Image Source: Mike Mozart
Hasbro battled a number of challenges in 2018, but it anticipates a return to profitable growth in 2019.
By Kris Rosemann
2018 brought a number of challenges for simulated Dividend Growth Newsletter portfolio idea Hasbro (HAS), not the least of which was the bankruptcy and liquidation of Toys ‘R’ Us and the shifting retail and consumer landscape. The impact of the Toys ‘R’ Us’ struggles were greater than Hasbro expected during the year, and it was not able to recapture as much of the lost business during the holiday period as anticipated due to the impact of the retailer’s liquidated inventory being available.
Prior to the bankruptcy filing, Toys ‘R’ Us was Hasbro’s third largest customer in the US and its second largest customer in Europe (VGK) and Asia-Pacific, and the loss in Europe only exacerbated a weak demand environment. A declining toy and game market in Europe impacted shipments to the region as inventories were lowered. Market research group NPD estimates that the European toy and game market fell 4% across the region’s top six markets, and the toy industry declined for the first time since 2009, with G11 markets contracting 2% for the full year 2018 and 6% in the fourth quarter.
Hasbro’s fourth quarter net revenues, results released February 8, fell 13% on a year-over-year basis, driven by 10% and 17% declines in its ‘US and Canada’ and ‘International’ segments. The company’s underlying operating profit margin declined as a result of the materially lower revenues and higher costs related to inventory clearing, and selling, distribution, and administration expenses leapt 39% in the fourth quarter from the year-ago period. GAAP earnings per share in the quarter benefit from a materially lower tax bill but came in at only $0.07, and non-GAAP earnings per share of $1.33 in the period were ~42% lower than the comparable period of 2017.
Free cash flow generation in the full year 2018 at Hasbro declined 14% on a year-over-year basis to ~$506 million due to a contraction in cash flow from operations and slightly higher capital spending. Cash dividends paid in the year came in at $309 million, and the company repurchased $250 million of its own shares in 2018. It finished 2018 with nearly $1.2 billion in cash and cash equivalents on the balance sheet compared to just over $1.7 billion in total debt. At last check, Hasbro registered a solid 1.9 Dividend Cushion ratio, and shares yield ~3.1% as of this writing after management raised its quarterly payout by 8%. This marks the 15th annual dividend increase in the past 16 years for Hasbro, and it has grown the payout at a 13% CAGR over the past ten years.
The negative impact of the Toys ‘R’ Us liquidation is expected to dissipate in the first quarter of 2019, and a strong entertainment lineup, lower retail inventory in Europe and the US, and a prioritization of digital capabilities, such as new marketing programs, are all expected to help return the company to growth in 2019. Explicit guidance ranges were not provided, but management anticipates operating profit margin expansion in addition to a return to top-line growth. Our fair value estimate for Hasbro sits at $95 per share.
However, rival Mattel (MAT) released a disappointing outlook for 2019 February 15, and the company expects gross sales to be roughly flat in constant currency compared to 2018 levels, which includes an ongoing impact from the absence of Toys ‘R’ Us in the first quarter of the year and a low-single digit negative impact from a decline in its China (FXI) business. Nevertheless, Hasbro’s management did not express concern over the impact of potentially slowing economic growth in the world’s second-largest economy, and the global toy industry is expected to return to growth in 2019 and beyond. Traditional toys and games industry retail sales are projected to increase at a 4.7% CAGR from 2019-2022, according to Euromonitor International.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.