In this segment from the MarketFoolery podcast, host Chris Hill is joined once again by Million Dollar Portfolio's Jason Moser, and Stock Advisor Canada's Taylor Muckerman to consider the uglier-than-anticipated first-quarter numbers from top toymaker Hasbro (HAS -3.11%), which reported Monday.
It's natural to point fingers at the implosion of the biggest retailer of your product. But the toy business has been under pressure for years for other reasons. The guys weigh in on where Hasbro stands as a business and as an investment, and explain what they think flipped Wall Street's script on it from pessimism to optimism again after the earnings call. They also consider rival Mattel (MAT 0.26%) and the exit of its CEO.
A full transcript follows the video.
This video was recorded on April 23, 2018.
Chris Hill: Hasbro's first quarter revenue came in much lower than expected, and not unfairly, Jason, they blamed -- I don't want to say blamed, yeah, let's say blamed -- they blamed Toys R Us for going out of business. And that shouldn't be a surprise to anyone who's paying attention to the toy business. We saw this in sports apparel when Sports Authority went under. We knew this was going to happen with Hasbro. The stock was actually up a little bit this morning. It sort of opened down, but then bounced back up. So, you tell me. You know this company better than I do. How bad was this quarter? Was this a speed bump or was this like, ooh, they might have some problems here?
Jason Moser: I saw this release first thing this morning. I'll go ahead and read to you what I tweeted out first thing this morning. I said, "Hasbro getting pounded this AM makes sense. It may be the leader in the space, but the space itself is in rough shape. With Toys R Us going under the market is undergoing a shift of epic proportions. That said, it's still a good business. This is not another Mattel in the making." The stock was down like 9% at that point, and fast forward to now, it's about 2% up. So, go figure, right?
It was not a good quarter, I mean, by pretty much every measure. They obviously missed on the expectations side. But, when you look at franchise brands and partner brands, all of that was down. The Entertainment Licensing division was up 21%, but that's still a very tiny portion of the business. The key to it all, Chris, was in the call, and management really, really saved this one in the maintaining of the guidance in the call, that optimistic midterm outlook, and confirming that they do still see the company bringing in $600-700 million in operating cash flow this year. That's what turned things around. Now, that means they have to do it. It's one thing to say it, it's another thing to do it. And they have their challenges. But, that's what saved it.
Hill: You mentioned Mattel. We talked about this on Motley Fool Money last weekend. I'm still a little surprised at Mattel's CEO, Margo Georgiadis, she's been there just over a year and just decided to bail.
Moser: I would imagine, too, she's not someone who's really stuck for cash at this point. With a Google background, and being hired --
Hill: That's right, she came over to Mattel from Google.
Moser: -- as a CEO, I mean, she's probably financially set, where she can make some of her own decisions. So, I have to imagine that Mattel for her became a more stressful job as the days wore on. It was already a company with a serious culture crisis, and that was one of her mandates, was getting in there and fixing that. But it's also a company that's facing a lot of the same challenges Hasbro is facing in this changing toy market, it's just that Hasbro has far more valuable properties and more of those properties, better leadership, better culture. So, really, Mattel is just bad in every sense of the word. It sounds like she had a great opportunity to go do something else that was a bit more in line with her interests.
Hill: And maybe it was stress, but look, we've seen situations where CEOs are brought in for a particular reason, and that reason is, "This company needs to be sold." And when she got to Mattel, it was clear that her focus was, "I'm going to try to turn this company around." So, it may have been a situation where the board, quietly or not so quietly, said, "Hey, look, the exit strategy for our company is to sell to Hasbro or someone else," and that may have been the impetus for her to leave, for her to say, "That's not why I came here."
Taylor Muckerman: She might not have gotten a realistic job preview when she accepted.
Hill: Yeah, let someone else do that.
Moser: The more I think about this, I think Mattel is stuck in a real bind here. They need a deal. I just don't think there's any other way out for this company. The balance sheet is becoming a big problem and they just don't have that top line growth there. Now, with that said, you have to look at the other side of the coin there and think, well, who wants Mattel, and why do they really want it? Because we were seeing the same thing with LeapFrog not all that long ago. "Oh, it'll just get acquired." I'm like, "Wait a minute, that's actually a pretty crappy business. I don't know why someone would want to acquire it." So, it's one thing to say, "A deal is in the making," but it's another one to sit there and try to add it all up and understand why another company may want it. And to me, I look at Mattel and I think, "Man, that'd be a lot of headaches for Hasbro." So, if they do make a deal, and they certainly could, that's going to work out in Hasbro's favor, because Mattel is going to be a very desperate seller, and Hasbro could pretty much just get it for a song.
Muckerman: Depending on the valuation, of course, would that change your idea about Hasbro, your stock thesis? If they did it that way?
Moser: You know, I would actually look at Hasbro with a bit more skepticism, to be quite honest with you, because at least you know they're bringing in a very troubled organization with some less-than-current assets. I'd be a little concerned, honestly, if they did buy Mattel.