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Hasbro Declines 2.1% in 1 Year: Can Innovation Revive Sales?

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Hasbro, Inc. (HAS - Free Report) continues to make efforts to develop the product line through various partnerships and innovations. Its focus on growing 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 this 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 2.1% compared with the industry’s decline of 17.9% in the same time frame.

Also, earnings estimates for the current year have been revised downward by 11.8% over the past two months, reflecting analysts’ concern surrounding the company’s earning potential.

 

Hasbro Strong on Product Innovation & Expansion

The U.S. toy industry suffered a heavy blow when the country’s largest independent toy seller, Toys "R" Us liquidated operations in the country. This left toymakers like Hasbro, Mattel (MAT - Free Report) and JAKKS Pacific (JAKK - Free Report) in a mess as they derived a considerable portion of revenues from sales to Toys "R" Us. Although retailers like Amazon (AMZN - Free Report) came to the rescue, 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. It 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.

Over the past few months, Hasbro has announced several partnerships and innovative ventures, all of which shows its efforts to diversify revenues beyond retail sales and expand customer base.

In addition to growing brands and leveraging opportunistic toy lines and licenses, the company seeks to grow the international business by expanding into emerging markets. In fact, despite difficult operating conditions in some key markets, Hasbro’s emerging brands’ revenues have increased consistently since 2012.

In the fourth quarter of 2018, emerging brands revenues increased 5% year over year. We expect the overall positive scenario to continue in 2019. Over the next few years, Hasbro expects emerging markets to grow in double digits, backed by innovation in products, entertainment and market share gains.

Concerns

While Hasbro’s revenue-building efforts may aid profits in the long run, related costs would hurt in the near term. The company’s cost of sales, as a percentage of net revenues, increased 140 bps to 40.4% in 2018. Operating profit margin contracted to 7.2% in 2018 from 15.6% in 2017.

Meanwhile, Hasbro’s net revenues in 2018 declined 12% year over year primarily due to the Toys “R” Us liquidation. It also led to a sales slump across the majority of brands under Hasbro. We believe that the effect of this liquidation will linger and the overall industry is expected to grow at a much slower pace for quite some time.

Hasbro currently 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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