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Hasbro Inc.’s (HAS - Free Report) third-quarter 2013 adjusted earnings per share of $1.31 came ahead of the Zacks Consensus Estimate of $1.27 by 3.2% and the year-ago level of $1.24 per share by 5.6%. Better-than-expected top line growth combined with operating margin expansion led to the earnings beat.

On a reported basis, including favorable tax adjustments, restructuring charges and partial pension settlement charges, the company posted earnings per share of $1.46, up 17.7% year over year.

Hasbro’s net revenue of $1.37 billion grew 2% from the year-ago quarter and beat the Zacks Consensus Estimate of $1.34 billion by 2.2%. Growth in the Girls and Games categories somewhat offset by persistent weakness in the Boys Category, which accounts for about one third of total revenue. Revenues include a positive $3.8 million impact from currency translation.

Behind the Headline Numbers

Hasbro’s product segments comprise Girls, Games, Boys and Preschool categories. Games category revenues grew 6% to $387.4 million. Brands like Magic: The Gathering, Jenga and Elefun & Friends performed well in the reported quarter.

The Girls category surged 29.0% year over year to $388.7 million. Products such as The Furby and My Little Pony supported revenue growth.

Preschool category revenues dipped 2% to $202.2 million. Higher sales of Play-Doh Sesame Street and Transformers Rescue Bots products could not offset the downward drift in category sales.

Despite decent performance of the Transformers and Star Wars products, the Boys category plunged 17% to $392.0 million as quite a few brands including Marvel and Beyblade continued to face tough year-over-year comparison.

Segment-wise, net revenue from the U.S. and Canada segments declined 5% year over year to $735.6 million owing to reduced sales in the Boys and Preschool categories. The segment’s operating profit also declined 5.0% to $147.0 million.

Despite favorable foreign currency translation, net revenue at the International segment grew 11% $582.7 million. Revenues in the International segment reflect a tailwind from all three segments -- Asia-Pacific (up 17%), Europe (up 9%) and Latin America (14%). The segment’s operating profit was up 24% to $105.7 million from the year-ago level.

Entertainment and Licensing segment revenues increased 13.0% year over year to $48.6 million, driven by increased entertainment revenues as well as addition of Backflip Studios to the segment. The segment’s operating profit plummeted 29% to $7.6 million on a year-over-year basis.

Hasbro’s cost of sales ratio declined 210 basis points (bps). Its selling-distribution-administration expenses ratio escalated 90 bps while there was a 30 bps decline in royalty expenses. Advertising expenses were flat year over year. Product development ratio was up 70 bps. All these led to an operating margin expansion of 40 bps to 19%.

Share Repurchase

During the third quarter of 2013, Hasbro bought back 643,559 shares of common stock for $30.0 million. Presently, shares worth $541.8 million remain available for further repurchase.  

Our Take

Hasbro managed to beat both top and bottom line estimates after posting inconsistent results over the past few quarters. Sales growth in all three geographic segments of the International division deserves a special mention. The company’s restructuring initiatives also seem to have paid off.

However, the Boys products segment, which was once a powerhouse brand of the company has been a laggard for quite some time. The performance of the preschool category was also not up to the mark. Faltering consumer confidence prior to the all important holidays season is also another cause of concern.  

We would prefer to remain on the sidelines at the current level till there is further clarity on the aforesaid issues. Hasbro currently carries a Zacks Rank #4 (Sell).

One of Hasbro’s peers, Mattel Inc. (MAT - Free Report) , which reported last week, beat both the top- and bottom-line estimates in the third quarter.

Two other toy companies, Jakks Pacific Inc. (JAKK - Free Report) and LeapFrog Enterprises Inc. are likely to report its earnings on Oct 23 and Nov 4, respectively.

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