It's been nearly a week now since Hasbro (HAS 0.59%) dropped a bombshell on the stock market, announcing layoffs, an executive departure, and an earnings warning -- and sending its stock down 8% in a day. (Note: The stock has since recovered all its losses. More on that fact below).
On Thursday last week, after trading was safely closed for the day, Hasbro revealed plans to lay off 15% of its global workforce -- 1,000 people -- in an effort to combat the cost of plunging sales at the toys and entertainment conglomerate. All of these layoffs, and all the costs attendant upon them, will hit the company's earnings this year. (On the plus side, Hasbro eventually expects the layoffs to help save it $250 million to $300 million in annual cost).
The company also announced that chief operating officer Eric Nyman will leave the company. No replacement was immediately named.
NASDAQ: HAS
Key Data Points
The earnings warning
So ... how badly is business going for Hasbro? Well, there's good news and bad news (and then some more bad news later on).
The good news is that Hasbro is still -- at least as of fourth-quarter 2022 -- enjoying "strong growth in Wizards of the Coast and Digital Gaming, Hasbro Pulse, and our licensing business." The bad news is that Hasbro's Consumer Products business "underperformed in the fourth quarter," explains CEO (and former Wizards of the Coast boss) Chris Cocks.
Q4 sales, when the official numbers come out on Feb. 16, will be down 17% year over year at about $1.7 billion. Hasbro will report an operating loss, and a net loss, too, of anywhere from $0.93 to $1 per share. (And a word to the wise: Hasbro will report an "adjusted" (non-GAAP) profit despite the net loss, but that non-GAAP number -- no matter how big a headline it receives -- won't count the cost of Hasbro's layoffs and other changes to earnings.)
The other earnings warning
Q4 being the final reported quarter of Hasbro's fiscal year, the company will also report its full-year fiscal 2022 results in two weeks. Those will be down only 9% year over year at $5.9 billion. What's more, both operating and net profits will be positive, and Hasbro will earn somewhere between $1.40 and $1.46 for the year.
That sounds pretty good -- except that it makes Q4's results look even worse in comparison.
The good news (and the rest of the bad news, too)
Hasbro had some good news to report last week, too. The sole bright light in an otherwise dismal report is that Hasbro's Wizards of the Coast (WOTC) and digital gaming division is still going strong (again, or at least it was going strong in 2022). Alone among Hasbro's three big business divisions, WOTC saw its sales grow last year -- up 3% for the year and up 22% for the quarter.
As the undisputed profits driver for Hasbro, WOTC accounted for only 22% of the company's sales last year -- but earned 72% of Hasbro's profits. The fact that this business kept humming along in 2022, and Q4 2022 in particular, should be great news for investors.
It should be, but it isn't.
You see, Hasbro recently made a critical and unforced error with WOTC. Seeing it for the cash cow it is, management attempted to milk the WOTC division for even more profits. It rewrote an important licensing agreement, used by fans of the company's Dungeons & Dragons gaming system to create outside content based on the game, to force users of its content to:
- Inform Hasbro of the products they sell using Hasbro intellectual property (IP).
- Pay Hasbro royalties of up to 25% on any sales (of over $750,000 annually) of those products.
- Grant Hasbro a "nonexclusive, perpetual, irrevocable, worldwide, sub-licensable, royalty-free license to use [any IP they create based on Hasbro's own IP] for any purpose" that Hasbro wishes.
Sound harsh? WOTC's customers thought so. Quick as a magic missile, Hasbro's move sparked a rebellion among WOTC's most ardent fans, creating weeks of negative publicity for the company on social media. Hasbro was forced to backtrack and offer multiple concessions to its fans, ultimately capitulating entirely and announcing last Friday that it will not rewrite its license agreement after all, but rather leave its old license in place.
So what does this mean for Hasbro? No royalties, for one thing. And no free IP created by its customers, either. Worst of all, Hasbro may have irreparably damaged relations with some of its biggest fans. It may even have driven some of them into the arms of WOTC's competitors, who are assembling under the banner of WOTC archrival Paizo (creator of the Pathfinder and Starfinder games) to offer creators their own "irrevocable, perpetual independent system-neutral open license" as an alternative to WOTC's license.
In short, not only has Hasbro's move to grow its WOTC business fallen flat, but the business may actually end up shifting into reverse as a result of this fiasco.
This being the case, it defies explanation that Hasbro stock has somehow managed to already recover all its losses from last week's news, and is once again trading for 44 times the 2022 earnings that it just pre-announced! This would be a princely sum to pay even for a growing company, but for a company like Hasbro, with sales slumping, customers fleeing, and employees receiving pink slips, it simply makes no sense at all.
