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Hasbro (NASDAQ:HAS) Misses Q4 Sales Targets, Stock Drops 10.7%


Full Report / February 13, 2024

Toy and entertainment company Hasbro (NASDAQ:HAS) fell short of analysts' expectations in Q4 FY2023, with revenue down 23.2% year on year to $1.29 billion. It made a non-GAAP profit of $0.38 per share, down from its profit of $1.31 per share in the same quarter last year.

Hasbro (HAS) Q4 FY2023 Highlights:

  • Revenue: $1.29 billion vs analyst estimates of $1.36 billion (4.9% miss)
  • EPS (non-GAAP): $0.38 vs analyst expectations of $0.64 (40.3% miss)
  • Free Cash Flow of $341.8 million, up from $4.49 million in the previous quarter
  • Gross Margin (GAAP): 55.5%, up from 45.6% in the same quarter last year
  • Market Capitalization: $7.12 billion

Credited with the creation of toys such as Mr. Potato Head and the Rubik’s Cube, Hasbro (NASDAQ:HAS) is a global entertainment company offering a diverse range of toys, games, and multimedia experiences for children and families.

Hasbro's journey began in 1923, established by the Hassenfeld brothers as a small textile remnant company that sold school supplies. The company's transition into toy manufacturing was driven by a vision to create products that sparked imagination and joy in children. Eventually, Hasbro evolved into one of the world's largest toy makers.

Today, Hasbro provides an extensive portfolio of toys, board games, and digital gaming experiences that cater to a variety of ages and interests. The company offers everything from action figures and dolls to digital gaming platforms.

Hasbro generates revenue through product sales, licensing agreements, and digital gaming subscriptions. Its multifaceted business model includes partnerships with entertainment franchises, leveraging iconic characters and stories to create toys that complement various media. This synergy has created a unique value in the market, appealing to generations of consumers who cherish both nostalgia and modern media.

Leisure Products

Leisure products cover a wide range of goods in the consumer discretionary sector. Maintaining a strong brand is key to success, and those who differentiate themselves will enjoy customer loyalty and pricing power while those who don’t may find themselves in precarious positions due to the non-essential nature of their offerings.

Competitors in the toy and entertainment sector include Mattel (NASDAQ:MAT), Funko (NASDAQ:FNKO), and Jakks Pacific (NASDAQ:JAKK). 

Sales Growth

A company’s long-term performance can give signals about its business quality. Any business can put up a good quarter or two, but many enduring ones muster years of growth. Hasbro's annualized revenue growth rate of 1.8% over the last five years was weak for a consumer discretionary business. Hasbro Total RevenueWithin consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. Hasbro's recent history shows a reversal from its already weak five-year trend, as its revenue has shown annualized declines of 11.7% over the last two years.

This quarter, Hasbro missed Wall Street's estimates and reported a rather uninspiring 23.2% year-on-year revenue decline, generating $1.29 billion of revenue. Looking ahead, Wall Street expects revenue to decline 11.6% over the next 12 months.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Given the consumer discretionary industry's volatile demand characteristics, unprofitable companies should be scrutinized. Over the last two years, Hasbro's high expenses have contributed to an average operating margin of negative 10.9%.

Hasbro Operating Margin (GAAP)

This quarter, Hasbro generated an operating profit margin of negative 93%, down 85.5 percentage points year on year. This reduction was driven by two non-recurring issues: 1) $1.846 billion of non-cash goodwill and intangible asset impairment charges in its entertainment segment (eOne Film, TV business, Family Brands), and 2) an inventory reduction in its consumer products segment.

Over the next 12 months, Wall Street expects Hasbro to become profitable. Analysts are expecting the company’s LTM operating margin of negative 30.8% to rise to positive 17.2%.

EPS

Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions. Hasbro EPS (Adjusted)

Over the last five years, Hasbro's EPS dropped 34.6%, translating into 8.1% annualized declines. We tend to steer our readers away from companies with falling EPS, especially in the consumer discretionary sector, where diminishing earnings could imply changing secular trends or consumer preferences. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).

In Q4, Hasbro reported EPS at $0.38, down from $1.31 in the same quarter a year ago. This print unfortunately missed analysts' estimates, but we care more about long-term EPS growth rather than short-term movements. Over the next 12 months, Wall Street expects Hasbro to grow its earnings. Analysts are projecting its LTM EPS of $2.51 to climb by 42.6% to $3.58.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

Over the last two years, Hasbro has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 5.3%, subpar for a consumer discretionary business.

Hasbro Free Cash Flow Margin

Hasbro's free cash flow came in at $341.8 million in Q4, equivalent to a 26.5% margin and up 409% year on year.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

Hasbro's five-year average return on invested capital was 7.1%, somewhat low compared to the best consumer discretionary companies that pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable business initiatives.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Hasbro's ROIC over the last two years averaged a 33.1 percentage point decrease each year. In conjunction with its already low returns, these declines suggest the company's profitable business opportunities are few and far between.

Key Takeaways from Hasbro's Q4 Results

We struggled to find many strong positives in these results. Its revenue missed analysts' expectations as its consumer products and entertainment segments declined 25% and 49% year on year. Its Wizards of the Coast and Digital Gaming segment was a silver lining (7% growth) but not enough to move the needle on company-level performance. The company's full-year 2024 EBITDA guidance also missed Wall Street's forecast.

On the bright side, Hasbro initiated a quarterly dividend of $0.70 per share, payable on May 15, 2024 to shareholders at the close of business on May 1, 2024. 

    Overall, the results could have been better. The company is down 10.7% on the results and currently trades at $45.82 per share.

    Is Now The Time?

    Hasbro may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

    We cheer for all companies serving consumers, but in the case of Hasbro, we'll be cheering from the sidelines. Its revenue growth has been weak over the last five years, and analysts expect growth to deteriorate from here. And while its projected EPS for the next year implies the company's fundamentals will improve, the downside is its declining EPS over the last five years makes it hard to trust. On top of that, its declining ROIC shows its profitable business opportunities are shrinking.

    Hasbro's price-to-earnings ratio based on the next 12 months is 14.3x. While we've no doubt one can find things to like about Hasbro, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

    Wall Street analysts covering the company had a one-year price target of $60.53 per share right before these results (compared to the current share price of $45.82).

    To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.