Toys 'R Us Headwinds Largely Subside at Hasbro

With the domestic Toys ‘R Us liquidation largely in the rearview mirror,

That said, after three consecutive quarters of sales declines, we expect Hasbro to return to positive growth ahead, and forecast second-half sales rising around 2%. Given that inventory levels have already been reduced at existing retailers and are in good condition, we think Hasbro is set up for a better 2018 holiday season than last year.

We don’t plan any material change to our $95 fair value estimate and view shares as modestly overvalued (following a double-digit gain post quarterly results), trading at more than 20 times our 2018 estimate with mid-single-digit EPS growth embedded in our five-year outlook (falling 3% in 2018 hindered by the Toys 'R Us bankruptcy). We also plan to maintain our outlook for total expenses over the next five years, with a cost of goods sold ratio improving slightly to 38% from historical averages (39% over the last five years) as franchise brands increase as a percentage of the total mix.

Our model incorporates operating margins that return to 16% in 2019, ahead of the company's long-term goal of 15% or higher. With expense ratios that we expect to remain stable over the next five years, given the maturity of the business, we think Hasbro can reach peak operating margin between 17%-18% by 2021.

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