Suffering from a disappointing Christmas quarter due to the lingering hangover of Toys R Us bankruptcy, a changing European market, and currency headwinds, Hasbro's (NASDAQ:HAS) expectations for the current period were decidedly muted.

The toymaker was going up against last year's blockbuster movie Black Panther at a time when Hollywood was off to its worst start in years, and a calendar shift meant the Easter holiday moved into the second quarter. So when the toymaker posted results that handily beat Wall Street's forecast, it was just as shocked as everyone else.

Action shot of Magic: The Gathering tournament

Image source: Magic: The Gathering.

A magical undertaking

Although its partner brands like Disney, Marvel, and Star Wars underperformed due to a lack of movies in theaters, Hasbro was able to turn up sales in its franchise brands segment, including one of the biggest surprises, Magic: The Gathering.

The classic collectible card game has been a enduringly popular for the entirety of its 25-year history, but Hasbro gave the analog version a digital makeover to keep it relevant, and beginning in 2017 started testing Magic: The Gathering Arena, a free-to-play online version. Last September it was put into open beta, which went live in December. The response has been overwhelming; chairman and CEO Brian Goldner told analysts on the earnings conference call that well over 700 million games had been played during its beta testing.

Hasbro is also aligning the game with the esports world. eMarketer estimates viewership of esports events will grow 52.5% between now and 2023, hitting 46.2 million, while ad spending on streams will increase 20% next year, growing from $178.1 million to $213.8 million. The toymaker has the opportunity to benefit from partnerships with esports teams, event marketers, and advertisers.

It held its first Magic tournament during the quarter, paying out $1 million in prize money and promising more to come this year. It wants to build on Magic Arena's preexisting popularity, as it's already considered a top 10 esports brand.

Notably, Magic: The Gathering generated $10.4 million in digital gaming revenue and $3.2 million in operating profit, helping the newly reconstituted entertainment, licensing, and digital segment generate a 24% increase in revenues for the quarter. Segment operating profits also expanded to $30 million, or 32.6% of revenues, compared to $17.1 million, or 23% of revenues last year.

A blockbuster hit

Also performing well in the quarter were classic standby brands like Nerf and Monopoly, which enjoyed strong sales in the period as Hasbro found new, nontraditional outlets to sell toys and games, like grocery stores and drugstores.

Transformers also showed surprising resilience. Bumblebee was released just before Christmas and did a fair showing, earning some $467 million in worldwide box office receipts, but it's now moved into home entertainment, so coupled with Hasbro's preschool programming and fan-oriented content, it is still generating a lot of money for the toymaker.

Hasbro has learned how to generate revenue away from a movie's release, and when you have a property like Transformers that has made several billions of dollars at the box office, it continues to contribute long afterward.

Which opens up the potential for what is sure to be the colossal opening of the next Marvel movie, Avengers: Endgame. Estimates are that it could have as much as a $900 million global launch and there's actually concern there might not be enough theater capacity to handle the demand. It certainly bodes well for Hasbro's next quarter.

Managing expectations

However, despite the sales and earnings beat, the growth of Magic: The Gathering, the potentially massive open for Avengers, and the release of a new Star Wars movie and a Frozen sequel later this year, Hasbro did not increase its full-year guidance.

While it does have some higher expenses to face, such as the costs associated with the migration of Magic to digital, the strength the toymaker exhibited this quarter suggests it may believe there is a significant slowdown ahead. Or it could just want to underpromise and overdeliver on expectations.

Considering the levers it still has available to pull, it would seem the latter is the case and that Hasbro has regained the magic that has made it an investor favorite.

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