Why Hasbro Investors Don't Care About Declining Sales

Image: Hasbro.

The toy industry has had some tough times in recent years, and toy-making giant Hasbro (HAS 0.60%) hasn't been immune to the harsh trends in sales. Even as the stock has climbed to all-time highs, Hasbro investors expect the company to post declining revenue when it reports first-quarter financial results on Monday. Nevertheless, Hasbro's longer-term prospects look more favorable than those of rival Mattel (MAT -0.66%), which has continued to struggle and has therefore opened the door for Hasbro to make a meaningful competitive push. Let's take a sneak peek at what Hasbro has been up to over the past few months and what we're likely to see in its quarterly report.

Stats on Hasbro

Source: Yahoo! Finance.

Should Hasbro investors be worried?
In recent months, investors have become less optimistic about Hasbro earnings, reducing their first-quarter projections by a third and cutting 5% to 7% from their yearly predictions for 2015 and 2016. The stock price has kept soaring, though, rising more than 26% since mid-January.

The biggest portion of Hasbro's share-price gains came immediately after the company announced its fourth-quarter financial results in February. A 1% revenue gain looked tepid at best and fell short of what investors had expected, but most of the drag on sales came from the strong U.S. dollar, and Hasbro said revenue climbed 7% on a constant-currency basis. In particular, foreign-exchange factors masked strength in the Asia-Pacific region, and a huge surge in the boys' toy division overcame declines in sales of girls' toys and in Hasbro's games segment. Hasbro's decision to raise its dividend by 7% also gave investors more optimism about the future, particularly in combination with a substantial stock repurchase program.

Star Wars will play a huge role at Hasbro in the years to come. Image: Hasbro.

Those results suggest the key to Hasbro's success this year will come not from top-line growth but from making the most profitable decisions with the revenue the company brings in. CEO Brian Goldner has emphasized the need to develop innovative new toys and games based on the company's most valuable brands, making sure to prevent well-known favorites from growing stale to new generations of customers. At the same time, Hasbro sees the huge potential in building up the connection between toys and games and entertainment content, both through traditional licensing arrangements to produce toys from hit movies and shows and by using more creative ways to develop original content based on existing products.

Mattel's results from earlier this week hold some clues to how Hasbro might fare. Sales at Mattel were better than investors had expected, even though they fell for the sixth straight quarter, and the toy maker's net loss was a penny less than the consensus projection. Yet what got shareholders excited was newly installed CEO Christopher Sinclair's pledge to "implement a rapid turnaround at Mattel," involving not only improving results from core brands such as Barbie but embracing new visions for its products through initiatives including its crowdsourcing collaboration with the online community of Quirky.

For its part, Hasbro maintains some advantages over Mattel. The biggest could be its deal with Disney (DIS 0.16%), which promises to have a huge impact in future years. Recent hype about the coming new installments of the Star Wars movie franchise could open up a whole new era at Disney, and Hasbro has positioned itself well to take advantage of this.

In Hasbro's earnings report on Monday, look at how the company's numbers compare with Mattel's struggles. As long as Hasbro can distinguish itself from Mattel in terms of execution, its stock will have the potential to keep climbing even if Mattel can't keep up. Still, Hasbro's long-term success depends on making the most of all its opportunities to expand its target market and capture as much of it as possible.