The Force Is Not With Hasbro

In times past, toy manufacturer Hasbro (NYSE: HAS  ) has greatly benefited from the Star Wars license. This isn't one of those times.

In its first-quarter earnings conference call, CEO Alfred Verrecchia said he was "very pleased" with its latest results. You have to wonder whether what he's actually saying is that he's pleased with the performance compared with anticipated weakness. Because given the negative impact of its Star Wars lineup, you definitely have to do some searching to find reasons for optimism.

Let's first address the Star Wars impact. Leading up to and following the release of the final installment of Star Wars in Episode III:Revenge of the Sith, Hasbro was enjoying its own Mos Eisley Cantina fiesta as kids flocked to the brand. This quarter, however, the company is finding itself in a tangle as the drop in sales of Star Wars-related toys weighed down both domestic and international sales -- which increased 7.5% and 2% (excluding the impact of foreign currency exchange), respectively. Moreover, since Star Wars products have typically been one of Hasbro's most profitable toys, as a result of declining revenues in this segment, gross margins were weakened to 60.3% from 63.5% in the year-ago period.

Offsetting the lower Star Wars sales were strength from various other products, such as Transformers, Supersoakers, and board games like Scrabble and Monopoly. Board-game revenues rose by double digits in the international market. Looking ahead, Hasbro expects Transformers to continue doing well as it builds up in anticipation for DreamWorks Animation's (NYSE: DWA  ) new Transformers movie set for release in 2007. The company is also excited about its Spider-Man toys, as the renewed interest in the building-jumping superhero should come to a peak with the release of Spider-Man 3, slated to hit theaters in 2007.

As Hasbro transitions from the Star Wars universe into these new films, management indicated that its inventory situation is in good shape in light of expected growth. With inventories down 8.4% year over year, one has to question whether this is indicative of anticipated weakness. As the company faces the power of the dark side from declining Star Wars sales, investors will want to be on the lookout to see whether Hasbro can still manage to spur solid growth on the strength of its Spider-Man and Transformer lineups.

Play on with more Foolish fun:

• Mattel (NYSE: MAT  ) continues to face challenges.
• Marvel (NYSE: MVL  ) signs a five-year licensing deal with Hasbro.
• And LeapFrog (NYSE: LF  ) faces stiff challenges with its latest gizmo.

Hasbro and DreamWorks Animation are both Motley Fool Stock Advisor picks. Take the newsletter dedicated to the best of David and Tom Gardner's picks for a 30-day free spin.

Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.