Brian D. Goldner took over as CEO of Hasbro(NASDAQ:HAS) in 2008, and since that time, his company has soundly outpaced the S&P 500. But even with our more successful investments, it is a good exercise to pose questions to the CEO.
Girls category turnaround?
Hasbro breaks its operations down into four product categories: boys, girls, games, and preschool. In fiscal year 2014, boys contributed $1.48 billion to revenue, compared with $1.26 billion for games, $1.02 billion for girls, and $511 million for preschool. The following year saw sales increases for three categories, including a 20% jump for boys. Girls revenue, however, fell 22%.
It's hard to expect all product categories to grow each year, but the contrast between the boys and girls segments is alarming. There are a few ways Hasbro can bolster this faltering category, and I'd like to know where the CEO is focusing. A merger with Mattel (NASDAQ:MAT), which has been rumored, would bring American Girl, Barbie, and a number of other powerful brands into the fold. Being able to pick and choose a few of the most promising offerings would appeal to me as a Hasbro shareholder, but an actual merger doesn't interest me.
Hasbro should look to redefine what the girls category means, and it seems Goldner was hinting at this on the fiscal 2015 earnings call: "We believe there is an opportunity to engage girls around a more immersive franchise story, including a new approach to multi-platform entertainment, which we will be unveiling in the future." Developing new properties will be difficult but won't dilute existing shareholders the way a large merger would.
Future of entertainment and licensing?
Great content is valuable, and Hasbro has a ton of it. Entertainment and licensing remains a small segment within the company, but the potential is immense. In the U.S. and Canada, the company had sales of $2.23 billion in 2015 and an operating margin of 19.4% of net revenue. In the rest of the world, the numbers were $1.97 billion and 13%, respectively. Entertainment and licensing contributed only $245 million to the top line in 2015.
This revenue figure belies the importance of the segment, which grew 11% year-over-year. The operating margin here was 31.4%, which was up from 27.6% in 2014. If Hasbro can bring revenue for this segment closer to that of its U.S. and Canada businesses and maintain (or further expand) margins, we could be looking at a drastically different (and more profitable) company in the years to come.
Transformers has been a huge success at the box office, and there are three more films on the way. Creating similar franchises out of Hasbro's treasure trove of intellectual property should be a major focus for the CEO. "The entertainment and licensing segment is benefiting from our ongoing investment in storytelling through episodic television programming, including a multi-year digital streaming deal," he said. Perhaps the lack of information on the call doesn't match the effort being put into it on the business side, but hearing more about these plans would be nice.
Hasbro has done a good job returning capital to shareholders. In the past five years, it has reduced its shares outstanding from 146 million in 2010 to 127 million on a TTM basis. In 2015, it retired 1.25 million shares at an average price of $68.01 per share. With the shares currently trading at around $72, this doesn't appear to be a particularly good or bad use of shareholder capital, but a more robust dividend would allow it to better compete with Mattel and should positively affect the share price.
Hasbro's forward dividend yield is around 2.9%, compared with nearly 5% for Mattel. Part of this difference can be explained by Hasbro's superior stock performance -- a conservative payout ratio (around 50%) and a commitment to repurchase a significant number of shares also play a part.
Pushing the payout ratio up and using cash for dividends instead of buybacks could bring the yield to over 4%, making it an even more attractive investment to a broader swath of investors. The company is already growing revenue at a much faster pace than Mattel. Buybacks are great when the stock is clearly undervalued, but with Hasbro's price-to-earnings, price-to-book value, and price-to-sales ratios all above five-year averages, it doesn't appear that this is currently the case.
Hasbro has significant opportunities on the horizon, and its CEO has done well during his eight years in the corner office. A plan to turn around the girls segment, a vision to grow licensing, and a greater focus on dividends could send this company and its stock to even higher levels.