Hasbro Earnings Once Again Decline on Toys R Us Woes

Toy maker Hasbro (HAS -0.60%) reported fourth-quarter and full-year 2018 results before the market opened on Friday. For the quarter, revenue dropped 13% year over year, GAAP earnings per share flipped from negative to positive, and EPS adjusted for one-time items fell 42%. 

As with earlier quarters in 2018, the main culprits behind the tepid quarterly results were the bankruptcy and subsequent liquidation of Toys R Us in the U.S. and other geographic markets, and the "rapidly evolving retail landscape" in international markets, particularly Europe. In addition, the lack of a Star Wars movie release from partner Disney during the holiday quarter hurt Hasbro's results, along with negatively affecting Disney's fiscal first-quarter 2019 results.

Hasbro shares closed down nearly 1% on Friday, which we can attribute to both revenue and earnings that came in lower than what most investors were probably expecting.

Hasbro's key quarterly numbers

Data source: Hasbro. GAAP = generally accepted accounting principles. EPS = earnings per share.

For the quarter, foreign exchange had a negative impact of $35.1 million on revenue. Adjusted results exclude the following: $96.9 million, or $0.76 per share, associated with impairment charges related to Backflip Studios goodwill and other intangible assets; $62.2 million, or $0.49 per share, of severance costs associated with the company's reorganization; $10.2 million, or $0.08 per share, associated with U.S. tax reform; and a benefit of $8.5 million, or $0.07 per share, "from a higher than previously anticipated recovery of pre-bankruptcy receivables based on the Company's final settlement with Toys 'R' Us," Hasbro said in the earnings release.

For context -- though long-term investors shouldn't give too much importance to Wall Street's near-term estimates -- analysts were looking for adjusted EPS of $1.67 on revenue of $1.52 billion in the quarter. So Hasbro missed both expectations.

For full-year 2018, revenue declined 12% to $4.58 billion; GAAP net income dropped 44% to $220.4 million, or $1.74 per share; and adjusted net income fell 30% to $488.8 million, or $3.85 per share. In 2018, Hasbro generated $646 million in operating cash flow and ended the year with cash and cash equivalents of $1.18 billion.

What happened with Hasbro in the quarter?

• Revenue from franchise brands declined 8% year over year to $729.9 million, revenue from partner brands dropped 20% to $272.9 million, Hasbro gaming revenue fell 22% to $267.4 million, and emerging-brands revenue increased 5% to $119 million.
• Franchise brands Magic: The Gathering and Monopoly, partner brands Beyblade and Disney's Marvel, gaming brand Dungeons & Dragons, and emerging brand Lost Kitties grew revenue in the quarter.
• U.S. and Canada segment revenue declined 9% year over year to $685.6 million, international segment revenue dropped 14% to $618.5 million, and entertainment and licensing revenue dropped 31% to $85.1 million.

What management had to say

Here's part of what CEO Brian Goldner had to say in the press release:

2018 was a very disruptive year, driven by the bankruptcy and liquidation of Toys "R" Us across most of the world and a rapidly shifting consumer and retail landscape. During 2018, we diversified our retailer base, meaningfully lowered retailer inventories, and delivered innovative new offerings to our global consumers. We were not, however, able to recapture as much of the Toys "R" Us business during the holiday period as we anticipated as the effect of its liquidated inventory in the market was more impactful than we and industry experts expected. It is an unprecedented yet finite event. In addition, as we discussed throughout the year, our European shipments declined as the teams successfully lowered retailer inventories amid a declining toy and game market.

Looking ahead

Hasbro doesn't provide guidance, though CFO Deborah Thomas commented on 2019 in the earnings release:

Despite the challenging year, Hasbro remains in a strong financial position with the ability to continue investing to drive profitable long-term growth and raise our quarterly dividend 8% in 2019. Given the rapid change in our business, our global teams are focused on identifying incremental opportunities to deliver top and bottom line returns. Investments to drive top-line growth include the acquisition of POWER RANGERS, storytelling such as Bumblebee and new growth drivers including Magic: The Gathering Arena and the associated MAGIC esports initiatives. We've also undertaken important operational programs -- investing in the geographic diversification of our manufacturing locations and a new Midwest U.S. warehouse opening in 2019. In addition, the organizational actions we outlined are now expected to deliver $50 [million] to $55 million in net pre-tax savings in 2019.

Check out the latest Hasbro earnings call transcript.