Tickers in this Article: HAS, MAT, DIS, DISCA, JAKK, LF, TWX, VIA
Game and toy maker Hasbro (Nasdaq:HAS) is coming off of what largely looks like a lost decade. Through 2010, the company saw compound revenue growth of less than 4% and negative growth in free cash flow. Keep in mind that period includes the regular production of new customers (children), several acquisitions and the launch of toy-centric movies like the latest round of "Star Wars".

That said, Hasbro seems to be getting its act together. The toy and game business is looking a little better, and the company's efforts in media (TV and film) could pay off in the long run. Still, toys and children's entertainment is a fiercely competitive business and there is no telling whether Hasbro will draw little kiddies' interest - and their parents' money - over the likes of Mattel (Nasdaq:MAT), Disney (NYSE:DIS) and other competitors. (For more on Hasbro, check out Despite Down Quarter, Hasbro Plays Well.)

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A Mixed Quarter With Some Questions
Hasbro offered up a mixed bag of results for the first quarter, which was reported April 14. Revenue was not bad, and performance was basically the same as last year, although it snuck above the average estimate. Interestingly, there was a fairly wide range of estimates going into this quarter and that often correlates with above-average volatility.

Still, there are some questions in that top-line result. Games/puzzles, along with toys for girls and preschoolers, were all down by double-digit percentages; meanwhile, tous for boys were up 25%. That suggests that Hasbro loaded the channel this quarter - perhaps banking on upcoming movie tie-ins to "Transformers", "Thor and "Captain America". If these movies perform well at the box office and there's good sell-through, that's fine ... but if the movies (or toys) falter, that could sour the whole year for Hasbro.

The questions don't go away moving on from the revenue. Gross profitability fell about 70 basis points and operating income dropped more than 29%, some of that clearly due to efforts to launch and support the new multi-platform venture ("The Hub") with Discovery Communications (Nasdaq:DISCA). More concerning is the jump in inventories; inventory levels jumped 77% from the year-ago level. Again, if there's good sell-through then it's all good, but faltering sales will make that inventory problematic. (To find out more about financial information on a company, check out 12 Things You Need To Know About Financial Statements.)

Is Newer Better?
Hasbro is clearly following a different model for its business now, and "The Hub" could prove to be a big part of that. So far, the programming has dipped deeply into the company's intellectual property (IP) estate - featuring programs around G.I. Joe, Transformers, Tonka and the company's game titles. While aging Gen-X'ers might appreciate a second chance to catch up on cartoons from their youth, only time will what The Hub will bring in in terms of programming fees and follow-on toy sales.

Of course, it is not like there is a surfeit of competition in youth-oriented TV. There's the entire lineup of Disney and Disney-owned channels, as well as Viacom's (NYSE:VIA) Nickelodeon business, Time Warner's (NYSE:TWX) Cartoon Network, and Discovery's own youth networks.

Hasbro is also looking to leverage more of its IP into the feature film market, and with better economics than on prior franchises for Transformers and G.I. Joe. How excited are people going to be to see movies based on games like Battleship, CandyLand, Monopoly, Risk and the Ouija Board? That's up to investors to decide. (For more information on business models, see Getting To Know Business Models.)

The Bottom Line
There's no doubt that Hasbro has valuable brands of its own and licenses to other popular franchises like Star Wars and Disney's Marvel.

What is in doubt is how much profitability and growth Hasbro can wring from these assets, all the while competing with Jakks Pacific (Nasdaq:JAKK), RC2 Corporation (Nasdaq:RCRC) and LeapFrog (NYSE:LF). Moreover, growth in the toy and game business is a tricky thing. New hot items seem to come out of nowhere every few years and it can be difficult to continually extend a brand (Hasbro has had its issues with Wizards of the Coast and franchises like Dungeons and Dragons).

At the right price, Hasbro is worth the risk. Today's price seems to be very close to fair value, though, so why take the chance when there are stocks trading at more substantial discounts? (To find more information on how Hasbro was started, read Ridiculous Ideas That Made People Milions.)

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