Hasbro Inc. (HAS) reported first quarter 2011 earnings per share of 12 cents, which was shy of the Zacks Consensus Estimate of 17 cents and way below 40 cents earned in the year-earlier quarter. The year-over-year decline was partly due to tough comparisons as first quarter 2010 net earnings included a favorable tax adjustment of 14 cents and increase in costs related to product development.
Hasbro’s net revenue of $672.0 million in the quarter was down a marginal 0.08% from the year-ago quarter but surpassed the Zacks Consensus Estimate of $660.0 million. Foreign exchange had a favorable impact of $4.8 million. We believe a late Easter Holiday and continuation of tough weather conditions in January marred the company’s sales to some extent.
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 expanded 25% to $290.2 million while Girls, Preschool and Games and Puzzles categories fell a respective 13% to $113.2 million, 18% to $68.2 million and 12% to $200.4 million.
Geographically, net revenue from the U.S. and Canada region declined 8% year over year to $391.2 million, while its operating profit plummeted 33% to $41.0 million. The International segment reported net revenue of $254.3 million, up 15% year over year. The segment’s operating loss of $1.7 million narrowed from the loss of $2.4 million in the comparablequarter last year.
The Entertainment and Licensing segment also experienced a dip in revenues. Net revenue in this segment slid 2.0% year over year to $24.6 million, while its operating profit showed a much greater fall of 42% to $5.4 million.
We noticed a 1.4% drop in Hasbro’s royalty expenses from the prior-year period to $43.2 million. Product development expenses totaled $45.8 million, up 13.6% year over year. Advertising expenses declined 6.6% from the prior-year quarter to $66.5 million. However, selling, distribution and administration expenses increased 7.3% to $186.4 million.
Financials
At quarter-end, total assets stood at $3.9 billion compared with $4.1 billion at the end of the year-earlier quarter. Hasbro’s long-term debt was at $1.4 billion flat year over year.
Hasbro repurchased a total of 1.4 million shares of common stock during the quarter at a total cost of $63.7 million and an average price of $45.48 per share. At quarter end, $86.4 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 association with Discovery, signing of long-term licensing agreements and growing presence in emerging geographical regions position the company for a strong 2011. Hasbro also has been trying to come up with a new and improved “Transformers” brand, which has so long been profitable for Hasbro, in order to spur sales.
We appreciate the company’s revenue performance as it managed to beat the Zacks Consensus Estimate in its seasonally weak first quarter despite higher inventory levels at retailers. Growing inventory at the company level will also help Hasbro to get rid of shipping related disturbances and ensure smooth supply to retailers in 2011.
However, most of its agreements will not materialize before late 2011. The company will also be facing a stringent cost environment owing incremental cost related to selling, distribution and administration as well as product development for its set of new initiatives. In an environment of increasing input costs, we believe, it would be challenging for the company to grow its earnings.
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. One of Hasbro’s closest competitors Mattel Inc. (MAT) is slated to announce its first quarter results tomorrow.
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