Hasbro, Inc.’s (HAS - Free Report) unremitting efforts to develop its product line through various partnerships and innovations have been helping the company gain market share amid all operating difficulties. The company’s focus on growing its brands beyond familiar itineraries to the emerging markets is also encouraging.
However, there is no denial of the fact that the company has been losing sheen of late. Not exempting the current fate of toymakers in the United States, Hasbro is plagued with declining consumer demand and sales crunch. A look at the toymaker’s price trend reveals that the stock has had an unimpressive run on the bourses in the past year. Shares of the company have lost 18.6% against the industry’s rally of 20.1% in the same time frame. This reflects investors’ pessimism on the stock, given uncertain sales environment. Also, earnings estimates for the current quarter and year have remained stable over the past month, reflecting analysts’ doubt surrounding the company’s future earnings potential.
Efforts to Revive Sales, Assessing the Impact of Toys ‘R’ US
The U.S. toy industry suffered a heavy blow when the country’s largest independent toy seller, Toys "R" Us filed for bankruptcy last September. Adding a nail to the coffin, Toys “R” US said that it is liquidating its entire U.S. operation, leaving toymakers like Hasbro, Mattel (MAT - Free Report) and JAKK Pacific (JAKK - Free Report) in a soup as these used to derive a considerable portion of their revenues from sales to Toys "R" Us. Although retailers like Amazon (AMZN - Free Report) came to the rescue of these toymakers, they don’t have shelf spaces as big as Toys “R” Us, which is a concern.
We appreciate Hasbro’s prescience in rightly gauging the impact of Toys “R” Us bankruptcy ahead of peers. The company has been testing waters with new distribution methods, development of digital-play components and exploration of ventures with other industries. The company has diverse retail channels such as drugstores and dollar chains, and big mass-market retail. It also has a robust online strategy in place that includes interactive content and virtual immersive experiences. It signed a five-year agreement with Paramount to enhance storytelling and content capabilities. The company also invested in Boulder Media, its animation studio, and cultivated digital capacities to drive sales.
Over the past month, Hasbro announced several partnership and innovative ventures, all of which indicate the company’s efforts to diversify revenues beyond retail sales, and expand customer base. After partnering with Quidd and acquiring Power Rangers, the company declared its multi-year partnership with the comedy duo Rhett & Link, which is expected to boost the popularity of Hasbro’s games.
Growth in Emerging Markets Bodes Well
In addition to growing brands, and leveraging opportunistic toy lines and licenses, Hasbro seeks to grow its international business by expanding into emerging markets in Eastern Europe, Asia,and Latin and South America. Emerging markets offer greater opportunities for revenue growth than developed markets and have been contributing to a significant share of Hasbro’s revenues, given its investments in advertising, and other brand-building efforts.
In fact, despite difficult operating conditions in some key markets, Hasbro’s emerging market revenues (excluding Fx impact) have been increasing consistently since 2012, a trend that is expected to continue in 2018 as well. Over the next few years, Hasbro expects emerging markets to grow in double digits backed by innovation in products, entertainment and market-share gains. Also, developed markets can grow from low to mid-single digits, as is expected by the toymaker.
Toys ‘R’ Us Woes Likely to Linger
Well, while we appreciate Hasbro’s relentless efforts to chalk out counter strategies and adapt to changing demand conditions, we remain apprehensive about the fact that Hasbro has not been able to revive sales yet. In fact, owing to the liquidation, sales of Hasbro across every brand declined in the first quarter of 2018. We believe that the effect of this liquidation will linger further, as Toys “R” Us was the last major chain fully dedicated to selling toys.
Rising Costs Affect Profits
Hasbro has been heavily relying on partnerships, mergers, product innovation and digital invention to revive sales. While such initiatives may aid profits in the long run, related costs would hurt the company in the near term. As it is, selling, distribution and administration expenses, as a percentage of net revenues, increased to 45.8% in the first quarter of 2018 from 28.7% in the prior-year quarter. These costs in turn are hurting the company’s earnings. Subsequently, per the consensus estimate, earningsare likely to fall 11.5% in 2018 from the previous year.
Currently, Hasbro carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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