Hasbro Inc. (HAS) reported its fourth quarter 2010 earnings of 99 cents per share, which was well ahead of the Zacks Consensus Estimate of 95 cents. In the year-earlier quarter, Hasbro had earned $1.09 per share. The better-than-expected results were driven by tight cost-control initiatives, which more than offset the muted growth in sales.
Hasbro’s net revenue of $1,278.7 million in the quarter was down 7.2% year over year and fell behind the Zacks Consensus Estimate of $1,300.0 million. Foreign exchange fluctuation had an unfavorable impact of $23.5 million.
Demand for toys was less than anticipated during the crucial holiday season. Severe winter and price increases by retailers as well as tough year-over-year performance were mainly responsible for this lackluster performance.
For full fiscal 2010, earnings per share were $2.74 versus $2.48 in 2009 while revenue declined to $4.0 billion from $4.07 billion recorded in the prior year. Foreign exchange had a $17.7 million negative impact on full-year 2010 revenues. Full-year earnings included a favorable tax adjustment of 15 cents per diluted share and dilution of 30 cents per share related to the company’s television investments.
Hasbro continued to return wealth to investors in the form of share repurchase programs and dividend distribution.
Performance Highlights
Hasbro experienced worldwide net revenue growth in two of its four major product categories, namely Girls are Preschool. On an annualized basis, the Girls category increased 10% to $298.7 million, the Preschool category grew 4% to $142.5 million while the Boys product category slipped 1% to $419.9 million and the Games and Puzzles category plunged 22% to $417.5 million.
Geographically, net revenue from the U.S. and Canada region declined 20% year over year to $604.8 million, while its operating profit plummeted 54% to $71.0 million. The International segment reported net revenue of $617.9 million, up 12% year over year. The segment registered an operating profit of $129.7 million, reflecting a 35% year-over-year rise.
The Entertainment and Licensing segment also experienced a notable decline in revenues. Net revenue in this segment fell 14% year over year to $53.5 million, while its operating profit showed an even greater fall of 49% to $15.0 million. The decline was mainly due to lower revenues from the movie-based Transformers and G.I. Joe toys.
We noted a 23% drop in Hasbro’s royalty expenses from the prior-year period to $79.1 million. Product development expenses totaled $62.0 million, up 9.4% year over year. Advertising expenses spiked 7.6% from the prior-year period to $143.7 million. Hasbro reported a 9.2% fall in selling, distribution and administration expenses to $228.3 million.
Financials
At quarter-end, total assets stood at $4.1 billion compared with $3.9 billion at the end of the year-earlier quarter. Hasbro’s long-term debt was at $1.4 billion versus $1.1 billion in the comparable quarter prior year.
Hasbro repurchased a total of 15.8 million shares of common stock during 2010 at a total cost of $636.7 million and an average price of $40.37 per share. At year end, $150.1 million remained available in the current share repurchase authorization.
Dividend Hike
Last week, Hasbro said that it hiked its quarterly dividend by 20% to 30 cents a share. The dividend is payable on May 16, 2011, to shareholders of record on May 2, 2011.
Outlook
Management expects a year-over-year increase in revenue and earnings per share for 2011.
Our Take
Hasbro’s strong product line-up, strategic association with Discovery, signing of long-term licensing agreements and growing presence in emerging geographical regions position the company for a strong 2011. However, we remain cautious on the stock due to the execution risk surrounding the joint venture with Discovery Communication.
Moreover, most of its agreements will not come to fruition before late 2011. The company’s quaterly earnings beat on the back of its cost cutting initiatives, not on revenue growth. In an environment of increasing input costs, we believe, it would be challenging for the company to sustain its earnings growth.
One of Hasbro’s closest competitors Mattel Inc.’s (MAT) fourth quarter surpassed the Consensus on both earnings per share and revenue parameters. Although dividend hike is a positive for Hasbro, Mattel is not far behind in this respect. During its fourth quarter earnings call, Mattel boosted its dividend by 11% to 23 cents.
Hasbro currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are also maintaining our long-term Neutral recommendation on the stock.
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