Hasbro Earnings: Dismal Consumer Products Demand Crushes Sales and Profit Outlook

Narrow-moat Hasbro HAS 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%.

In response to the near-term headwinds Hasbro is facing, we are lowering our $97 fair value estimate by a high-single-digit rate. Although we view shares as extremely undervalued, we caution investors that it may take some time to work through weakness in the CP portfolio and see upside in profit surface. On a positive note, we still expect Hasbro’s divestiture of entertainment components to Lionsgate to lift operating margins given the 10% margin line that the segment delivered in 2022. This mix shift is the linchpin in our forecast for Hasbro to reach a 21% operating margin over the next five years, even with only flat average sales and modest incremental cost savings gains.