Hasbro's (HAS +4.07%) revenue and profits collapsed in the second quarter, reflecting the widespread store closures in recent months. Non-GAAP (adjusted) revenue was down 29% year over year, which led to a loss on the bottom line.
But there were plenty of positive signs of a recovery on the horizon. Management believes the third quarter will be better than the second, leading to a strong finish for the year. The stock price has rebounded strongly off the lows it hit in March but is still down 29% year to date. If Hasbro shows quarter-over-quarter improvement from here, the share price should drift back to its 2019 highs.
During the recent earnings call, management cited strong underlying demand for its classic toys and games and said that the supply chain is almost back to full operation. Here's the lowdown on current business trends and why the stock may head higher.
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Strong underlying demand for toys and games
Hasbro saw strong point-of-sale demand with global growth in the high single digits. However, this didn't translate to growth in revenue because of retail closures, product shortages, and the shift in focus to the e-commerce channel during the period. The growth at point-of-sale did continue into the third quarter.
Hasbro Gaming, which made up a third of total revenue last year, was the only area of the business that saw growth during the quarter with gaming sales up 11% year over year. More people staying home meant greater demand for classic games. Hasbro reported strong demand for Jenga, Connect 4, Battleship, and Mousetrap. Hasbro Gaming also includes revenue from other classics like Monopoly, Dungeons & Dragons, and The Game of Life.
The company similarly reported strong e-commerce demand for classic toys like Play-Doh and NERF. E-commerce point-of-sale revenue in the U.S. more than doubled with Play-Doh up 166% and 84% growth across all franchise brands. This was despite Play-Doh products being in short supply, caused by disruptions to the supply chain during the quarter.
Across toys and games, e-commerce's share of revenue made up nearly 30% and expanded by 13 percentage points. "We believe the digital-led model will continue with e-comm today forecasted to be about 30% or more of our full-year revenues," CEO Brian Goldner said during the call. However, the near term will remain challenging as retailers try to plan inventory around the rate that stores reopen, not to mention the uncertainty as to how quickly customers actually return to stores.
Still, Goldner is optimistic about the company's growth initiatives looking into 2021. "What has been consistent is the robust demand for our brands and content and the strong execution by our global teams," he said. "We are positioning ourselves to execute a good holiday season and to drive our business in 2021 and beyond."
Robust plans for new products
Hasbro is executing on marketing campaigns and planning to launch several new products across its brands to prepare for a "successful holiday season" as Goldner explained. Gaming brands and NERF are currently experiencing good momentum, so management has plans for new products to capitalize on the sales trends within those franchises in the fourth quarter. And the upcoming release of season two of Disney's The Mandalorian on Disney+ should drive strong demand for Baby Yoda products.
While Magic: The Gathering revenues were down in the second quarter due to a tough comparison to the year-ago quarter, Goldner said, "The engagement with [the game] has been quite strong." Hasbro has new analog and digital releases coming for Magic in the second half of the year.
"We have good visibility to consumer demand, and our retailer plans are quite robust as we go through Q3 and into Q4," Goldner said.
Hasbro's supply chain is close to full strength
The supply chain was not operating at full speed in recent months, but nearly all of Hasbro's factories and warehouses are currently back online. Management believes the business is well-positioned to meet full-year demand from here on out. According to CFO Deb Thomas:
Going forward, as stores reopen, entertainment production begins to return, MAGIC has meaningful launches in analog and digital, and we execute our marketing plans for the back half of the year, we believe the third quarter is the beginning of the road to recovery and performance should meaningfully improve from the second quarter.
The stock is currently sitting around $75 per share, or a price-to-sales ratio of 2.1. The stock hasn't traded this cheap in about five years. With management signaling a path to recovery on the horizon, this might be the last chance investors have to scoop up shares of this top consumer brand at a discount.
