Company Reports

Hasbro continues to hold a leading position in the nearly $30 billion North American retail toy industry (Circana), developing, manufacturing, and marketing well-known global brands that include Transformers, My Little Pony, and Nerf. The firm operates a relatively differentiated business model, thanks to its digital properties exposure, content creation ability, and key licensing arrangements, abilities can be better monetized with the divestiture of Entertainment One (EOne) entertainment-related assets complete. Production capabilities support Hasbro's multimedia presence, as does Discovery Family, a joint venture that brings Hasbro's brands to television, bolstering the firm's brand blueprint strategy. Hasbro has historically dominated the big-screen, building brand loyalty and generating new streams of revenue from its licensing businesses (like Star Wars and Marvel). We think Hasbro and the toy industry have modest runway for growth ahead through international growth (Asia-Pacific and emerging markets still provide longer-term growth potential through share gains) and acquisitions of strategic players that fit into Hasbro's portfolio (for example, D&D Beyond).

Now liberated from the eOne entertainment business, narrow-moat Hasbro’s profitability swung significantly higher. In the first quarter, Hasbro delivered adjusted operating margin of 19.6%, more than 1,500 basis points higher than last year, which was saddled with excess inventory markdowns. Cost savings from the firm’s $750 million reduction plan are coming faster than we anticipated, with savings from operating expenses contributing to more than half the improvement. Sales of $757 million were in line with our forecast, although Wizards of the Coast and digital (WOTC) sales were a touch better than we expected, up 7%, while consumer products were a bit weaker, down 21%, suffering from lower consumer demand and the out license of lower profitability brands. Working capital is much healthier, with inventory flat sequentially but down 53% year over year, as Hasbro cleans house in consumer products. We have long held that a refocus on core competencies would provide a positive step change in profitability, which is finally coming to fruition.

Narrow-moat Hasbro’s shares have struggled to gain footing in 2024, trading flat through the end of February and underperforming the Morningstar Global Markets Index’s return of 5%. We view shares as significantly undervalued relative to our $84 fair value estimate and contend the weak performance is reflective of a business in transition that has faced idiosyncratic risks in 2023, such as slower entertainment growth from the writers' strike and the overhang from the pending sale of the majority of the EOne production business (completed December 2023). With Hasbro now largely liberated from the low-margin EOne entertainment segment, we expect solid lift from an improved revenue mix, with the high-margin Wizards of the Coast and digital segment set to represent around 35% of sales in 2024 (from 29% in 2023).

Hasbro continues to hold a leading position in the nearly $30 billion North American retail toy industry (Circana), developing, manufacturing, and marketing well-known global brands that include Transformers, My Little Pony, and Nerf. The firm operates a relatively differentiated business model, thanks to its digital properties exposure, content creation ability, and key licensing arrangements, abilities can be better monetized with the divestiture of Entertainment One (EOne) entertainment-related assets complete. Production capabilities support Hasbro's multimedia presence, as does Discovery Family, a joint venture that brings Hasbro's brands to television, bolstering the firm's brand blueprint strategy. Hasbro has historically dominated the big-screen, building brand loyalty and generating new streams of revenue from its licensing businesses (like Star Wars and Marvel). We think Hasbro and the toy industry have modest runway for growth ahead through international growth (Asia-Pacific and emerging markets still provide longer-term growth potential through share gains) and acquisitions of strategic players that fit into Hasbro's portfolio (most recently D&D Beyond).

Weaker-than-expected fourth-quarter sales and profits along with frustration around the duration of narrow-moat Hasbro’s turnaround sent shares down at a mid-single-digit clip on Feb. 13. But we view the reaction to Hasbro’s initial 2024 outlook—that calls for a fourth year of top-line declines—as relatively subdued, thanks to turnaround efforts that are set to benefit the intrinsic value of the firm over the longer term. We plan to lower our $88 fair value estimate by a mid-single-digit rate to account for near-term headwinds but still view shares as attractive given near-term profit gain visibility.

