Hasbro Inc. (HAS) reported second quarter 2011 earnings per share of 42 cents, which exceeded the Zacks Consensus Estimate of 38 cents and improved from 29 cents earned in the year-earlier quarter. The quarter’s earnings included a favorable tax adjustment of 15 cents a share as well as a cost of 6 cents for severance and relocation associated with establishing a Center of Excellence for Hasbro Games in Rhode Island.
Hasbro’s net revenue of $908.5 million in the quarter grew a solid 23.0% from the year-ago quarter and handily beat the Zacks Consensus Estimate of $846.0 million. Foreign exchange had a favorable impact of $35.8 million. Standout performance by the Transformers brand along with continued double-digit growth in the International segment aided the revenue upside.
Hasbro continued to return value to investors in the form of share repurchase programs and dividend distribution.
Performance Highlights
Hasbro experienced worldwide net revenue growth in only one of its four major product categories, namely Boys. On an annualized basis, the Boys product category shot up 96% to $460.4 million while Girls, Preschool and Games and Puzzles categories fell a respective 11% to $119.1 million, 10% to $97.6 million and 12% to $231.3 million.
Geographically, net revenue from the U.S. and Canada segment improved 14% year over year to $505.0 million, while its operating profit dipped 2% to $57.7 million. The International segment reported net revenue of $374.5 million, up 43% year over year. The segment’s operating profit was $33.8 million, significantly higher than the year-ago quarter.
However, the Entertainment and Licensing segment experienced a plunge in revenues. Net revenue in this segment slid 11% year over year to $27.2 million, while its operating profit showed a much greater fall of 95% to touch $0.6 million.
We noticed a 64.1% jump in Hasbro’s royalty expenses from the prior-year period to $82.2 million. Product development expenses totaled $55.0 million, up 15.8% year over year. Advertising expenses increased 13.6% from the prior-year quarter to $81.8 million. Selling, distribution and administration expenses also increased 20.6% to $213.4 million.
Financials
At quarter end, total assets were $3.94 billion compared with $3.97 billion at the end of the year-earlier quarter. Hasbro’s long-term debt was at $1.40 billion, almost flat year over year.
Hasbro repurchased a total of 2.4 million shares of common stock during the quarter at a total cost of $112.0 million and an average price of $45.80 per share. At quarter end, $474.5 million remained available in the current share repurchase authorization.
Outlook
Management expects year-over-year growth in revenue and earnings per share for 2011.
Our Take
Hasbro’s strong product line-up, strategic tie-ups and growing presence in emerging geographical regions position the company for a strong second half of 2011. In addition to a robust entertainment line-up, Hasbro has a Kre-O, a new construction brand built around Transformers for 2011.
We appreciate the company’s revenue performance as it nicely managed to beat the Zacks Consensus Estimate. Management commented that the licensing segment which is presently underperforming, will begin to record revenues associated with ‘Transformers: Dark of the Moon’ in the third quarter. Additionally, the upcoming quarter will also be seasonally strong.
However, in an environment of increasing input costs, we believe, it would be challenging for the company to grow its earnings. An incremental cost of $7 million, primarily associated with recruiting and office space at Rhode Island, is expected over the next three to four quarters.
Hasbro currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are also maintaining our long-term “Neutral” recommendation on the stock. Last Friday, one of Hasbro’s closest competitors Mattel Inc. (MAT) reported its second quarter 2011 earnings of 23 cents per share, which beat our estimate by 7 cents.
