Shares of Hasbro (HAS) fell 3% on Oct. 22 after the toymaker's third quarter numbers broadly missed analyst estimates. Its revenue fell 12% annually to $1.57 billion, missing estimates by $140 million and marking the company's fourth straight quarter of declines.
Hasbro's GAAP net income fell 1% to $263.9 million, or $2.06 per share. On a non-GAAP basis, which excludes a $17.3 million benefit from U.S. tax reform, Hasbro's net income dropped 7% to $246.5 million, or $1.93 per share, which missed expectations by $0.30.
Why is Hasbro struggling?
Hasbro attributed its latest earnings miss to the bankruptcy of Toys 'R' Us, which resulted in lost revenues in the US, Europe, and Asia Pacific markets. It also noted that shifting consumer behaviors and an evolving retail landscape hurt its overseas sales, while unfavorable currency headwinds reduced its total revenues by 2%.
Hasbro's US and Canada revenues fell 7% annually to $924.2 million, while its International revenues tumbled 24% to $560.7 million. The decline in its international business was caused by a 29% decline in revenues in Europe, a 16% drop in Latin America, a 14% drop in Asia Pacific, and an 18% drop in emerging markets.
The only bright spot was its Entertainment and Licensing segment, which grew its revenues by 45% annually to $84.9 million on a digital streaming deal for Hasbro shows and revenues from last year's My Little Pony: The Movie. However, that growth was significantly inflated by Hasbro's switch to the ASC 606 accounting standard.
Hasbro's operating profit grew 4% annually at the U.S. and Canada unit, but tumbled 50% at the International unit. However, the operating profit of its Entertainment and Licensing unit nearly doubled on higher-margin streaming deals.
Breaking down the brands
Hasbro's brands struggled across the board. Its Franchised Brand revenues fell 5% to $847.7 million as its growth from Monopoly, Play-Doh, Magic: The Gathering, and Baby Alive was offset by soft sales of Nerf, My Little Pony, and Transformers products. Hasbro attributed the softer sales of My Little Pony and Transformers on tough comparisons to 2017, which saw theatrical film releases for both franchises.
Its Partner Brand revenues plunged 37% to $305.8 million as its growth in Beyblade and Marvel products was offset by declines in its other brands.
Its Gaming revenue -- which excludes games included in its Franchised Brand segment -- stayed nearly flat at $280.8 million as stronger sales of Dungeons & Dragons, Duel Masters, Jenga, and Don't Step in It were offset by weaker sales of Pie Face and other gaming products.
Lastly, its Emerging Brand revenues rose 2% to $135.3 million, as new products -- like Lost Kitties, Lock Stars, and Yellies -- complemented fresh licensing revenue from Power Rangers.
The headwinds and tailwinds
Simply put, the growth of Hasbro's stronger brands simply couldn't offset the declines in its weaker brands. That failure, which was exacerbated by the bankruptcy of Toys 'R' Us and regional challenges, caused its operating margin to contract 10 basis points annually to 20% -- which missed the consensus forecast of 21.1%.
Hasbro plans to protect its margins by restructuring its business and laying off a "single digit percentage" of its global workforce of over 5,000 employees. It expects to record a $50 million to $60 million charge during the fourth quarter related to severance packages, but it expects those layoffs to generate $30 million to $40 million in annual savings by 2020.
Hasbro's main rival, Mattel (MAT 3.14%), also announced that it would lay off about 2,200 workers, or 22% of its global workforce, earlier this year. Mattel is also struggling with the bankruptcy of Toys 'R' Us, fickle demand for its top franchises, and tough currency headwinds.
Analysts expect Hasbro's revenue to fall 6% this year, but recover 8% next year as the company moves past the Toys 'R' Us bankruptcy and new catalysts like Bumblebee and Fortnite reinvigorate its core franchises. Wall Street expects its earnings to drop 13% this year, but rise 12% next year.
Based on those estimates, Hasbro trades at just 18 times forward earnings -- which is much lower than Mattel's forward P/E of 67. Mattel suspended its dividend last year as its bottom line dipped into the red, but Hasbro still pays a solid forward dividend yield of 2.6%.
Is it time to buy Hasbro?
I think Hasbro is a better toymaker than Mattel, but I don't see any compelling reasons to buy this stock. If I wanted better growth, I'd buy Funko, which creates pop culture collectibles for older shoppers. If I wanted dividends, there are plenty of other income plays with higher yields and more stable businesses than Hasbro.