Times have been tough for toymakers over the past year, and it's been no different for Hasbro (NASDAQ:HAS). Fears about a slowdown in sales of traditional toys descended into an all-out panic when retailer Toys R Us closed its doors for the last time. At one point earlier this year, Hasbro had lost nearly a third of its value from highs reached in July of last year, though it has since recovered some of those losses.
Hasbro is scheduled to release its 2018 second-quarter financial report on July 23 before the market opens. Coming out of the first half of the year, investors are hoping the worst is over and will be looking for indications that the storied toymaker is on the road to recovery. Let's dive into some of the biggest drivers behind this story.
A dismal start to the year
For the 2018 first quarter, Hasbro reported sales of $716 million, down 16% year over year, producing an adjusted profit of $0.10 per share. These results fell far short of analysts' expectations for revenue of $820 million and earnings of $0.34 per share.
The most obvious cause for the dismal performance was the bankruptcy of Toys R Us, but other factors contributed as well. Weakness in Europe and the bankruptcy of a French retail store also weighed on the company's results. In light of the difficulties, Hasbro announced plans to accelerate changes to its sales organization, taking a number of one-time charges, which also negatively impacted the reported numbers.
The road ahead
Even in a difficult environment, Hasbro is making other moves that it believes will position the company well. At a recent investor conference, Hasbro's chairman and CEO Brian Goldner said the company had added "21,000 doors of retail" to its network and is pursuing its omni-channel strategy, which includes dollar stores, drug stores, gaming stores, and sporting goods stores -- in addition to traditional retail and e-commerce outlets.
The company also recently announced the acquisition of Saban's Power Rangers and a host of other brands in a deal valued at $522 million. In addition to Saban's flagship characters, Hasbro acquired My Pet Monster, Popples, Julius Jr., Luna Petunia, and Treehouse Detectives, among others. Hasbro was already licensing the iconic characters and now plans to plug the newly acquired intellectual property into its brand blueprint with the release of "toys and games, consumer products, digital gaming and entertainment, as well as geographically throughout our global retail footprint."
A look at the future
As a result of the ongoing turmoil in the industry, Hasbro has not provided specific near-term guidance for the year. For the second quarter, analysts' consensus estimates are calling for revenue of $841.2 million and earnings per share of $0.32, which would represent year-over-year declines of 13% and 40%, respectively.
In 2019, the company expects to have moved past the Toys R Us headwind and is anticipating a return to its previous trajectory, with low to mid-single digit year-over-year growth in developed economies and double-digit growth in emerging markets, excluding foreign currency exchange rate differences. Hasbro has previously said that the worst would be behind it after the first half of the year, so watch for indications that things are progressing as expected.
Hasbro is currently a compelling value, though its current price-to-earnings ratio of over 50x is deceiving. The number contains charges related to recent U.S. tax reform. Adjusting for this one-time event reveals that the company is trading at closer to 22x times trailing earnings as of this writing -- even with no adjustments for Toys R Us. I recently added to my position, as I believe that worst is behind the leading toymaker, but we'll know for sure in the coming days.