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Hasbro: Looking Beyond Transformers

By William Bias - Sep 10, 2013 at 9:20AM

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The popularity of the movie franchise isn't enough to guarantee superior returns for Hasbro.

With a tentative release date of June 27, 2014, Viacom's (NASDAQ: VIA) (VIAB) Paramount pictures will release the fourth Transformers movie to a great deal of fanfare. This will most likely serve as a boon to the sales of Hasbro's (HAS 2.47%) Transformers toy line and boost overall revenue for both companies. However, you may wonder what life will entail for Hasbro beyond the release of this next movie. This is a valid concern. Let's examine the prospects of this company beyond the next movie.

Transforming fundamentals
The Transformers movies were released in 2007, 2009, and 2011. As you can see in the chart below, Hasbro experienced vast improvements in revenue following each of those releases. Action-loving Gen Xers who remember playing with Generation 1 Transformers back in the '80s bring themselves and their children to see these movies. Historical bias could lead you to conclude that the next movie may do the same; however, these people may eventually tire of seeing the same reinvented storylines over and over.

HAS Revenue Annual Chart

HAS Revenue Annual data by YCharts.

Brand fatigue
Brand fatigue also represents a legitimate concern, especially since Hasbro has decided to focus on its most popular core products such as G.I. Joe, Monopoly, and My Little Pony, as well as Transformers. While Hasbro does a good job of reinventing these products, a competitor with a fresh new product could steal consumer attention.

With Transformers 4, Hasbro intends to combat this potential problem by bringing on a whole new human cast and moving the premise in a different direction. According to IMDb, the movie will actually center on a discovery made by a mechanic and his daughter that pits them against Autobots, Decepticons, and the government. If this storyline holds true, humans versus Transformers would represent a break with the past.

Viacom is no stranger to brand fatigue. In 2003, Star Trek: Nemesis bombed, bringing in a mere $67 million. This essentially marked the end of a successful 16-year run for the Star Trek franchise, until J.J. Abrams revived it in 2009. The two movies produced under the J.J. Abrams banner, Star Trek and Star Trek Into Darkness, grossed more than $385 million and $462 million, respectively, at the box office.

In its most recent quarter, rival toy company Mattel (MAT 1.60%) also experienced slumping sales in older brands such as Barbie and Hot Wheels, which declined 12% and 1%, respectively. Knowing it needs to innovate, Mattel introduced new product lines such as Monster High, American Girl, and Max Steel. In contrast to its older brands, American Girl increased its revenue 14%. Moreover, Max Steel comes with its own television show and interactive experiences to promote that brand, fostering growth for that product. Mattel's newer brands will serve as a basis for Mattel's future growth. Hasbro will need new toys of its own to keep its product line fresh.

License for the future
Hasbro recently expanded its merchandising relationship with entertainment conglomerate Walt Disney (DIS 3.30%), under which Hasbro will produce toys and games based on Disney's popular Marvel and Lucasfilm content. Marvel's Iron Man 3 and The Avengers grossed $1.2 billion and $1.5 billion, respectively, serving as a catalyst for the 8% year-to-date increase in Walt Disney's consumer product revenue. It's anticipated that the new Star Wars will do at least as well as the Marvel-based films. Hasbro wants a piece of the success by making toys based on these popular brands.

The digital age
Many pundits worry that the distractions of the digital age will pull children away from toy play. Hasbro plans to meet this concern head-on. Its acquisition of a majority interest in Backflip studios, an online gaming company, demonstrates Hasbro's concern for the digital age's impact on toy sales. In addition, Hasbro wants to produce a toy line under license from Sunrights based on B-DAMAN an animated television series. The toys will come with codes for consumer access to exclusive content on the Internet.

Hasbro's best bet lies in its ability to continually renew popularity of its core brands. Transformers 4 may yet again revive Hasbro, although it may face a less-than-stellar future beyond that. If Star Wars doesn't live up to really high expectations, Hasbro may make less than the guaranteed royalty payments to Disney. Successful integration of digital technology to increase engagement could go a long way to enhancing top and bottom lines. Hasbro will need strong new ideas to complement its portfolio of strong brands. Otherwise, the company could underperform over the long term.

Fool contributor William Bias owns shares of Walt Disney. The Motley Fool recommends Hasbro, Mattel, and Walt Disney. The Motley Fool owns shares of Hasbro and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Hasbro, Inc. Stock Quote
Hasbro, Inc.
$80.58 (2.47%) $1.94
The Walt Disney Company Stock Quote
The Walt Disney Company
$121.57 (3.30%) $3.88
Mattel, Inc. Stock Quote
Mattel, Inc.
$23.54 (1.60%) $0.37
Viacom, Inc. Stock Quote
Viacom, Inc.

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