Sales for the toy industry have struggled in 2023, with Circana reporting U.S. toy sales down 8% through September. When narrow-moat Hasbro reported its third-quarter results (October), the lack of demand was acute, with companywide sales down 10% and an updated full-year outlook calling for the top line to shrink 13%-15%. Although Hasbro was not alone in experiencing weakness across the consumer discretionary landscape, it was disproportionately affected by an entertainment business that faced a writer and actor strike and a consumer product business that was exiting underperforming lines and rightsizing inventory. But customer takeaway has continued to languish, with U.S. toy sales declining 10% in November (Circana/Wall Street Journal), prompting Hasbro to take more extreme measures to adjust its cost base to the evolving environment. The implication of Hasbro’s additional restructuring implies visibility for demand remains weak, sending shares 5% lower in aftermarket trading.

Hasbro continues to hold a leading position in the nearly $30 billion North American toy industry (Circana), developing, manufacturing, and marketing well-known global brands that include Transformers, My Little Pony, and Nerf. The firm operates a relatively differentiated business model, thanks to its digital properties exposure, content creation ability, and key licensing arrangements, abilities that were augemented with soon-to-be-divested Entertainment One (EOne) entertainment-related assets. Production capabilities support Hasbro's multimedia presence, as does Discovery Family, a joint venture that brings Hasbro's brands to television, bolstering the firm's brand blueprint strategy. Hasbro has historically dominated the big-screen, building brand loyalty and generating new streams of revenue from its licensing businesses (like Star Wars and Marvel). We think Hasbro and the toy industry have modest runway for growth ahead through international growth (Asia-Pacific and emerging markets still provide longer-term growth potential through share gains) and acquisitions of strategic players that fit into Hasbro's portfolio (most recently D&D Beyond).

Narrow-moat Hasbro put up dismal performance in its consumer products division during its fiscal third quarter, displaying a disconnect with consumer interest on top of softening industrywide demand, sending shares tumbling more than 10%. Total sales were nearly $200 million short of our estimate, at $1.5 billion, with the CP segment accounting for the miss, down 18%, affected by the pruning of underperforming brands and a softening discretionary demand environment. The upcoming quarter appears to be in for the same fate (high-teen sales declines), as Hasbro reduced its full-year 2023 CP segment sales forecast to include a mid- to high-teen decline, down from a mid-single digit decline prior. We surmise performance in the CP segment was the impetus in the firm lowering its enterprise level operating margin outlook to 13%-13.5%, materially below the 16% we had forecast previously, given it may take more promotional effort to facilitate conversion. Wizards of the Coast performed better than we expected with sales rising 40%, and entertainment continued to suffer from the writer's strike, with revenues falling 42%.

Hasbro continues to hold a leading position in the nearly $30 billion North American toy industry (Circana), developing, manufacturing, and marketing well-known global brands that include Transformers, My Little Pony, and Nerf. The firm operates a relatively differentiated business model, thanks to its digital properties exposure, content creation ability, and key licensing arrangements, abilities that were augemented with soon-to-be-divested Entertainment One (EOne). Additionally, production capabilities support Hasbro's multimedia presence, as does Discovery Family, a joint venture that brings Hasbro's brands to television, bolstering the firm's brand blueprint strategy. Furthermore, Hasbro has historically dominated the big-screen, building brand loyalty and generating new streams of revenue from its licensing businesses (like Star Wars and Marvel). We think Hasbro and the toy industry have a decent runway for growth ahead through international growth (Asia-Pacific and emerging markets still provide longer-term growth potential through share gains) and acquisitions of strategic players that fit into Hasbro's portfolio (most recently D&D Beyond).

With narrow-moat Hasbro's pending sale of eOne's film and TV lines to Lionsgate, we expect the firm will return to an asset-light state that sets it on a course for higher operating margins ahead. It expects $375 million in cash proceeds from the transaction (to close in 2023) to pay down $400 million in debt, which we think will return Hasbro to net debt/EBITDA below 3 times, a metric untouched since prior to the eOne tie up (2019). The loss of 85% of entertainment sales affects our valuation negatively, but we think the sale of the lowest margin business could result in a roughly 200-basis-point lift to our operating margin forecast, with our terminal forecast rising to more than 23% from 21.6% before the earnings call. While Hasbro has yet to guide on the transaction's impact, moving cost of goods sold and program production costs back toward pre-eOne levels and also incorporating an updated 2023 outlook renders a low-single-digit decline to our $104 fair value estimate. Even still, shares remain attractive.

