie?

Hill: Actually, no. That's not a Monopoly movie.

Boyd: But, you know, the spirit of it.

Barker: Starring Kevin Hart.

Hill: Really?

Barker: Yeah. You thought I was making stuff up?

Hill: Well, it wouldn't be the first time on the show you've done that.

Barker: [laughs] Sorry, he's rumored. I'm looking at IMDd. But it seems a natural for the plot of the movie that you're imagining here.

Hill: Kevin Hart is one of those people where, if he's in a movie, I'm automatically more interested to see the movie. It doesn't mean I necessarily go, but it moves the needle in the right direction.