Blockbuster Connections Give Hasbro the Advantage Over Mattel

Character-driven products are giving Hasbro a leg up over Mattel.

May 2, 2014 at 1:18PM

A strong portfolio of character-centered brands such as its enduring Transformers line, Magic: The Gathering, and My Little Pony gives toy/media company  Hasbro (NASDAQ:HAS) a leg up over rival Mattel (NASDAQ:MAT) which lacks a product portfolio with that type of focus. Sure, Mattel has Monster High, American Girl, Barbie, and Hot Wheels; however, Mattel lacks the blockbuster exposure brought to Hasbro through live-action movie line-ups like Transformers  and G.I. Joe: The Rise of Cobra. This is one big reason that Hasbro looks like a better investment right nowthan Mattel.


Consumer engagement
In Hasbro's most recent earnings call, CEO Brian Goldner summed up the company's strategy in one sentence: "In 2014, we have strong retailer support both in-store and online for Hasbro product and licensing initiatives as we drive the revolution in consumer engagement with content, licensing and in partnership with our global retailers."  The operative words here are "consumer engagement with content." Hasbro wants its customers to experience its products on multiple levels such as movies, animated series, and variations on its toys.

For example, the previous three live-action Transformers movies gave a serious boost to Hasbro's top line in the years surrounding their release as excited consumers purchased toys based on the movies .   Hasbro, via its partially owned  Hub TV network, has also aired animated Transformers series to keep the interest alive between movies. Transformers' related revenue declined slightly in the most recent quarter; however, this stems from clearing inventory and gearing up for the new movie event Transformers: Age of Extinction, slated for release on June 27.  

Another example is Magic: The Gathering, an immersive card game in which people play matches with one another either face to face or in online forums, creating customer interaction with the content and one another. Hasbro renews consumer interest by providing fresh, new card sets and updates to story lines on a periodic basis. Another plus: Magic: The Gathering provides the company growth in revenue that doesn't depend on the holiday season. Magic: The Gathering increased revenues in the most recent quarter, serving as a buffer against further revenue declines in Hasbro's games segment. 


My Little Pony characters also helped drive revenue gains of 21% in Hasbro's girls segment.  Like Transformers, this brand comes with an animated series and movies to help keep consumer interest in the product line alive. Hasbro's new variation, My Little Pony Equestria Girls, has helped refresh the line for its consumers.


Hasbro also engages customers in board game marketing. For example, Hasbro allowed customers to vote on new terms such as "Geocache" for playability in its board game Scrabble. Moreover, Hasbro hosted a debate online where customers weighed the pros and cons of "House Rules" and will make changes in future Monopoly games accordingly. 


The Competition
Mattel's product portfolio lacks two elements that Hasbro possesses in abundance: more character-centered brands and blockbuster movies based on them. In Mattel's most recent quarter Barbie experienced a sharp decline in sales of 14% globally. Barbie largely represents a general character with diverse accessories to suit the customer's interests, but without a singular personality. Another longtime product line that usually struggles, Hot Wheels, perhaps due to its inanimate nature in contrast to Transformers that change shape and represent dynamic characters, increased 2% in the most recent quarter. New products, animated content, and a revised website helped serve as a shot in the arm. However, it's Mattel's Monster High product line, which centers on a set characters that are promoted through video games and television, that has grown into a $1.5 billion product line.  

Positive results
Hasbro's focus and brand strength translated into superior fundamentals for the company in the most recent quarter. Hasbro grew its overall revenue 2% versus a 5% decline for Mattel. Hasbro showed a net income of $32 million during that time frame while Mattel showed a net loss of $11 million. Hasbro also sports a better balance sheet, with cash clocking in at 50% of stockholder's equity versus 29% for Mattel. Hasbro saw a 32% year-over-year reduction in its long-term debt during the most recent quarter, bringing its long-term debt-to-equity ratio from 95% to 60%.Hasbro also wants to refinance $425 million of that to bring in a lower interest rate this year.

What now?
Hasbro should experience a good year assuming that Transformers: Age of Extinction lives up to its predecessors. Mattel wants to jump on the bandwagon with its recently announced Barbie movie. Hopefully this will add a character element to this ailing Mattel product line. Otherwise, Hasbro remains the better bet for investors now. 

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William Bias has no position in any stocks mentioned. The Motley Fool owns shares of Hasbro and Mattel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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