Hasbro continues to hold a leading position in the more than $30 billion North American toy industry (Euromonitor), developing, manufacturing, and marketing well-known global brands that include Transformers, My Little Pony, and Nerf. The firm operates a relatively differentiated business model, thanks to its digital properties exposure, content creation ability, and key licensing arrangements, abilities that were elevated with the 2019 tie-up of Entertainment One (EOne). Additionally, production capabilities support Hasbro's multimedia presence, as does Discovery Family, a joint venture that brings Hasbro's brands to television, bolstering the firm's brand blueprint strategy. Furthermore, Hasbro has historically dominated the big-screen, building brand loyalty and generating new streams of revenue from its licensing businesses (like Star Wars and Marvel). We think Hasbro and the toy industry have a decent runway for growth ahead through international growth (Asia-Pacific and emerging markets still provide longer-term growth potential through share gains) and acquisitions of strategic players that fit into Hasbro's portfolio (most recently D&D Beyond).

Weak holiday sales led to soft expectations for toy companies in the first quarter, but narrow-moat Hasbro was able to best a depressed outlook. First-quarter sales of $1 billion fell 14%, ahead of our 20% forecast decline. The outperformance stemmed from strong sales in the Wizards of the Coast and digital segment, which grew 12% thanks to a 16% increase in Magic: The Gathering and 13% tick up in Dungeons & Dragons. Like at narrow-moat peer Mattel, Hasbro’s consumer products sales struggled, with net revenue declining 23% (to $520 million) as retailers clear excess holiday inventory. Although entertainment segment sales fell 19%, we attribute some of the contraction to the timing of releases but fail to fret over category performance given the ongoing sale of the line, which we expect to conclude in short order. While the firm’s operating margin was depressed at 4% during the period, we are confident Hasbro will be able to better leverage fixed costs as sales rise over the rest of 2023.

Hasbro continues to hold a leadership position in the more than $30 billion North American toy industry (Euromonitor), developing, manufacturing, and marketing well-known global brands that include Transformers, My Little Pony, and Nerf. The firm operates a relatively differentiated business model, thanks to its digital properties exposure, content creation ability, and key licensing arrangements, abilities that have been elevated with the 2019 tie-up of Entertainment One (EOne). Additionally, production capabilities support Hasbro's multimedia presence, as does Discovery Family, a joint venture with Discovery that brings Hasbro's brands to television, bolstering the firm's brand blueprint strategy. Furthermore, Hasbro has historically dominated the big-screen arena, building brand loyalty and generating new streams of revenue from its licensing businesses (like Star Wars and Marvel). We think Hasbro and the toy industry have a decent runway for growth ahead through international growth (Asia-Pacific and emerging markets still provide longer-term growth potential through share gains) and acquisitions of small, strategic players that fit into Hasbro's portfolio (most recently D&D Beyond).

We plan to lower our $114 per share fair value estimate for narrow-moat Hasbro by around $10 after incorporating weak fourth-quarter sales and a 2023 revenue outlook that is short of our preprint projections. We still view shares as attractive at a more than 40% discount to our updated value. Hasbro previously announced that fourth-quarter sales were set to fall 17% to $1.68 billion, hurt by soft results in the consumer products (down 26%) and entertainment (down 12%) segments, which together comprised 80% of period net sales. Impressively, the adjusted operating margin of 16% printed more than 500 basis points of expansion, benefiting from mix of sales and cost-savings initiatives.

Narrow-moat Hasbro released preliminary fourth-quarter results, offering a peek into a disappointing holiday performance. The update is likely to reduce our $114 fair value estimate by a low-single-digit percentage, but shares remain significantly undervalued.

