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Hasbro’s U.S. Operating Profit Hit by Toys R Us Bankruptcy

10-23-2017

Hasbro’s Q3 U.S. operating profit fell 5% to $217 million, driven partly by Toys R Us’ bankruptcy and despite revenue in increasing 7% to $993.8 million.

Toys R Us filed for bankruptcy in September and Hasbro briefly suspended shipments to the retailer causing a “short-term disruption” in the toymaker’s business, CEO Brian Goldner told analysts. It has since reached an agreement with Toys R Us on receiveables and shipping terms, the latter being struck late last week, Goldner said. Toys R Us is scheduled for a hearing on $3 billion in debtor-in-possession financing Tuesday in U.S. Bankruptcy Court, Richmond, VA.

“We will see how things emerge, but we don’t expect” Toys R Us’ bankruptcy to have “significant impact” on Hasbro’s business in 2018, Hasbro Chief Financial Officer Deborah Thomas said. “We just have to determine what Toys R Us can receive over the next few months.”

Hasbro reached an agreement with Toys R Us to make sure “it has all the support it needs to emerge” from bankruptcy protection. Hasbro, which is the retailer’s second largest unsecured creditor at $59 million, lowered its Q4 revenue forecast slightly to a 4-7% increase, due partly to the Toys R Us bankruptcy.  Hasbro previously forecast a 10% sales increase for Q4, so revised projection  lowers forecast revenue by $80-$100 million, says Jeffries’ Stephanie Wissink. Toys R Us is expected to account for 6.5% ($400 million) of Hasbro’ annual sales this year, down from 9% ($450 million) in 2016, says Wissink.

While Hasbro maintained support for Toys R Us, it also stressed it had broadened distribution in recent years with other retailers. In addition to expanding sales to “value” and drug retailers, Hasbro also has deepened its business with Walmart, Target, Amazon and other ecommerce retailers,   Goldner said.

Overall, Hasbro’s net income in Q3 ended Sept. 30 grew 3% to $265.6 million as revenue rose 7% to $1.79 billion as the company’s “multi-platform content strategy” helped offset Toys R Us’ bankruptcy filing, Goldner said.

Hasbro’s entertainment and licensing operating profit jumped 20% to $16.9 million as net revenue grew 4% to $58.4 million. Despite the gains, revenue from Hasbro’s partner brands, which includes licensing agreements with Disney and others, dropped 2% to $485.7 million, while sales of its Hasbro’s franchise brands increased 7% to $827.3 million. The downturn in partner brand sales was driven by declines in products tied to Yo Kai Watch and Trolls properties, the latter having benefitted from a movie release a year earlier. The declines were offset by sales gains with Star Wars, Beyblades, Sesame Street and Descendants.  The partner brand revenue rose in the U.S. and Canada, but fell in international markets.

With Star Wars: The Last Jedi slated for release Dec. 15, Hasbro expects that film to have “long term sales impact” into spring 2018 and doesn’t expect it will “cut off the tail” revenue-wise of the Solo: A Star wars Story movie due in May, Goldner said. The Star Wars films “set us up for a great” 2018 and Hasbro is in “pretty good shape” inventory-wise, having sold through products tied to Rogue One: A Star Wars Story, which was released in December 2016. Hasbro’s sales of Star Wars products declined slightly in Q4 2016 and were partly responsible for a rise in inventory at fiscal year-end on Dec. 31 (Inside Licensing Feb. 6).

Meanwhile, the release of the My Little Pony movie earlier this month could provide a template for other Hasbro properties, Goldner said. My Little Pony started as a toy and was developed into digital games, TV series and finally a film. The movie itself fell short of the forecast for opening weekend box office revenue, coming in at $8.8 million versus projections for $10-$17 million, according to Box Office Mojo. The film had generated $35 million in global box office revenue as of Monday, Box Office Mojo said.

“I think the model for My Little Pony has really worked and we are beginning to think about what our next movie might look like,” Goldner said. “The brand will halo quite strongly. We are seeing a reinvigoration of our core fans and lots of new fans are being invited into the brand.”

Contact: Deborah Thomas, Chief Financial Officer, 401-431-8697. Deborah.thomas@hasbro.com

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