Hasbro: Toys Are Back (NASDAQ:HAS)


Hasbro (NASDAQ:HAS) is a name that we bought on the large decline and encouraged members in our chat service to do so, since shares were under $70 back in the spring. You see, the initial lockdown phase was incredibly detrimental. The consumer has started to come back on rather strong, at least compared to March-April. Stimulus has helped. More things are open. Operationally, Hasbro has made strategic moves and acquisitions. While there is a long way to go, we are pleased on this. Overall, the company has an innovative product line, including leadership in gaming, excellence in global ecommerce, and selective marketing campaigns drove meaningfully better performance in recent months. Building off recent growth in toys, games and digital, we look forward to a good holiday season. Live-action entertainment production is also returning, and this must be acknowledged. We remain bullish.

The company has just reported earnings and shares have moved lower, catching our eye. As such, we want to check in on the name, which we believe is still the top play in the toy space, to determine if we should stick with the name. We still believe the company is starting a new digital “toy cycle,” which should only improve as it aligns new launches with the return of new TV shows and movies. In this column, we will highlight a few key trends that you should be aware of and update our projections for 2020.

Revenue patterns are key

We came into this quarter expecting fully to see sales that would rise after acquisitions, though expected a still-pressured consumer to potentially weigh. In these uncertain times, the company will need to innovate and work to get its products into the hands of merchants and consumers moving forward. Amazon (AMZN) is one partner, but Amazon cuts into margins given the reach. Hasbro and the industry at large experienced an overall decline in consumer demand this year and are just starting to claw back.

The trend in sales here and from other companies having reported earnings reveals the consumer is still strong, but demand is largely still depressed. For the quarter, we expected revenues of $1.72-1.80 billion on the back of acquisitions. Our expectations were surpassed $200 million at the midpoint of our range. This is because revenues came in at $1.78 billion, which also surpassed consensus by $40 million. This was up 12% as reported, though if we back out the acquisitions and adjust for them, pro forma revenues were actually down 4%, reflecting a weaker economy.

We will discuss changes in sales on a pro forma basis, as they help hone in on performance of the name. Sales were up in the U.S. and Canada, but down internationally. In the U.S. and Canada, net revenues increased 9% to $977 million compared to $898 million last year, while operating profit expanded 36%. The segment reported an operating profit of $263 million, compared to an operating profit of $194 million.

One big negative was what we alluded to in the open. As things reopen and new TV shows and movies can come back, we will see promotions and licensing around these new films. Without those, the segment is hurting. The Entertainment and Licensing segment saw net revenues decrease 23% to $89 million, compared to $115 million in 2019.

Internationally, net revenues were $517 million, down 8% compared to $561 million in 2020. International segment revenues and operating profit declined, primarily driven by declines in Latin America. Revenues grew in the European region. The International segment operating profit declined as a result of the lower revenues and efforts to clear retail inventory in Latin America. This was partially offset by favorable product mix and cost management. There is still reason to be positive, however.

Bottom line strong

There is no question that the top line was hit hard, but we were expecting worse, particularly in the U.S. and Canada. With the much-better-than-expected overall sales, despite the declines, earnings were strong, and they increased from last year. Net earnings were $221 million, or $1.61 per share, versus pro forma net earnings of $216 million, or $1.57 per share, in 2019. We will point out that net earnings included $19.6 million after tax of purchased intangible amortization associated with the eOne acquisition, $13.7 million of incremental tax expense related to a change in the U.K. tax code and $4.7 million after tax of acquisition and related costs. Excluding these items, adjusted net earnings were $258.9 million, or $1.88 per share. That is strong.

Forward projections

A digital toy cycle is emerging, but the loss of new movies and TV is being felt. Hasbro does have a strong financial position with $1.13 billion in cash and only $20 million of short-term debt. Long-term debt is $778 million, but we expect the company to chip away at this debt over time. For 2020, the holiday quarter is going to be tough, but a stimulus bill before the holidays should help sales. We are targeting $5.3-5.45 billion in revenues, down from $5.4-5.6 billion. On the bottom line, we expect a reduced share count, similar expense growth and a tax reform benefit to drive earnings per share higher. Based on our revenue projections, we are eyeing earnings of $3.5-3.75. At the highest end of these expectations, we have a stock at $84 per share. This means the name is trading at 22 times 2020 earnings. Our early read for 2021 is $4.5 in EPS, which puts the stock at 21 times forward earnings. We like buying this. In our opinion, this is a but expensive, especially after the 11% return we have had in shares since our buy call.

Take-home

Hasbro is our top choice in this sector. Let the name cool off, then do some buying.

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Disclosure: I am/we are long HAS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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