As it works to replace the retail business lost to the bankruptcy of Toys R Us – one of its major customers – Hasbro is being forced to adjust some of its fundamental shipping and distribution practices.

The lack of Toys R Us this holiday season has put about $3.5 billion of revenue in play in the U.S., CEO Brian Goldner said as the company released earnings for Q3, ended September 30.   Target and Walmart have responded by adding more space for toys, while other retailers are entering the category for the first time.

Hasbro has added about 10,000 stores to its distribution during past year, including entry into the sporting goods channel for its Nerf products, Goldner said. The sporting goods chains have picked up Nerf products and are expected to carry Fortnite and Overwatch co-branded Nerf items in 2019, Goldner said.

The new distribution forced Hasbro to adjust shipping schedules to handle smaller orders later in the quarter, Goldner said. Indeed about $50 million in orders slated for late September delivery slipped into early October (and will be included in Q4 results) as Hasbro couldn’t meet “all shipping commitments” late in Q3. Hasbro plans to open a new warehouse in the Midwest in 2019 to better meet demand for shorter lead times, Goldner said.

“We don’t expect to recapture all the [TRU] dollars this year, Goldner said, “but we are making sure that retailers see the success of being invested in the toy business and our brands in particular,” Goldner said.

He said Hasbro expects to fully offset TRU revenue within the “next few quarters,” slightly behind earlier plans for Q1 2019 as it awaits new owners for TRU’s Asia business.

Toys R Us Asia and joint venture partner Fung Retailing have been locked in a court battle over the business there.  Fung, which owns 15 percent of the joint venture, has filed an arbitration complaint and Toys R Us responded with a request for an injunction, arguing that Fung was seeking to “derail” to reorganization process in Asia.

“It is taking a bit longer to get this ownership transition resolved” which is delaying Hasbro’s full “recapture” of Toys R Us revenue, Goldner said. “Asia is one area that we would like to move forward with new ownership.”

Hasbro’s net income improved slightly to $263.9 million in Q3 as the company recorded a $17.3 million tax adjustment tied to U.S. Tax reform. Revenue declined 12 percent to $1.57 billion.

The downturn was partly tied to a 37 percent drop in partner brand revenue to $305.8 million as strong sales of Marvel and Beyblades-related products were offset by declines in Moana, Beauty and the Beast and Star Wars ,which benefitted from a film release in last year’s quarter. Hasbro expects revenue from partner brands to improve in 2019 with the release of Frozen 2, The Lion King, Star Wars: Episode IX and others.

Hasbro’s entertainment and licensing business posted a 45 percent revenue gain to $84.8 million due largely to the renewal of a streaming agreement with Netflix and payments from 2017’s My Little Pony film.

Emerging brands, which includes Hasbro-owned Lost Kitties, Lock Stars and Yellies, registered a two percent revenue gain to $135.3 million, which also included business related to the recently acquired Power Rangers brand. While Power Rangers is currently an emerging brand, it is expected to transition to franchise, which typically signifies annual sales of more than $1 billion.

Gaming revenue increased five percent to $447.8 million as initial shipments of Monopoly Fortnite generated strong sales. Magic the Gathering also will formally release “Magic the Gather Arena” in 2019, a digital version of the card game that had been in beta testing and will be positioned for eSports, Goldner said.

Hasbro’s sales in the U.S. and Canada sales decreased seven percent to $924.2 million, while those in “international” markets fell 24 percent to $560.7 million. The decrease in international business was largely tied to Europe, where Toys R Us closed many stores including all outlets in the UK. The excess inventory that has hampered growth in the European business is expected to be cleared by late this year.

Meanwhile, Hasbro will take a $50-$60 million charge against Q4 earnings as it trims about 250 jobs across the company. Noting that about half of Hasbro’s employees have joined the company within the past six years, Goldner said the restructuring was tied to “making a step-change in management” with a focus on social media, data analytics and digital marketing, especially in Europe where there is an effort to “go after online and omni-channel retailers,” Goldner said.  The move is expected to generate $30-$40 million in annual savings by 2020.

Contact:

Hasbro, Deborah Thomas, CFO, 401-431-8447.