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HAS AT A GLANCE

P/E ► 12.6 AVG EV/EBITDA ► 7.46 AVG ROA ► 9.9% HIGH ROE ► 21.3% HIGH Debt to Equity ► 1.60 AVG Current Ratio ► 2.25 AVG Interest Coverage Ratio ► 8.73 HIGH

 

 

 

 

 

 

Hasbro, Inc. (NYSE: HAS) is the second largest U.S. toy company (behind Mattel (MAT) by revenue, with a portfolio of brands and products in the toy market that target traditional trading card and board-game audiences, family game consumers, and educational/developmental toy consumers. Its core brands include the educational toy line Playskool, trading-card and role-playing games Magic: the Gathering and Dungeons and Dragons, traditional board and family games Monopoly, Battleship, and trademarked franchises such as Star Wars and Marvel action heroes. The company reported global net sales of $4.02 billion in 2008 and net earnings of $307 million.^[1]

In an effort to expand its core product offerings and sustain its brand image of family and traditional games, Hasbro acquired Cranium to add to its board-game portfolio ^[2] and will abandon its tween electronic toy division beginning in 2009 due to low margins and strong competition from family-oriented hand-held electronic games on the Nintendo DS and Nintendo Wii.

As a toy company that focuses mainly on delivering traditional gaming experiences through board games and role-playing games, Hasbro faces increased pressures from age compression of its core demographic as children turn to more sophisticated gaming experiences offered by electronic media at an increasingly younger age. In addition, Hasbro will experience significant supply difficulties in its Indian market due to India's Jan 2009 ban on importing all toys originating from Chinese manufacturers, including Hasbro's main product portfolio.^[3]

Company Overview

Hasbro's gaming products are delivered through different media, including traditional board and card, role-playing, hand-held electronic, and DVD games. In addition to products crafted purely for entertainment purposes, Hasbro also offers electronic learning aids and puzzles.

Business Segments^[4]

Hasbro divides its business into two regional segments:

U.S. and Canada (61.6% of 2008 Revenue, 63.2% of Operating Profit)

Product offerings for this region in 2008 were divided into five major categories: ^[5]

Games and Puzzles (32.7% of 2008 Net Sales)

Major brands included Trivial Pursuit, Monopoly, Battleship, Game of Life, Scrabble, Risk, and others. Core role-playing and trading card games include Magic: the Gathering and Dungeons & Dragons. In 2008, Hasbro extended its core brand portfolio by acquiring Cranium and continued its strategic alliance with Electronic Arts, Inc. (EA) to extend core brands to digital platforms. For these core brand games, Hasbro continues to push sustained marketing campaigns to extend its audience to the upcoming generations of children.

Boy's Toys (26.9% of 2008 Net Sales)

Core brands include GI Joe, Transformers, Star Wars, Marvel, etc. The continued popularity of these brands depend largely on their success as media-based entertainment, as main characters in these games and toys are featured in major motion picture releases in 2008 featuring Marvel action heroes.

Girl's Toys (19.7% of 2008 Net Sales)

Core brands include Littlest Pet Shop, Strawberry Shortcake, etc. Most products in this category seek to create a traditional and wholesome play experience focused on role-playing and character creation.

Preschool Toys (11.9% of 2008 Net Sales)

Core brands focus on aiding growth and development of infant and preschoolers and are mainly marketed under the Playskool trademark. Examples of popular products in this category include Mr. Potato Head and the Ages & Stages system, which seek to help children and parents during each stage of infant and child development.

Pre-teen/Tween (6.7% of 2008 Net Sales)

Core products in this category target 8-12 year-olds and have a stronger emphasis on electronic entertainment products such as games for hand-held electronics such as the Nintendo DS, Nintendo GBA and Sony PSP. However, as electronic games have become more affordable, Hasbro will discontinue its tween product category in 2009 due to falling product margins. Going forward, items will be offered under the boys' or girls' category.

