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Tepid 4Q for Hasbro; Hikes Dividend

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Hasbro Inc.’s (HAS - Free Report) fourth-quarter 2012 adjusted earnings per share of $1.20 were in line with the Zacks Consensus Estimate and increased 13.2% year over year.

However, on a reported basis, including restructuring charges, earnings per share were 99 cents, down 6.6% from the year-earlier quarter.

Hasbro’s net revenues of $1.28 billion fell 3.8% from the year-ago quarter and missed the Zacks Consensus Estimate by 7.2%. Revenues include a negative $8.2 million impact from currency translation. The Boys and Preschool product categories were dampeners to quarterly revenues.

Lower holiday product sales in the U.S. and some international markets were also responsible for the lower sales. However, the company recorded higher adjusted earnings on the back of efficient cost management.

Hasbro continues to return value to investors. In the fourth quarter, Hasbro raised its quarterly cash dividend by 11% to 40 cents per share, payable in May 2013.

Behind the Headline Numbers

Hasbro experienced worldwide net revenue growth in two of its four major product categories; Girls & Games.

The Girls category surged 17.0% to $292.6 million year over year. The Furby, My Little Pony and One Direction products supported revenue growth. Revenues at the games category grew 25% to $428.6 million. The Boys Action Gaming product line and Angry Birds Star Wars performed well in the reported quarter.

Boys and Preschool categories fell 23% to $414.1 million and 13% to $148.3 million, respectively. In the Boys category, the Transformers lagged a bit. On the other hand, the Preschool category experienced difficult comparisons due to the initial launch of Sesame Street products in 2011.

Geographically, net revenues from the U.S. and Canada segments inched up 2% year over year to $606.2 million, reflecting growth in the Girls and Games categories, partially offset by sluggish performance in Boys and Preschool categories.

Though the revenue increase was only marginal, the segment’s operating profit registered a huge increase of 76.0% to $89.5 million driven by improved product mix as well as inventory management.

Net revenues at the International segment dipped 9% year over year to $607.8 million. Revenues in the International segment reflect a tailwind from Latin America (flat year over) but a headwind from Europe (down 13.0%) and Asia-Pacific (down 1.0%).

The segment’s operating profit was $105.3 million, down 24.0% year over year due to an unfavorable mix as the low-margin emerging markets did better than the high-margin developed markets.

Entertainment and Licensing segment revenues grew 3% year over year to $65.8 million. The sale of television programming in all formats in the U.S. and abroad drove segment revenues while lower movie-related revenues acted as an offsetting factor. The segment’s operating profit witnessed an increase of 23% to $26.5 million on a year-over-year basis driven by higher revenues and improved expense leverage.

As a percentage of net revenues, Hasbro’s royalty expenses fell 90 basis points (bps), and cost of sales dipped 430 bps while product development, advertising and selling-distribution expenses grew 100 bps, 90 bps and 390 bps, respectively. All these culminated to an operating margin contraction of 70 bps to 15.6%.

Full-Year Update

In 2012, adjusted earnings were $2.81 per share, up 2.6% year over year mainly due to cost curtailment. On a reported basis, including restructuring charges, Hasbro’s earnings were $2.55 per share, considerably down from the year-ago earnings of $2.82 per share.

The company’s net sales were $4.09 billion, down 4.7% year over year. Excluding a $98.5 million negative impact from foreign exchange, full year 2012 revenues declined 2%. The decline was mainly due to underperformance in the developed markets.

Cost Savings

In the fourth quarter, Hasbro adopted a program to save up to $100 million annually by 2015. Its cost saving measures include a 10% reduction in workforce, facility consolidation and the implementation of process improvements.

Share Repurchase & Dividend Hike

Hasbro repurchased a total of 2.7 million shares during 2012 at an average price of $37.11 per share. At year end, $127.3 million remained available in the current share repurchase authorization.

Hasbro raised its quarterly cash dividend by 11% to 40 cents per share, which will be payable on May 15, 2013 to shareholders of record as of May 1, 2013.

Our Take

Hasbro currently carries a Zacks Rank #3 (Hold). The comapny has been reeling under pressure for the last few quarters mainly in terms of its revenues. However, we have a favorable view of the company’s persistent efforts to curtail costs and at least score on earnings amid a sluggish operating environment. Persistent share buyback activity and a dividend hike also come across as a ray of hope for investors.

The company is on a restructuring mode involving several brand building and cost saving initiatives. From the inventory point of view also, Hasbro remains well-positioned at the start of 2013. However, we would still prefer to remain on the sidelines at the current level until we see any definite sign of materialization of aforesaid initiatives.

As a point of reference, one of the major toy companies, Mattel Inc. (MAT - Free Report) missed on both lines in its fourth quarter. However, some Zacks Rank #1 (Strong Buy) toy companies that warrant a look at present include LeapFrog Enterprises Inc. and Nintendo Co. Ltd. (NTDOY - Free Report) .  

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