thewoof2's picture
By: thewoof2, Christopher Gallon
Feb 17 2016 1:00pm
0
Login or register to post comments
1855 views


The Recap

Last we left off, from my article found here, Hasbro’s stock was booming and performing amazingly well to its peers.  They had announced strong earnings and laid out plans for the future in their Toy Fair address.  In summary, Hasbro management had seen significant growth in their Magic franchise brand and detailed key future initiatives in expanding their e-Sports/in-person events and enhancing their digital platforms.  The future was bright and there were many positive signs for the Online platform and continued Hasbro investment in Magic as a core product.  I will quote my final thought from the last article:

"In closing, Magic Online is still a top priority for WOTC and Hasbro based on the recent earnings call and I hope there is also a changing of goals to driving new users and usage of the platform from senior management."

Where are we now?

Financial Stats

Hasbro’s (Ticker: HAS) stock on 2/11 was at $69.73.  Hasbro stock performance has remained strong however is down from its price back in last August (from $80/share).

Next let’s take a peek at HAS 1 year chart:


This is a one year chart therefore a year ago Hasbro traded at around $58, so if you invested in the company you would have made nearly $12 profit per share if you sold today.  Comparing this to the S&P index in blue and Apple (AAPL) in green you can see Hasbro performed considerably better then both over the 1 year timeframe.  So despite a rough economic environment over the last year, Hasbro was able to increase their stock price over 1 year while many other companies decreased.  Just as impressive is Hasbro opened this year 2016 with a share price of $66.34 and has been able to increase share value when the overall market in 2016 has tanked.  So in short, from a stock perspective Hasbro has performed outstanding!  That said, from its high price of $84.42 last July, the stock has declined.  As I mentioned though the market has declined overall and Hasbro has declined much less.

Strategy

More ambiguous is judging how Hasbro has performed to their mentioned strategy.  Digital platforms and specifically MTGO were key strategic initiatives, and looking at the previous 6 to 12 months I have troubles saying we are seeing any meaningful execution on that strategy.  Sure we can all point to incremental digital enhancements, such as MTGO leagues, but what still seems unclear is a clear strategy with timelines for any large update.  A more detailed roadmap with a communication plan probably should have been communicated by now putting questions in my mind on their ability to execute on this strategy.

The other strategic goal was to drive new users and increase usage of MTGO.  While I have no stats relating to usage of MTGO over the past year I have to question their execution on this goal.  From just my perspective, overall I tend to see actions that further point to a disconnect between Hasbro strategic statements and WOTC's ability to translate those strategies into an actionable plan for execution.  Things like removing game types show a mindset of limiting players rather than trying to find ways to market and expand usage.  Any individual decision can be argued, which is not my goal here, but in aggregate my impression is WOTC is struggling to significantly increase usage and getting new users.

So I think it is too early to say Hasbro has changed their strategy or failed to deliver on it, but this is an area to watch.  As I write this article, Hasbro is presenting at the yearly Toy Show in Rhode Island, hopefully that will yield information specifically to these goals and their roadmap (I will cover the Toy Show in a subsequent article).

Hasbro (HAS) Earnings Report: Q4 2015

So let’s delve into some more specifics on Hasbro.  On 2/8 Hasbro had their Q4 2015 earnings announcement, for those of you less familiar with the finance industry this is the time where Hasbro management releases more financial specific information on their company and provides investors with the ability to have Q&A.  On the earnings call, Hasbro’s most senior team is present namely Brian Goldner (Chairman, President, CEO), Debbie Hancock (VP of Investor Relations) and Deb Thomas (CFO).  My goal is to convey what was announced on the call and provide some personal commentary on it as needed.  The commentary will be focused on its impact for MTGO from my opinion, most of this is speculatory in nature however!

Financial Results from a sales and market growth perspective

  • Revenues increased 13% absent FX, and reflected the strong demand we saw at the local level around the world. On a reported basis, revenues grew 4% despite a significant negative impact from foreign exchange translation.
  • For the full year, Hasbro franchise brands revenue grew 7%. Including the impact of currency translation, franchise brand revenues declined 2%. The 7% growth was led by increases in PLAY-DOH, NERF, MAGIC: THE GATHERING, MONOPOLY and MY LITTLE PONY.
  • The international segment revenues grew 16% absent FX, and emerging markets increased 15%.
  • $552 million in operating cash flow, ending the year with close to $1 billion in cash on the balance sheet.
  • They announced an 11% dividend increase, coupled with $479 million in available share repurchase authorizations.

Commentary

Hasbro is doing great from a sales and market growth perspective.  They are up on all major categories and have decided to increase payments to shareholders in the form of dividends (for more info see Sidebar) and buying back shares.  Specific to Magic we see that it helped fuel a 7% increase across all franchise brands at Hasbro.  In short, Hasbro and Magic specifically is doing great financially.  FX rates (or currency conversion costs) hit their bottom line fairly significantly but that is out of their control for the most part.

Dividend Sidebar

Some companies decide to give a portion of their earnings to shareholders in a form called a dividend.  Those that have HAS stock will now get cash payments of 11% more per share on the dividend payment date. 

Slightly more interesting – Expenses

  • Selling, General & Administrative Expense (SG&A) increased 8% for the year. A number of factors contributed to the growth in expenses. As we outlined in previous calls, and in our November Investor Day, we continue to make strategic investments in our business. This includes investing in the digital platform for MAGIC: THE GATHERING. This is a multiyear investment program which we believe will expand the potential market for MAGIC over the long-term.
  • In addition, our IT expense and depreciation expense is higher, reflecting our increased investments in improving the efficiency of Hasbro going forward. As we outlined in November, these expenses increased in 2015, and will again increase in 2016 and 2017. In 2018, we anticipate they will begin to decline.
  • Compensation expense was also higher, reflecting the strength of our results. We are able to expand operating profit while making incremental investments, given the ongoing focus of our teams on managing expenses, and the inherent financial advantages of executing our brand blueprint strategy.

