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Hasbro Accelerates Transformation on Earnings Miss

By Danny Vena – Apr 25, 2018 at 8:17AM

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While the situation at Toys R Us dented its results, Hasbro is positioning itself to return to growth.

Going into Monday's first-quarter financial report, Hasbro, Inc. (HAS -2.13%) investors were expecting the worst, but hoping for the best. The bankruptcy announcement late last year by major toy retailer Toys R Us and its subsequent liquidation have weighed heavily on companies in the toy industry.

Among toy makers, Hasbro has widely been considered in the best position to weather the storm, having long pursued an omni-channel strategy while embracing the move to a digital era. Recovering from the loss of a major retailer takes time, and Hasbro has much to do in the year ahead.

People playing Monopoly game, with one handing over game cash, while the other hands over property card.

Hasbro is positioning itself to win the game over the long term. Image source: Hasbro.

A tough quarter

For the 2018 first quarter, Hasbro posted revenue of $716 million, a decline of 16% year over year, generating a net loss of $112.5 million. This resulted in a loss of $0.90 per share, compared to $0.55 per share earnings in the prior-year quarter. When adjusted for various one-time items, the company reported a net profit of $12.4 million, or $0.10 per diluted share. Analysts had been expecting earnings of $0.34 per share on revenue of $820 million. 

Revenue Source

Q1 2018

Q1 2017

Change (YOY)

Franchise Brands

$361.7 million

$449.2 million

(19%)

Partner Brands

$200.6 million

$213.0 million

(6%)

Hasbro Gaming

$105.2 million

$135.8 million

(22%)

Emerging Brands

$48.8 million

$51.8 million

(6%)

Total

$716.34 million

$849.66 million

(16%)

DATA SOURCE: HASBRO SEC FILINGS. YOY = YEAR OVER YEAR.

Hasbro reported that sales in Latin America and Asia Pacific grew, but those were more than offset by weakness in Europe, which was impacted by several issues in addition to Toys R Us. The company said a bankrupt French retailer had been placed in receivership, and Hasbro was also working through carry-forward inventory, especially in its European market.

Revenue Source

Q1 2018

Q1 2017

Change (YOY)

U.S. and Canada

$364.3 million

$451.6 million

(19%)

International

$287.9 million

$345.3 million

(17%)

Entertainment and Licensing

$64.0 million

$52.7 million

21%

DATA SOURCE: HASBRO SEC FILINGS. YOY = YEAR OVER YEAR.

Adapting to the shift to online sales

Hasbro has working to adapt to the continuing trend toward e-commerce, and while the company already had plans for changes to its sales organization later in the year, recent events have convinced Hasbro to accelerate those plans:

Over the past several years, the company has invested in developing an omni-channel retail presence, and in 2018 is bringing onboard new skill sets and talent to lead in today's converged retail environment. These actions were initially planned to occur over time, commencing later this year. Given the current retail environment, the Company chose to accelerate its actions. 

Hasbro took several one-time charges that affected the quarters' results. The company had a $59.1 million bad debt expense related to Toys R Us, as well as a $15.7 million charge for severance related to Hasbro's organizational changes, and $47.8 million in repatriation tax expenses resulting from last year's U.S. tax reform.

The company also made the strategic decision to hold back some of its "high-quality inventory" so it didn't have to compete with merchandise that was being discounted at Toys R Us stores as the result of its liquidation. Hasbro said it would draw down this inventory as the impact from discounted toys wore off.

Looking ahead

In the face of the ongoing changes in the retail environment, Hasbro didn't give specific guidance for the current quarter. The company did say that it expects the most pronounced impact in the first half of the year, and to a lesser extent as 2018 progressed. The company expects to return to a familiar growth trajectory in 2019. 

Over the next few quarters, Hasbro will be working to minimize the damage, but for long-term investors, this will likely be nothing more than a speed bump.

Danny Vena owns shares of Hasbro. The Motley Fool owns shares of and recommends Hasbro. The Motley Fool has a disclosure policy.

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