Hasbro: Don't Expect Much

| About: Hasbro, Inc. (HAS)
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Summary

I never expect much out of Q1 for Hasbro.

The company just reported earnings.

I discuss the results, and hone in on operation performance domestically versus internationally.

Hasbro (NASDAQ:HAS) has licensing deals with a ton of popular franchises and is a top play in the toy space. As you know Hasbro is one of the three toy companies that I like to trade when the fundamentals set up properly, in addition to Mattel (NASDAQ:MAT) and JAKKS (NASDAQ:JAKK). Many of these names are event driven stocks that can be traded, but every now and again a so-called 'toy-cycle' presents itself where new products are released year-after-year piggybacking on successful movies or other entertainment related venues. All three toy companies have been good stocks to own and trade over the last few years. The traders do well from a relatively strong consumer coupled with a catalyst (say a movie product deal) that can help drive sales. Over the long-term, when we string together a number of them we have the so called 'toy-cycle'. Of course we know toy companies have moved away from traditional toys and board games into more interactive products. The traditional toy industry is still kicking, but technology like electronic/computer-based toys, apps and complex interactive toys are now extremely popular. That said I think we are in a strong spot.

Now, in terms of making an investment in the space I will say that Relative to JAKKS and Mattel, Hasbro is the least expensive when it comes to current valuation. This is an important place to start. Hasbro trades at 24 times earnings, whereas Mattel trades at 31 times earnings, but JAKKS has seen losing quarters (negative earnings). I still contend that unless one of the companies has an incredibly lucrative deal in place, they tend to trade in a similar fashion, chart-wise. Still, the fundamentals matter.

That said, what can we expect looking ahead? Hasbro has just announced its most recent earnings report and it reveals some clues about the consumer and threats to the company, but also provides a basis for where the sector may be heading. Now considering the holiday shopping season was last quarter, I never expect much out of the first quarter. To my surprise this quarter was actually rather strong. It delivered a strong top line and bottom line beat versus analyst estimates. Net revenues for Hasbro's Q1 2016 were 16% higher year-over-year. Revenues were $831.2 million beating estimates by a strong $54 million.

Now, as I have discussed in most articles this earnings season, the strong dollar has been a major issue for many domestic companies with international sales. It has, of course, impacted Hasbro which does a lot of international businesses. So if we look at revenues on a constant dollar basis, it would back out a $28.6 million impact. In this case, net revenues were actually up 20%. That is incredible strength in sales. Net earnings for the quarter were $48.8 million or $0.38 per share, compared to $26.7 million or $0.21 per share last year. This is a solid improvement year-over-year of 83%. On an adjusted basis, earnings were $154.9 million or $1.22 per share. As a whole as reported earnings beat estimates by $0.14.

So sales continue to be pretty strong and the company is managing expenses leading to strong earnings. Digging a little deeper into the performance, we see that Hasbro's U.S. and Canada segment brought in net revenues of $443.6 million for the quarter compared to $345.7 billion for the comparable 2014 quarter. This is a 28% increase year-over-year. Solid. There was growth in the Boys and Preschool product categories but saw some declines in the Games and Girls categories. The segment reported operating profit of $78.3 million. This is a nearly a 90% gain from the $41.4 million in 2014. Simply outstanding.

Internationally, things rebounded. As a whole, net revenues were $345 million compared to $305.7 million in the comparable 2014 race. There was growth in all product categories and that is incredibly strong. On a regional basis, Europe was up 14%, Latin America dipped 3%, while Asia-Pacific was up 25%. Interestingly emerging markets saw revenues dip 7%. However, the key is to look at this on a constant dollar basis. Excluding an unfavorable $26.7 million impact of foreign exchange, net revenues in the International Segment grew 22%, increasing 19% in Europe, 19% in Latin America and 33% in Asia. On a constant dollar basis the International Segment operating profit was $2.9 million, an increase of 50% versus 2014.

Turning to the Entertainment and Licensing segment, this key business division saw net revenues that declined year over year. Net revenues were $42.5 million compared $60.6 million in 2014, falling 30%. For the most part this was due to a multi-year streaming deal for Hasbro Studios television programming that was not renewed. As such this segment saw a big decrease in operating profit to $5.4 million compared to $16.4 million in 2014, a decline of 67%. Commenting on the quarter, Brian Goldner, Hasbro's president and CEO stated:

"The momentum with which we ended last year has continued throughout the first quarter 2016, delivering revenue and earnings growth. Our focus on executing our Brand Blueprint continues to drive strong retail and consumer demand for our brands, while enhancing overall profitability of Hasbro. Hasbro Franchise Brand revenue increased behind continued double-digit growth in NERF and PLAY-DOH, overcoming expected difficult quarterly comparisons in TRANSFORMERS as well as a digital streaming deal in the Entertainment and Licensing segment recorded last first quarter. Demand for STAR WARS: THE FORCE AWAKENS products continued to be high and we benefited from the addition of DISNEY PRINCESS and FROZEN fashion and small dolls. We are very encouraged with global demand and our outlook for 2016."

Looking ahead, I continue to like the company. The company is fundamentally strong as a whole and is delivering in a somewhat tough environment. It has long been reliable. I love the shareholder-friendly nature of the company. Hasbro paid $57.4 million in cash dividends to shareholders during 2015. The company recently its dividend 11% to $0.51 per share quarterly. On top of the nice dividend, the company also has a repurchase plan in place. Hasbro repurchased approximately 475,000 shares of common stock at a total cost of $35.8 million and an average price of $75.41 per share. The company still has $443.5 million available in the current share repurchase authorization. The stock is a winner.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.