The Holiday Shopping Season Weighs on Hasbro's Latest Results

Despite announcing third quarter results that were much stronger than its biggest industry rival, Hasbro (HAS -0.77%) investors punished the stock as a result of weaker guidance for the all-important holiday quarter.

In this segment from Industry Focus: Consumer Goods, Vincent Shen is joined by Fool.com contributor Danny Vena who shares his thoughts on the latest developments at the No. 1 toy company.

A full transcript follows the video.

This video was recorded on Oct. 31, 2017.

Vincent Shen: Hasbro. The company reported its latest results on Oct. 23. I'll pass the ball to you again, Danny, to give us some highlights from that report and what's going on with the company.

Danny Vena: Sure. The same thing with Hasbro as I discussed with Mattel, there's a little bit of history that brought us to where we are today. If you go back to 2008, Hasbro as a company wasn't doing very well. They had kind of lost focus on some of their key brands. They were letting Mattel essentially run away with the ball. When CEO Brian Goldner took over, one of the first things he did was sent a team of 25 people out into the marketplace, and they traveled around the country talking to kids and parents, and tried to see how it was that folks engaged in their toy shop. And one of the key things they found out was that the toys that kids wanted were all connected with movies or television shows, so they could engage with the characters, their toys, in another way. So that was kind of a genesis for a big development at Hasbro, where they went back into creating more television shows, creating more movies. That was the big push behind the Transformers movies, and also the My Little Pony movies and television shows, those were all a result of what they found out.

Then, also, they won that Disney Princess and Frozen licensing contract away from Mattel. That was announced in September of 2014, and took place in January of 2016. That was a key loss for Mattel, but it was a key gain for Hasbro. Now, looking at their individual results worldwide, Hasbro grew its net revenue 7% year over year to $1.79 billion, and it's important to note that for the last few quarters, Hasbro has actually become the world's largest toy maker by sales, because they've beat out Mattel. Pretty much the exact opposite of what we saw with Mattel, Hasbro had strong sales across all of their segments. The one laggard was partnered brands, which is the companies like Disney, where they license the characters and create toys. In that same period last year, DreamWorks had released the Trolls movie, so there was a big run-up in toy sales for that. So that wasn't really a concern in my book. A weaker movie slate, you're going to see that happen.

But as a result of Toys R Us, Hasbro announced they had temporarily suspended shipments with the company, and they expected growth in their fourth quarter, which is that important Christmas season, were going to be in a range of 4% to 7%. Now, it's important to note that analysts were expecting growth in a range of 11% over that same period, which was part of the reason that Hasbro's stock fell the way it did. I disagree with that. I think Hasbro, coming in with a conservative forecast was probably the right thing to do. There's a lot of uncertainty around the Toys R Us bankruptcy, and even just going into the call, they said it was only the day before, or that day, I don't remember exactly, but they had just announced that they had come to an agreement with Toys R Us, and they would resume shipments of toys to them in advance of the holiday season. So I think Hasbro is doing just fine, and that drop in the stock price, I saw that as a buying opportunity.

Shen: The stock took about a 10% hit after their earnings were released. Otherwise, especially after just having discussed Mattel and all of the challenges that they were running into, the issues they were having, you have a company here where revenue was up 7%. That was both in their U.S. and Canada segment, and also their international segments. And among the four different brand categories that they have, their franchise brands, which includes Transformers, which you mentioned, Danny, Play-Doh, Nerf, My Little Pony, that was up 7%. The partnered brands was only down 2%, again, because of the changes in the theatrical release schedule. The fact of the matter is, their partnerships with Marvel, think about all the big superhero movies, the Disney Princesses, Trolls, Sesame Street, that's a very significant part of their business. Then, the Hasbro gaming brands, think Pie Face, Connect4, Jenga, Scrabble, did phenomenally well, up 22%. Then, they have some of their emerging brands, which is what they categorize as the smaller names that haven't quite reached franchise brand status, but those are also growing quite well, 9%. The company has about $1.2 billion cash on the balance sheet. I think that gives it quite a bit of dry powder to return capital to shareholders. They have their dividends, they have their share repurchases, also to continue investing in growth, staying focused on their product pipeline, new toys, the additions and the more interactive investments they're making, the technology that they're also incorporating into the toys that they release.

So combining all that, it seems like the Toys R Us jitters or concerns there plus the lower guidance is really what had investors running off with that short-term hit. Otherwise, obviously, the much stronger player in this industry, and big picture, I think, the company is similarly focused on emerging markets -- they've stated that -- about having the right brand images and stories, similar to Mattel, and again, having these immersive and engaging product experiences.