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Hasbro Inc. (HAS - Analyst Report) has reported second quarter 2012 adjusted earnings per share of 33 cents, flat year over year. The quarter’s earnings surpassed the Zacks Consensus Estimate of 24 cents. On a GAAP basis, earnings declined 25.3% year over year to $43.4 million in the quarter.
 
Hasbro’s net revenue of $811.5 million fell 10.7% from the year-ago quarter and missed the Zacks Consensus Estimate of $829.0 million. Foreign exchange had an unfavorable impact of $34.4 million.  The Preschool market was the main savior of quarterly revenue.

Hasbro continued to return value to investors in the form of share repurchases and dividend distribution.

Performance Highlights

Hasbro experienced worldwide net revenue growth in only one of its four major product categories -- Preschool -- which increased 6% to $103.4 million, on an annualized basis. Boys, Girls and Games categories fell 16% to $389.1 million, 13% to $104.2 million and 8% to $213.8 million, respectively.

The Transformers and Beyblade brands in the Boys category began seeing instability from the first quarter. After outperforming for several quarters, the brands were flat year over year in the preceding quarter and were the dampeners this quarter.

Geographically, net revenue from the U.S. and Canada segment declined 19% year over year to $406.6 million, while its operating profit registered a growth of 6% to $60.9 million. A constructive product mix and higher quality inventory aided this profit growth.

Net revenue at the International segment slid 4% year over year to $360.5 million. However, excluding the adverse effect of currency translation, revenue grew 5% in the quarter. Revenue in the International segment reveals a tailwind from Latin America but headwind from Europe and Asia Pacific. The segment’s operating profit was $29.9 million, down 12% year over year.

The Entertainment and Licensing segment experienced a 59% year-over-year surge in sales to $43.2 million. The segment’s operating profit showed an increment to $8.2 million from $0.6 million recorded in the year-ago period.

As a percentage of net revenue, we noticed a 30 basis points (bps) decline in Hasbro’s royalty expenses to 8.7% and 310 bps reduction in cost of sales to 38.5%. Product development expenses were 6.2%, up 20 bps year over year, advertising expenses increased 80 bps to 9.8% and selling, distribution and administration expenses nudged up 10 bps to 23.6% as a percentage of net revenue. All these culminated to an operating margin improvement of 170 bps to 10.6%.

Financials

At quarter end, total assets were $4.01 billion compared with $3.94 billion at the end of the year-earlier quarter. Hasbro’s long-term debt was $1.40 billion, almost flat year over year.

Hasbro repurchased a total of 139,734 shares during the quarter at a total cost of $4.9 million. At quarter-end, $217.3 million remained available in the current share repurchase authorization. The company spent $46.7 million in cash dividends.

Outlook

Management expects year-over-year growth in revenue and earnings per share for 2012 excluding the impact of foreign currency translation. Management also expects its fourth quarter revenue and earnings per share to be higher than the third quarter.

Our Take

Hasbro’s strong product line-up slated for the second half of the year, strategic tie-ups, and its growing presence in emerging geographical regions bode well for future growth. The return of operating margin growth in the U.S. and Canada was a pleasant surprise in the quarter.

Management’s plan to shift shipments nearer to the peak buying season in the third and fourth quarters in the U.S. should prove beneficial. We heard a positive tone from Hasbro regarding its Holiday initiatives.

However, we prefer to remain on sidelines at the current level until we see any definite sign of materialization of aforesaid initiatives. Hasbro currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

We are maintaining our long-term Neutral recommendation on the stock. As a point of reference, one of Hasbro’s major peers Mattel Inc. (MAT - Analyst Report) beat the Zacks Consensus earnings per share and revenue estimates in its second quarter 2012.

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