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Hasbro Is Increasingly Reliant on TV and Movies, and That's A Bad Thing at the Moment

By Nicholas Rossolillo – Jul 28, 2020 at 1:57PM

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But filmed entertainment, and the revenue it generates for the toymaker, is headed for a rebound -- eventually.

Demand for toys and games helped prop Hasbro (HAS -2.36%) early on in the pandemic, but the company's luck wasn't as good in the second quarter of 2020. Earnings results released Monday show revenue took a steep tumble year-over-year, even as the company's gaming segment performed quite well once again.

The culprit? It would seem the company is suffering collateral damage from the delay of movie releases, and some TV productions are getting delayed by the redundancy crisis that has emerged due to COVID-19. 

A not so great quarter this time around

After posting decent results to kick off 2020, supply chain issues (some factories were shuttered due to the pandemic), retail store closures, and the delay of TV and movie programming (especially at the recently acquired EntertainmentOne TV and movie production studio) conspired against Hasbro in Q2. The gaming segment was the lone area of strength, but it wasn't enough to offset a big year-over-year tumble.

Segment

Q 2020 Revenue

Q 2019 Revenue (including EOne results)

% Change

Franchise brands

$377 million

$577 million

(35%)

Partner brands

$138 million

$213 million

(35%)

Hasbro gaming

$137 million

$123 million

11%

Emerging brands

$76 million

$107 million

(29%)

TV/film/entertainment

$132 million

$195 million

(32%)

Total

$860 million

$1.22 billion

(29%)

Data source: Hasbro.

Most notable was the partner brands segment, which surged by double-digit percentages last year. Though management said demand for Disney's (DIS -2.31%) Star Wars and Frozen toys -- which Hasbro holds licensing deals for -- remained strong, it's clear that a lack of new blockbuster theatrical releases from the House of Mouse took a steep toll. 

And as for eOne, production of new content is coming back online, but the company's slate of new TV shows and movies -- including more from Peppa Pig and PJ Masks and a My Little Pony feature film -- are trending closer toward 2021 for release and monetization. I still like Hasbro's takeover of the kids' content studio long-term, but clearly the closure of theaters and production delays are hurting at the moment. 

Two animated pigs eating ice cream cones from the Peppa Pig cartoon.

eOne's Peppa Pig. Image source: Entertainment One.

It wasn't all bad, though. Free cash flow (basic profitability measured as revenue minus cash operating and capital expenses) did fall 30% from a year ago through the first six months of 2020, but remained positive at $194 million, for a profit margin of 10%. 

Blockbusters can't return soon enough

Another positive was that Hasbro's top brass said it expects Q2 to be the most challenging, and that financial results will improve going forward, starting with the current summer quarter. It also expects to get production of toys caught up in time for the important holiday shopping season (although it remains to be seen just how much holiday shopping cheer there will be this year). And e-commerce points-of-sale are also reportedly on the rise, with digital channels making up 30% of Hasbro's toy and game sales in the period. 

Nevertheless, though many households are spending more time than ever in front of a screen, getting content up-and-running sooner rather than later will be incredibly important for Hasbro. eOne's progress will be the key, as Disney keeps having to push back releases of its films to account for the current global box office doldrums, which doesn't exactly bode well for a sudden revival of licensed toy sales. Perhaps the return of Baby Yoda on The Mandalorian this autumn will rekindle the partner brands segment, but that's still months away. And we all know how fast things can change these days. 

I'm still optimistic about Hasbro's long-term chances, though. At the end of June, the company had $1.04 billion in cash and equivalents on the books, and access to an additional $1.5 billion in a revolving credit line if needed. Total debt was at $5.19 billion (due to the eOne acquisition), but it looks as if there is ample liquidity for the time being, and enough free cash generation to keep the currently-3.5%-yielding dividend flowing.

Blockbuster-worthy film or TV can't come back soon enough for Hasbro, but in the meantime, the toymaker is in decent shape.

Nicholas Rossolillo and his clients own shares of Hasbro and Walt Disney. The Motley Fool owns shares of and recommends Hasbro and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short October 2020 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Hasbro, Inc. Stock Quote
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HAS
$69.44 (-2.36%) $-1.68
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DIS
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