International (38.4% of 2008 Revenue, 36.8% of Operating Profit)

Major representative brands from all categories of the US and Canada segment are distributed to retailers and wholesalers in Europe, Asia, and South America. In 2008, Hasbro expanded operations in developing markets such as Brazil, China, Russia, and Korea, pushing main brands such as Playskool and Littlest Pet Shop. Besides toy offerings that mainly focus on wholesome and traditional experiences, collectibles from popular franchsies such as Transformers, Star Wars, and Marvel are marketed as well.^[6]

Distribution to Wholesalers

As the main channel through which Hasbro products are brought to market, distribution to wholesalers constitutes a significant portion of Hasbro's sales revenue. In 2008, its main three distributors, Wal-Mart (WMT), Target (TGT), and Toys 'R Us represented 25%, 12%, and 10%, respectively, of global sales. In the US and Canada segment alone, these top three retailers constituted 71% of net revenues. ^[7]

Venture into Children's TV Programming

On April 30, 2009, Hasbro announced that it will be injecting $300 million for a 50% stake in a new cable television and online venture along with its partner in this venture, Discovery Channel. If successful, the television and online venture will bring $125 million in merchandising royalty revenue, on top of the channel's subscription fees and advertising sales revenue. The children's entertainment network is scheduled to launch in 2010.^[8]

This venture is poised to compete in the lucrative but competitive market of children's television and online entertainment, going head-to-head with the existing giants in the industry, including Disney Channel, Nickelodeon, and Cartoon Network, all of which have online components as well. Hasbro's venture into this industry is spurred by the large amount of revenues that channels such as Disney have brought in through subscription fees, advertising revenues, and merchandising revenues. To compete with the existing channels, Hasbro and Discovery have planned to deliver television programming that is more geared towards "children's entertainment and education", hoping to revive some of Hasbro's oldest brands. ^[8]

Business Growth

FY 2008 (ended December 28, 2008)^[1]

• Net Income in FY2008 was $307 million, a drop of 7.8% from the previous fiscal year, during which net earnings was $333 million. The decrease in earnings was mainly due to the acquisition of Cranium in January 2008 as well as weaker operating results during the last two quarters of the year due to recessionary pressures.

• In FY2008, net revenue was $4.02 billion, an increase of 4.8% from $3.8 billion in FY2007. The increase in sales performance was mainly due to the success of trademarked collectible and toy sales, including the franchises Iron Man and Indiana Jones, prompted by the commercial success of the movies released during the year. In addition, HAS is optimistic that the success of the 2009 success of the Transformers movie series will boost sales before Q2 09 earnings.^[9]

• Operating margins were 12.3%, or $494 million, in FY2008. This was an 80 bp decrease from FY2007, during which operating profit was $333 million, or 13.5% of net sales. The lower margins on 'tween electronic gaming toys contributed to lowered profit margins in 2008, prompting Hasbro to announce abandonment of this division in 2009 to focus on its core traditional products.

• Hasbro net sales grew at a CAGR of 9.1% from FY2005 to FY2008.

Q3 2009 (ended September 27, 2009)^[10]

• Hasbro's net income increased 8.7% year-over-year, from $138 million in Q3 2008 to $150 million in Q3 2009 despite recessionary pressures from the economics downturn in 2008. The increase in net income was driven by an increase in international sales, which grew by 4% absent the negative impact of foreign exchange rates.

• Net sales was $1.28 billion in Q3 2009, down 1.6% from net sales of the prior-year quarter. However, in the absence of the impact of foreign exchange effects, net sales actually grew 1%. Sales in the United States and Canada fell by 3.5% in the quarter.

• Operating profit for Q3 2009 was $231 million, and operating margin was 18.0% of net sales. This is a 140 bps increase from Q3 2008, during which operating profit was $216 million, or 16.6% of net sales.

Trends and Forces

Ban on importing Chinese-manufactured Toys into India will create vacuum in 25% of Hasbro's toy portfolio in India

On January 23, 2009, the Directorate General of Foreign Trade (DGFT) banned imports of toys manufactured by Chinese vendors into India for six months, aimed to restrict the influx of Chinese toys into India. The ban applies to all toys that originated from China, regardless of the country of import of the marketing company and brand. The ban will have substantial impact on the profitability of Hasbro's indian division, Funskool India Ltd., which sources 25% of its toy portfolio, including staple infant and pre-school toys, from Chinese vendors. As Funskool India depletes its existing stock of these Chinese-manufactured toys in April-May of 2009, it will have to either substantially increase the manufacturing capacity of its two Indian plants to compensate for the shortage of toys caused by the ban or cease production of the toy categories affected by the ban altogether. Either way, Hasbro will see its market share in these toy categories diminish due to the ban as it experiences difficulties in producing adequate supplies. In addition to existing toy categories, Funskool India had planned to bring toy merchandise based on the movies Transformers II and GI Joe in the second half of 2009 but will have to abandon the India market for these toys, since they would be manufactured in China. ^[3]

Age Compression Forces Hasbro to Target the Lower-Margin Tween Demographic, but Face Competition with Popular Video Games