Commentary

Costs:

First off an increase of 8% in SG&A is significant, so they are investing and it's substantial.  Looking at their SG&A over the past year we see they are spending a lot more compared to prior years.

Date                                                                                 SG&A Spend

Dec. 31, 2015 413.09M
Sept. 30, 2015 389.05M
June 30, 2015 291.51M
March 31, 2015 276.53M
Dec. 31, 2014 376.15M
Sept. 30, 2014 391.56M
June 30, 2014 285.52M
March 31, 2014 262.56M

This is companywide SG&A but one assumes since management specifically calls out Magic digital platforms that the increase is attributed to it.  So some quick math shows spending has increased ~$120 million since June 2015, that is a huge number in a short time.  Granted we have no idea how much of the $120M was invested in Magic Digital activities but one would assume funding has significantly increased to WOTC digital teams.  That said, they also mention increased spend going to operational efficiencies and compensation.  So of the $120M the question becomes how much went to paying themselves and increasing operations efficiency vs. investing in digital platforms.

Timelines:

"This is a multiyear investment program which we believe will expand the potential market for MAGIC over the long-term."

It's not much, but does show they are looking at improving Magic over a multiyear timeframe with the goal of expanding MAGIC in the long term.  

Q&A

Probably some of the more interesting information comes from the Q&A session after Hasbro's presentation.  Here are some of the important Q&A's with commentary

Q&A #1

Question Rephrased:  Tell me more about this expense profile you shared.

Answer:  Deb Thomas (CFO):
"And some of the investments that we are making, as Brian just mentioned, are things like MAGIC: THE GATHERING online, our investment in our development process, which we expect will lead to future savings in the cost of sales line a couple of years out, and we have got the higher level of depreciation coming through. We expect to see those coming through the P&L for the next 2016, 2017, and starting to decline in 2018. And we will begin to see revenue from some of these activities like MAGIC online beginning in 2017.
So it's a little bit of a balance. But we expect to see some of those expenses begin to decline by 2018. And we'll have some charts on depreciation and amortization, and some of the details behind that at Toy Fair on Friday."

Commentary

OK so investments are going to what they consider the "development process" with the goal that it will lead to future savings in the cost of sales in a few years out.  Fairly basic stuff.  The more interesting point is the implied timelines in the next sentence.  So they see the increased investments continuing in 2016, 2017 and start to decline in 2018 with some revenues in the beginning of 2017.  If we follow the money I would gander that project timelines are to deliver something of substance end of 2016 resulting in increased digital revenue in early 2017.  Then in 2018 they want to decrease investment spend.  The decreased spend might be them figuring they need to seed money for a drastic change over the next year or so then pull back to normal "run" levels.  Deb points to today's Toy Fair, hopefully more details in my next article,

Q&A#2

Question:  "Brian, can you comment on the performance of MAGIC during the quarter? Any quantification in terms of sales growth, and any noteworthy changes or variances in terms of the content strategy in 2016, relative to this past year?"

Answer:  "Yes, it -- MAGIC had a great year. It grew for the full year, it grew very strongly in the fourth quarter. We talked about Battle for Zendikar being the most successful set launch. Just to remind everyone that MAGIC is really story-led, it's much less responsive to quarters or holiday seasonality. It's really about the stories that we are telling. We think the transition the team has taken the brand through this year, and how we tell stories is very helpful to the brand as we go forward.
So we continue to invest to improve, and drive our online business. As Deb said, we would expect to see some revenues from the new MAGIC next platform in 2017. But MAGIC is a long-term growth driver for us, and we're very happy to have a brand like that. Also, and we'll talk more about this on Friday, that talks to and appeals to a different demographic and psychographic that helps the Company to expand our portfolio, and deliver value and brands across a number of different demographics."

Commentary

So this is focused on Magic overall but the CEO showed his excitement with Magic as a product line.  Battle for Zendikar was Magic's MOST successful set!

Q&A #3

Question:  "on SG&A, it looks like it grew 18% year-over-year in the quarter. So just wondering how should we think about, maybe what -- how we should think about SG&A in 2016?

Answer:  "Well, on the full year basis we've said we have got a couple of these investments, which I indicated earlier we'll outline a bit more on Friday at our meeting at Toy Fair -- but a quite a few more of these investments that are continuing for the next few years before we start to see the revenue from it.
And that includes depreciation, which is going to ramp down coming in 2018 from these new systems that we've put in. So we will highlight more of that. I mean, the other item that impacted us of significance in the SG&A line was compensation because of the performance of the year. But again, we'll outline more about that on Friday."

Commentary

So more good news that something interesting is being shared today.  That aside, they paid themselves handsomely for great work in 2015.

Wrap-Up

The earnings call was overall positive from a market perspective.  Hasbro expanded its market share and sales are strong.  Overall expenses have increased significantly to fund things like the Magic digital platform over the next year or two with a decline in spend targeting 2018.  There were numerous references to more details being shared in the Toy Fair being held today (2/12), I look forward to seeing what is presenting and sharing further information with you!

Woof

1 Comments

Tim, indeed and my next by thewoof2 at Fri, 02/19/2016 - 13:42
thewoof2's picture

Tim, indeed and my next article will detail the Toy Fair! Caner, one can hope!