Narrow-moat Hasbro disclosed its intent to put the acquired TV and film business from Entertainment One up for sale. While there are no specifically interested parties disclosed, we believe the carve out could fetch $800 million for Hasbro, given sales attributable to the segment should generate less than $1 billion in 2022 with a low-teens EBITDA margin. Admittedly, this would be contingent on Hasbro selling the business at around an 8 times EBITDA multiple, which could be tricky if capital market conditions become less favorable. But even a 5 times EBITDA multiple would represent $550 million in cash, helping Hasbro facilitate a faster path to its leverage target (gross debt/EBITDA of 2-2.5 times from around 3 at year-end). In retrospect, with the prior sale of the music business (for $385 million in 2021) and the divestiture of the TV and film assets, the EOne transaction was largely a noisy and expensive acquisition to bolt on additional family brands like Peppa Pig and PJ Masks. We think the sale offers solid strategic direction and maintain our Standard capital allocation rating.

Hasbro continues to hold a leadership position in the nearly $40 billion domestic toy industry (NPD), developing, manufacturing, and marketing well-known global brands that include Transformers, My Little Pony, and Nerf. The firm operates a relatively differentiated business model, thanks to its digital properties exposure, content creation ability, and key licensing arrangements, factors that have been enhanced with the 2019 tie-up of Entertainment One (EOne). Additionally, production capabilities support Hasbro's multimedia presence, as does Discovery Family, a joint venture with Discovery that brings Hasbro's brands to television, bolstering the firm's brand blueprint strategy. Furthermore, Hasbro has historically dominated the big-screen arena, building brand loyalty and generating new streams of revenue from its licensing businesses (like Star Wars and Marvel). We think Hasbro and the toy industry have a decent runway for growth ahead through international growth (Asia-Pacific and emerging markets still provide longer-term growth potential through share gains) and acquisitions of small, strategic players that fit into Hasbro's portfolio (most recently D&D Beyond).

Despite weak third-quarter results, we plan to raise our $104 fair value estimate for narrow-moat Hasbro by a high-single-digit rate after updating our model for a promising updated long-term outlook offered at the firm’s Oct. 4 investor day. We think the market continues to focus on near-term consumer uncertainty and is discounting Hasbro’s ability to shift the mix of its portfolio over the next few years to capture structurally higher margins.

We don’t plan any material change to our $104 fair value estimate for narrow-moat Hasbro after digesting the opportunities and risks articulated at its investor day. The firm laid out a robust five-year outlook, calling for mid-single-digit top-line growth that leads to more than $8.5 billion in sales in 2027, which is above our $7.9 billion estimate. The differential stems from gaming revenue that is set to rise at high-single to low-double-digit rates through 2024 before accelerating as near-term investments pay off. We had forecast Wizards of the Coast, or WOTC, and digital games growing at mid-single-digit rates over time, so we now plan to bump them up. Impressively, Hasbro lifted its long-term operating margin prognosis to above 20%, versus the 16%-plus it aimed for prior, helped by a mix shift in product sales and the licensing away of underperforming businesses. We plan to nudge our 18%-plus long-term operating margin forecast north but believe ongoing investment in innovation across the brand blueprint could intermittently bound potential upside in profitability. Hasbro also offered an expense reduction plan of $250 million-$300 million in annual run rate savings (5.5% of total costs). However, this plan comes at a cost of around $200 million between 2022-24, so we are unlikely to see progress until 2024.

Hasbro continues to hold a leadership position in the nearly $40 billion domestic toy industry (NPD), developing, manufacturing, and marketing global brands that include Transformers, My Little Pony, and Nerf. The firm operates a relatively differentiated business model, thanks to its digital properties exposure, content creation ability, and key licensing arrangements, factors that have been enhanced with the Entertainment One (EOne) tie-up. Additionally, production capabilities support Hasbro's multimedia presence, as does Discovery Family, a joint venture with Discovery that brings Hasbro's brands to television, bolstering the firm's brand blueprint strategy. Furthermore, Hasbro has historically dominated the big-screen arena, building brand loyalty and generating new streams of revenue from its licensing businesses (like Star Wars and Marvel). We think Hasbro and the toy industry have a decent runway for growth ahead through international growth (Asia-Pacific and emerging markets still provide longer-term growth potential through share gains) and acquisitions of small, strategic players that fit into Hasbro's portfolio (most recently D&D Beyond).