In 1999, I covered Hasbro's (NYSE: HAS) announcement of its plans to buy fantasy games and literature company Wizards of the Coast (perhaps best known for its Magic: The Gathering card game) in part because of the curiosity factor. Here was something not well-known outside the world of school kids and dorks getting the nod from one of the world's leading toy makers... to the tune of $325 million.
Today, news from Wizards of the Coast is interesting for a different reason: Hasbro's third-quarter financial results highlighted strong Magic sales as key drivers of growth in both its U.S. games and international divisions. (For more coverage of the toy business, revisit LouAnn Lofton's take on Mattel's Q3 (NYSE: MAT) from last week.)
A closer look at Hasbro, now a Motley Fool Stock Advisor pick, shows just how important the success of the games business is to the company as a whole. (Broadly speaking, it appears Hasbro is performing well heading into the holiday quarter. Though while we appreciate the detailed income statement and balance sheet in the earnings release, a cash flow statement would have been nice, too.)
Hasbro's U.S. toys division -- which gives us Transformers, G.I. Joe, Playskool, Star Wars, and Pokemon toys -- is the company's main revenue driver. In the third quarter, for example, it delivered $377 million of Hasbro's $970 million in sales on 23% year-over-year growth. But the U.S. games business, which includes Magic, Pokemon, and the myriad of games distributed under the Milton Bradley and Parker Brothers names, consistently turns in higher operating profits on lower revenue thanks to better profit margins.
In Q3, for example, U.S. games delivered $58 million of operating profit on just $250 million in sales thanks to operating margins approximately twice those of the U.S. toys business. (The international division, which comprises both games and toys, also turns in higher revenues than U.S. toys, but has slimmer profit margins.) Magic, as noted, is just part of this -- but its important that the products perform if the acquisition was to make sense since the retail side of Wizards of the Coast has done little but lose money since Hasbro bought it.
This is good news for the U.S. games business, which saw game segment revenues and operating profits fall in 2002. (Revenues fell in 2001 as well, though the division did return to operating profitability thanks to the sale of the money-losing Hasbro Interactive and Games.com businesses.) Continued progress at the games business stands to further please Hasbro investors, who've been well-rewarded with a near-double over the past 12 months. The stock is up 47% since David Gardner picked it in Motley Fool Stock Advsior in May.
Game commissioner Dave Marino-Nachison can be reached at dmarnach@fool.com.
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