As a natural part of growing up, kids trade their traditional toys for more sophisticated forms of entertainment such as video games and electronics. However, each year it happens at a younger age, so that the age range to market toys is shrinking. Age compression is a major issue across the toy industry and is not specific to Hasbro. This forces Hasbro to target the "tween" 8-12-year-old demographic in order to maintain its market size through selling electronic-based games, which have a shorter lifespan and lower margin. ^[5] In 2005, Hasbro launched several new brands to attract tweens but has announced its abandonment of the division in fiscal year 2009.^[11]

Despite Hasbro's efforts to target 'tweens, toy sales in the U.S. have been growing at a very low rate for the last five years. In fact, in 2008 toy sales in the U.S. fell 3%.^[12] This is mainly because of the shift from traditional toys towards video games. In 2008, sales of video game software units (actual games as opposed to consoles) grew 15% in the United States and 26% in the United Kingdom.^[13] In 2008, Nintendo Wii sales passed 50 million units around the world, and the Nintendo DS hand-held console has shipped more than 100 million.^[14]. The high popularity of the Nintendo DS and Wii console sales demonstrates the success of Nintendo's sales strategy of targeting wider audiences, including young girls and parents in addition to the traditional hand-held electronic demographic of tween and teenage boys. The shift of the electronic gaming industry to target these traditional audiences is threatening the most profitable divisions of Hasbro's games as more traditional board-game demographics switch to electronic gaming products.^[15]

Economic Downturn and Weak Retail Lowers Demand for Discretionary Goods, Including Toys

In December 2008 the National Bureau of Economic Research reported that the U.S. economy had been in a recession since December 2007.^[16] The recession was spurred by the 2008 Financial Crisis and has resulted in a significant decline in consumer spending, which has hurt retail sales. In November 2008, total retail sales fell 5.5% in the U.S.^[17]

The weak holiday sales hurt Hasbro's profitability significantly in Q4 2008, during which Hasbro's sales decline 5.2% and net income declined more than 30%. The entire toy industry has performed poorly as consumer demand for discretionary products such as toys has declined.

Competition

Hasbro's broad range of internationally recognized brands is rivaled only by Mattel (MAT). Mattel designs and manufactures and markets toy products worldwide through large retailers as well as directly to consumers.^[18]

• Focus on Trademarked Franchises: Like Hasbro's royalty relationships with the Marvel, Star Wars, and Transformers franchises to market toys and collectibles based on these popular icons, Mattel has alliances with several profitable franchises, including Disney Classics, High School Musical, Batman, Kung Fu Panda, and Dora the Explorer.

• Brand: Similar to Hasbro, Mattel also markets toys in Girls' and Boys' categories, including its renowned Barbie dolls and accessories for girls as well as its Hot Wheels and Tyco R/C.

• Educational: Competing directly with Hasbro's Playskool core products, Mattel's Fisher-Price and Sesame Street brands focus on developmental and educational toys targeted toward parents of infant and preschool-aged children.^[19]

References

1. ↑ ^{1.0 1.1 1.2 1.3} HAS 2008 10-K pg. 42 and 43
2. ↑ MSNBC "No brainer: Hasbro buys Cranium" 4 January 2008
3. ↑ ^{3.0 3.1} Express Buzz "No Longer "Fun's Cool" after Ban on Chinese Toys" 9 February 2009
4. ↑ HAS 2008 10-K pg. 74
5. ↑ ^{5.0 5.1} HAS 2008 10-K pg. 1 and 2
6. ↑ HAS 2008 10-K pg. 3
7. ↑ HAS 2008 10-K pg. 5
8. ↑ ^{8.0 8.1} Wall St. Journal "Hasbro and Discovery Form Children's TV Network" 1 May 2009
9. ↑ Seeking Alpha, "Strong Transformers Movie Opening Bodes Well for Hasbro," 06/30/09
10. ↑ ^{10.0 10.1} HAS Q3 2009 Report
11. ↑ Projo "Hasbro turns off switch on tween products" 13 February 2009
12. ↑ NPD Group "U.S. Toy Industry Sales Generate $21.64 Billion in 2008" 12 February 2009
13. ↑ NPD Group "2008 Video Game Software Sales Across Top Global Markets Experience Double-Digit Growth"2 February 2009
14. ↑ BBC "Nintendo Console Sales Surpass Expectations"26 March 2009
15. ↑ Wired "Japanese Marketers Target Gamer Girls, Moms" 11 May 2007
16. ↑ Wall St. Journal "Recession is Official in December 2007"
17. ↑ Wall St. Journal "Retail Sales November 2008"
18. ↑ Mattel, Inc. Google Finance Profile
19. ↑ ^{19.0 19.1} Mattell 2007 Annual Report to Shareholders