It's a tough time to be in the consumer sales business. The oft-cited trade war between the U.S. and China is raising expenses for many companies, and digital disruption and shifting consumer trends are creating headwinds to growth. That's the backdrop against which toymaker Hasbro (NASDAQ:HAS) reported its third-quarter 2019 results.

The good news was that the company continues to report profitability after a tough 2018 dealing with the loss of Toys R Us. The bad news? Turns out shares had priced in better results than what was reported leading into the all-important holiday shopping season. Toys, it seems, are old news. Digital and video entertainment is where it's at right now, and Hasbro's acquisition of the "Peppa Pig" cartoon is nearing completion.

A picture of two animated pigs eating ice cream cones from Entertainment One's "Peppa Pig" cartoon.

Image source: Entertainment One/Peppa Pig.

Tariffs, exchange rates, and partner brands take their cut

To be fair, Hasbro did post 2% year-over-year sales growth during Q3, excluding factors outside its control. Multiple factors conspired against the toy company, though, including toy supply disruption because of the aforementioned trade war, foreign currency exchange rate expenses of $20.5 million due to a stronger U.S. dollar against international sales, and a huge surge in partner brand sales -- mainly from Disney (NYSE:DIS) -- that carry a lower profit margin than Hasbro's owned franchises.  

Though the margins are getting squeezed by Disney's licensing agreement with Hasbro (management said royalty fees will come in at about 8.5% of revenues for full-year 2019), it's a good thing they're selling so well. Partner brands surged 40% during Q3 to $427 million, offsetting an 8% decline in Hasbro's brand sales (down to $780 million during the quarter) and a 17% drop in the gaming division ($232 million). The Star Wars: The Rise of Skywalker and Frozen 2 movies coming out in the fourth quarter are no doubt responsible for the big jump.  

As a result, Hasbro's bottom line took a year-over-year hit in the quarter because of the trade wars, exchange rates, and Disney's cut. However, Hasbro has made progress in updating its digital selling capabilities and digital play strategy -- moves that will likely pay off soon enough.

Metric

Q3 2019

Q3 2018

YOY Change

Revenue

$1.58 billion

$1.57 billion

0%

Gross profit margin (after cost of sales and royalties)

52.1%

51.5%

0.6 pp

Operating profit

$297 million

$313 million

(5%)

Data source: Hasbro. YOY = year over year. Pp = percentage points.   

Entertainment is the path forward

That's because Hasbro is poised to finalize its acquisition of Entertainment One (OTC:ENTMF) during the fourth quarter. Best known for its British animated TV show "Peppa Pig," eOne helps Hasbro double down on what has been its best-performing segment for a while now: its entertainment, licensing, and digital segment. Up 24% and 28% in Q1 and Q2 2019, respectively, the high-growth area, though Hasbro's smallest, put up strong numbers again during the third quarter.

Segment

Q3 2019 Revenues

YOY Change

U.S. and Canada

$898 million

(2%)

International

$561 million

0%

Entertainment, licensing, and digital

$116 million

20%

Data source: Hasbro. YOY = year over year.  

Creating movies, TV shows, and video games based on its franchises -- most notably the Transformers series, Magic: The Gathering, and Dungeons & Dragons -- has been a winning strategy for Hasbro in the digital age. The company has been able to drive engagement with kids by telling stories, creating a type of vertical experience that covers play time and TV screen time. The addition of eOne should help deepen the company's reach in that regard. 

Thus, while the third quarter didn't live up to investor hopes, fortunes aren't made in a three-month stretch. Hasbro is still posting better numbers than last year, and its big and potentially transformational takeover of eOne is right around the corner. The toy maker is still worth some attention.