For decades, Hasbro Inc. (HAS, Financial) has managed to survive and thrive as a leading maker of toys and games. Even as consumer tastes have shifted and the nature of gaming has evolved, Hasbro has not failed to adapt with the times. Among the company’s many strong brands and licenses are Monopoly, Star Wars and Transformers. Other properties, such as Wizards of the Coast and its Dungeons & Dragons and Magic: The Gathering games, offer a vast array of offerings for gamers of all ages.
Hasbro reported third-quarter earnings on Oct. 22. After posting impressive growth in the second quarter, market expectations were high. Unfortunately, Hasbro failed to deliver another beat, instead posting profits well short of analysts’ estimates.
By the numbers
While far from disastrous, Hasbro’s third quarter was definitely not great. Revenues clocked in at $1.58 billion, just a hair more than the $1.57 billion posted in the third quarter of 2018. Part of this weakness was due to a negative foreign exchange impact, which cost $20.5 million to the top line. Absent that adjustment, revenue was up 2%.
Hasbro managed to maintain healthy (if not thrilling) cash flow in spite of the top line challenges, posting $389.6 million in operating cash flow. That brings Hasbro’s cash balance to a solid $1.1 billion at the end of the quarter.
In terms of earnings, Hasbro again fell short, post $212.9 in net earnings, or $1.67 per share. Excluding the one-off loss due to foreign exchange impact, adjusted earnings were $233.8 million, or $1.84 per share. Even if we strip out the foreign exchange impact, however, net earnings were still below those seen during the same period last year; in the third quarter 2018 Hasbro posted adjusted net earnings of $246.5 million, or $1.93 per share.
What’s causing the pain
Tariff implementation and tariff uncertainty were the twin causes of Hasbro’s third-quarter distress. During the Oct. 22 earnings call, CEO Brian Goldner explained the full extent of the impact:
“In the third quarter, the threat of, and the implementation of tariffs in certain instances, impacted our shipments, and our ability to fully meet demand. Importantly, during Q3 alone we saw multiple different dates for the enactment of List 4 tariffs come and be delayed, now scheduled for December 15 and yet the prospect had our retailers cancel major direct import program orders and rewrite many of those orders as domestic shipments. The impact of the shift was that July and August total shipments were lower and September shipments were far higher than a year ago. However, given the location of our inventory in Asia to satisfy direct import orders during July and August, we ultimately were unable to re-plan the orders and rewrite all of the orders from direct import to domestic orders all within the quarter. We were also unable to ship all the orders, many of which came late in September, by the end of the quarter. Our supply chain team worked to rapidly respond as our domestic shipments increased to 59% of orders this year versus 51% of the U.S. and Canada segment this quarter last year.”
The cause of Hasbro’s profit shortfall is no mystery. The company’s sprawling supply chain and logistics network was built around Asian manufacturing. The Trump administration’s trade war with China, which has included the ratcheting up of tariffs, has resulted in significant headwinds for Hasbro.
Grasping for a solution
Supply chain chaos and tariff uncertainty threw purchase orders into chaos, making it very difficult for Hasbro to meet demand. In our next entry concerning Hasbro, we will discuss what the company must do to turn things around, as well as what management is already doing.
Disclosure: No positions.
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