The near-term soft patch could be over for Hasbro (Nasdaq:HAS). A string of blockbuster movies, the successful launch of a new TV network and international repositioning has the Rhode Island-based toy maker in excellent shape to transform its summer malaise into a positive second half of this year.
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Two Toy Stories
It's been a tough past few months for Hasbro shares. Since hitting a 2011 peak above $48 a share in mid-May, Hasbro is down more than 15%. Rising costs and inventory overhang has dogged the stock. The inventory buildup - and cash burn related to The Hub TV Network launch - have increased expenses and pressured profitability ratios. As a result, operating profit margins, excluding severance relocation and related costs, fell from 10.8% during the second quarter of 2010 to 10.3% during the same period this year.
Meanwhile, Hasbro competitor Mattel (Nasdaq:MAT) is surging. During the first year and a half following the global recovery that began in March 2009, Hasbro vastly outperformed Mattel. Since winter 2010, it's been a completely different story. Mattel springboarded off the smash hit "Toy Story 3" last year, and Hasbro underperformed. Most recently, strong international revenues for Barbie toys and tie-in sales from "Cars 2" helped Mattel crush earnings estimates last quarter.
Movies Trimming Inventory
Like Mattel, Hasbro will begin seeing the impact of tie-in sales from wildly popular movies. Worldwide grosses for several films that Hasbro makes toys for have been impressive. "Transformers: Dark of the Moon" is blowing away expectations with a massive $914 million international haul thus far, Thor grossed a very respectable $446 million, and "Captain America: The First Avenger" scored an outstanding $67 million opening weekend. Hasbro's licensing revenue in entertainment brands lags traditional toy and game revenue by quarter due to when licensing partners report revenue. This means sales for the Transformers line will show up in the third quarter.
International sales are of particular importance to Hasbro. The world's second-largest toy maker has undergone significant restructuring to target markets outside the United States. Hasbro's international sales jumped 43% last quarter, contributing to a 23% sequential revenue gain. Targeting select international growth markets, the percentage of Hasbro's foreign sales may pass domestic sales by early 2013.
The excellent reception overseas will be crucial to transforming inventory overhang into cash flow. High inventory levels are already showing signs of easing. Transformers, Thor and Captain America toy lines, plus high margin royalties, will drive revenue growth in the coming quarters, along with toys from the Sesame Street line. In addition to movie tie-in sales, Hasbro's new TV Network is a long-term growth driver. Big investment expenses into The Hub, which is jointly owned with Discovery Communications (Nasdaq:DISCA), contributed to Hasbro's poor 2011. The Hub should start contributing signficantly to the bottom line by mid-2012.
The Bottom Line
The TV network, big screen toy sales and an expanding international footprint make Hasbro a great investment play. The board of directors and management are making it extremely fun to play with Hasbro's shares as well. A recently approved 20% dividend hike now has the shares yielding a solid 2.9%. Hasbro's aggressive buyback program and an increase in insider buying activity suggest management believes the shares are undervalued. CEO Brian Goldner and CFO Deborah Thomas each purchased 5,000 shares last week. (For related reading, see Can Insiders Help You Make Better Trades?)
The summer sell-off is good news for new Hasbro investors, as this time of year is historically a good time to get in. The past two years have been very good to Hasbro shares during the August to January period. Expect Hasbro to leverage the increase in overall run-rate of costs to generate consistent cash flow growth during the holiday shopping season (when the toy maker earns most of its profits). Assuming a 12% compound annual cash flow growth rate, a 2011 price target near the July high of $46 is achievable.
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