Hasbro's Brand & Product Lineup Impress, High Costs A Worry

Hasbro Inc.’s (NASDAQ:HAS) strong product line up of entertainment backed products along with focus on strategic partnerships pose the company for long-term growth. However, higher costs and lower demand for traditional toys are somewhat denting the company’s profit.

Last month, Hasbro reported mixed fourth-quarter 2017 results, with earnings surpassing the Zacks Consensus Estimate and revenues lagging the same. Adjusted earnings of $2.30 per share surpassed the consensus mark of $1.82 by 26.4%. Earnings grew 40.2% from the year-ago quarter, driven by benefits from the recent U.S. tax reforms.

In the fourth quarter, revenues from its Partner Brands and Europe declined, significantly affecting net revenues. However, strength in the franchise brand revenues drove the top line. Management believes that product innovation and digital initiatives will help the company gain traction in 2018 and beyond.

However, costs related to such initiatives would hurt the company’s margins in the near term.

Notably, shares of Hasbro have lost 7.3% in the past year, widely underperforming the industry’s gain of 37.9%. Moreover, given management’s lowered guidance for 2018, based largely on negative overall industry trends, we find the stock’s upside potential to be limited.

Product Launch, Strategic Partnerships & Strong Brand-Building Efforts Aid Top Line

To drive revenues, Hasbro continues to invest in relentless product innovation. The company continues to release Transformers Franchise in all forms of entertainment, including movies, television and digital expressions, which are expected to drive the top line in the coming 10 years.

On the product innovation front, Hasbro launched several social games. Among them, Dungeons & Dragons was particularly successful. With the launch of DROPMIX, the company further strengthened its digital gaming revenues. Product innovation remains a strong driver of sales growth for Hasbro.

Meanwhile, the company is continuously signing partnership deals with social, digital and television platforms to enhance sales. Hasbro entered into a five-year agreement with Paramount to enhance storytelling and content capabilities. It further invested in Boulder Media, the company’s animation studio and increased digital capacities to drive sales. Moreover, the deal with Walt Disney to manufacture dolls based on Disney Princess’ stories and characters, beginning 2016, is expected to continue bolstering Hasbro’s top line.

Hasbro continues to increase its brand awareness through television. Hasbro Studio is responsible for the creation and development of storytelling based on Hasbro’s brands, across mediums including television, film and digital shorts. The television programming is currently aired worldwide.

Hasbro has 40% interest in a joint venture with Discovery Communications (NASDAQ:DISCA) called the Discovery Family Channel (formerly known as ‘The Hub Network’). This network offers high-quality children’s shows as well as family entertainment and educational programs. In international markets, Hasbro Studios distribute to various broadcasters and cable networks on various digital platforms, including Netflix (NASDAQ:NFLX) and iTunes. These initiatives are aiding the company to achieve its target of growing the brands beyond traditional toys and games, and providing entertainment to consumers of all ages, thereby boosting demand and sales.

Toys ‘R’ Us Bankruptcy Remains a Major Headwind

The Toys ‘R’ Us Chapter 11 bankruptcy filing in September, 2017 has been an added concern for the already suffering toy industry players. The bankruptcy continues to affect Hasbro, as well as other significant toymakers like Mattel (NASDAQ:MAT) and JAKKS Pacific (NASDAQ:JAKK) , as each of these companies generate almost 10% of their overall sales from Toys “R” Us.

In fact, Hasbro’s U.S. and Canada segment’s fourth-quarter 2017 revenues and operating profit were dented due to the incremental bad debt expense related to the bankruptcy filing. The segment’s operating profit in 2017 declined 2% to $509.9 million.

Zacks Rank

Hasbro 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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