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Hasbro Misses Earnings and Revs in 2Q

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Hasbro Inc.’s (HAS - Free Report) second-quarter 2013 adjusted earnings per share of 29 cents fell short of the Zacks Consensus Estimate of 35 cents by 17.1% and the year-ago level by 12.1%. A sluggish top line combined with operating margin pressure resulted in the year-over-year decline in earnings.

On a reported basis, including restructuring charges and pension settlement charges, the company posted earnings per share of 28 cents, down 15.2% year over year.

Hasbro’s net revenue of $766.3 million declined 6% from the year-ago quarter and missed the Zacks Consensus Estimate of $808.0 million by 5.2% mainly hurt by persistent weakness in the Boys Category which accounts for about one third of total revenue. Revenues include a positive $1.0 million impact from currency translation.

Behind the Headline Numbers

Hasbro’s product segments comprise Girls, Games, Boys and Preschool categories. Games category revenues grew 19% to $255.4 million. Magic: The Gathering, and Monopoly performed well in the reported quarter.

The Girls category surged 43.0% to $149.4 million year over year. Products such as The Furby and My Little Pony supported revenue growth.

The Preschool category saw a 4% increase in revenues to $107.8 million driven by Play-Doh, Playskool Heroes brands and Sesame Street products.

Despite decent performance of the Nerf products, the Boys category plunged 35% to $253.7 million due to tough year-over-year comparisons as major motion pictures were released in the comparable period of last year.

Segment-wise, net revenue from the U.S. and Canada segments declined 4% year over year to $389.2 million. The segment’s operating profit declined 3.0% to $59.0 million.

Despite a favorable foreign currency translation, net revenues at the International segment fell 6.0% $340.2 million. Revenues in the International segment reflect a headwind from Asia-Pacific (down 10%) and Europe (down 6%) while Latin America managed to post just flat revenues. The segment’s operating profit was down 50% to $14.8 million from the year-ago level.

Entertainment and Licensing segment revenues slipped 18.0% year over year to $35.3 million mainly due to tough comparison. The year-ago quarter contained an increased mix of revenues from television programming sales for digital distribution. The segment’s operating profit plummeted 55% to $3.7 million on a year-over-year basis.

Hasbro’s cost of sales ratio increased 70 basis points (bps). Its selling-distribution-administration expenses ratio escalated 190 bps while there was a 210 bps decline in royalty expenses and a 20 bps dip in advertising expenses. Product development ratio was flat. All these culminated to an operating margin decline of 60 bps to 10%.

Share Repurchase

During the second quarter 2013, Hasbro bought back 0.77 million shares of common stock for $35.4 million leaving $71.8 million available for further repurchase.  

Our Take

After just one top-line beat in the first quarter following six consecutive quarters of missing, Hasbro again disappointed this time. The Boys products segment, which was once a powerhouse brand of the company, has been a laggard for quite some time.

The company is in a restructuring mode, which involves several brand building and cost saving initiatives. But we are yet to see their impact on the earnings front. We would prefer to remain on the sidelines at the current level and wait until there is further clarity on the aforesaid initiatives. Hasbro currently carries a Zacks Rank #3 (Hold).

As a point of reference, two renowned toy companies, Mattel Inc. (MAT - Free Report) and JAKKS Pacific Inc. (JAKK - Free Report) which reported last week, missed on both the top- and bottom-line estimates in the second quarter.

However, another toy company, LeapFrog Enterprises Inc. , is likely to report its earnings on Aug 1. Its expected surprise prediction or ESP (Read: Zacks Earnings ESP: A Better Method) of +12.50% and a Zacks Rank #2 (Buy) makes us look forward to an earnings beat this quarter.

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