Girls Category Sales Drive Hasbro's Q1 Earnings - Analyst Blog

Hasbro Inc. HAS posted mixed first quarter 2014 results. Its quarterly earnings beat the Zacks Consensus Estimate while revenues missed the consensus mark.

Adjusted earnings per share of 14 cents beat the Zacks Consensus Estimate of 11 cents by 27.2% and were up 180.0% from 5 cents reported in the year-ago quarter. The upside was driven by higher year over year revenues, decline in expenses and lower share count.

On a reported basis, including favorable tax adjustments, the company posted earnings per share of 24 cents compared to a loss of 5 cents in the year-ago quarter.

Hasbro's net revenue of $679.0 million increased 2.4% year over year driven by continued growth in the Girls Category and a turnaround in the Boys segment. However, it missed the Zacks Consensus Estimate by a meager 0.7%, which we believe was due to the underperformance of the Games and Pre-school segment. Revenues also experienced an unfavorable impact from currency translation.

Behind the Headline Numbers

Hasbro's product segments comprise Girls, Games, Boys and Preschool categories. Games category revenues declined 4.5% to $220.5 million. Decline in revenues from Action Battling games as well as Duel Masters Brand, a card game, was partially offset by an increase in revenues from Magic: The Gathering and Monopoly.

The Girls category surged 21.0% year over year to $138.7 million, thanks to continued strong growth from My Little Pony, My Little Pony Equestria Girls and Nerf Rebelle.

Preschool category revenues dipped 3.6% to $72.5 million due to lower revenues from Playskool products.

After declining throughout 2013, revenues from the Boys category went up 2.1% year over year driven by growth in Nerf and Marvel products, partially offset by continued year-over-year declines in Beyblade sales.

Segment-wise, net revenue from the U.S. and Canada segments declined 1.3% year over year to $337.7 million owing to a decline in the Boys, Games and Preschool categories in the region. However, it was partially offset by higher revenues from the Girls category. The segment's operating profit also declined 5.0% to 35.8 million.

International segment revenues grew 5.4% to $305.5 million. Revenues in the International segment reflect an increase of 8.0% and 17.0% in Europe and Latin America, respectively, offset by a decline of 13.0% in Asia Pacific. The segment's operating profit was $2.4 million compared to an operating loss of $4.5 million in the year-ago quarter.

Entertainment and licensing segment revenues increased 13.3% year over year to $34.9 million, driven by growth in lifestyle licensing as well as the addition of Backflip Studios to the segment. The segment's operating profit increased 13.2% on a year-over-year basis to $6.0 million.

Hasbro's cost of sales ratio improved 220 basis points (bps). Its selling-distribution-administration expenses ratio declined 210 bps while there was a 20 bps decrease in royalty expenses ratio. Adjusted operating profit was up 10.0% year over year owing to a decline in cost of sales and other expenses.

Our Take

Hasbro put up a decent performance this quarter after missing the Zacks Consensus Estimate on both lines in the fourth quarter of 2013. The Girls segment was the chief growth driver this quarter while the Boys segment managed to stage a comeback.  The company was also successful in lowering costs, which improved margins. All these results come in the wake of Hasbro's continued efforts to establish its presence worldwide through strategic partnerships, rapid growth in emerging markets as well as cost containment efforts to cope up with the difficult operating environment.

However, there is still some time before these initiatives start paying off fully. Moreover, we believe consumer spending uncertainty still lingers amid sluggish economic growth in the U.S. with customers reducing their non-essential purchases. Hasbro carries a Zacks Rank #4 (Sell).

However, some better-ranked stocks in the toys and games industry include Glu Mobile, Inc. GLUU, JAKKS Pacific, Inc. JAKK and Mattel, Inc. MAT. While Glu Mobile sports a Zacks Rank #1 (Strong Buy), JAKKS Pacific and Mattel hold a Zacks Rank #2 (Buy).