Will people still buy toys during economic downturns? Yes, absolutely. While Hasbro Inc. (HAS, Financial) continues to hold a leading position in the $30 billion North American toy industry, shares have been unfairly pushed lower by 20% in the last year. All this did was make shares more attractive both on a valuation basis and for those investors that want to collect income. Currently, Hasbro has a market capitalization under $9 billion and pays out $2.80 a year in dividends, a 4.4% rate.
A story stock
Hasbro was founded in 1923 by three brothers, Henry, Hilal and Herman Hassenfeld. Originally, the company sold textile remnants, but over the years, it evolved into a major company in the toy industry.
Hasbro is known for manufacturing some of the world's best-known brands and toys, including G.I. Joe, Transformers, My Little Pony, Power Rangers and the board game Monopoly. The company also has a strategic partnership with The Walt Disney Co. (DIS, Financial), which allows it to produce Disney-themed toys and games.
In addition to toys and games, Hasbro branched out into the digital media and film industry. The company owns Entertainment One, a multimedia company that specializes in the acquisition, production and distribution of film and television content. This acquisition has given Hasbro access to popular TV franchises like Peppa Pig and PJ Masks.
One hundred years after its founding, Hasbro continues to occupy space in the hearts and minds of millions of parents and children. Today, that has continued into teen and early adult years as well with Dungeons & Dragons, Magic: The Gathering and Entertainment One.
A family of amazing brands
The company's variety of products are sold in more than 100 countries around the world.
One of Hasbro's most popular brands is Nerf, which consists of toy guns and dart blasters that are popular with children and adults alike. NERF guns shoot foam darts that are soft and safe to use. They come in a variety of shapes and sizes, and they can be used for target practice, role-playing or just for fun.
It also produces a franchise of action figures, toys and cartoons that features transforming robots. The Transformers brand has been around for over 30 years, and it has been enjoyed by generations of fans.
Magic: The Gathering is a collectible card game that has been played by millions of people around the world. Magic cards are sold in booster packs, with each pack containing 15 cards. The cards can be used to create decks that can be used to battle other players.
The company also produces Play-Doh, a brand of non-toxic modeling clay that is used by children to create all sorts of shapes and creations.
Dungeons & Dragons is a tabletop role-playing game that allows players to create their own characters and embark on epic adventures. The complex and strategic game requires a group of players to work together to achieve their goals. It is estimated that 40% of D&D players are 25 years or younger; however, the largest group of players are between the ages of 20 and 24, while 15 to 19-year-olds make up just 12% of the player base. Surprisingly, 11% of players are over 40.
Hasbro also produces a wide variety of board games, including Monopoly, Risk and Clue, which should move to app stores rather than store shelves.
With such popular and well-known brands in its portfolio, Hasbro is positioned for continued success.
Future growth potential
Hasbro has traditionally held a strong position in the film industry, fostering brand allegiance and creating additional revenue sources through its licensing ventures, such as Star Wars and Marvel. The company, along with the toy industry, has a promising path to continued growth through international expansion. Regions like Asia-Pacific and emerging markets offer possibilities of market share increases. Additionally, the acquisition of strategic entities that align with its portfolio, like the recent addition of D&D Beyond, also contributes to the company’s growth potential.
The start of 2023 has been a struggle for Hasbro with a combination of inflation and a softer economy resulting in a challenging environment for discretionary spending. Retailers accumulated excess inventory, which is expected to be mostly cleared during the March quarter, the results of which were due to be reported shortly after my analysis.
Hasbro's new management has initiated a strategy to concentrate on its top 10 brands from a pool of over 1,500. The company is phasing out several weaker products and major toy extensions that have yielded low returns. Consequently, many analysts have revised this year’s forecast downwards, with revenue coming in around $5.7 billion and earnings per share around $4.50.
However, a significant cost reduction initiative is in progress, with the aim of saving $250 million annually by 2025, which is expected to boost annual earnings. Put that alongside a stronger focus on key brands and earnings growth rates may reach double digits in the coming years.
Another change worth noting is one toward higher-margin digital products. Management has been working to develop more digital products to cater to tech-savvy consumers. The strategy also involves aligning games and products with film releases. The recent publicity for the movie "Dungeons & Dragons: Honor Among Thieves" could potentially revitalize the brand and stimulate additional sales of the iconic game. The movie grossed over $208 million at the box office on a $150 million budget.
Bottom line
Despite its debt load of $3.6 billion, Hasbro deserves a higher multiple because it is not going out of business and the industry is only going to grow long term. New entrants may have an easier time coming online than ever, but that will only grow the total pie for everyone.
Hasbro's forward price-earnings ratio is around 13, while historically that has been closer to 25, which puts the stock near an eight-year low. This time last year, everyone was calling for a recession, but exactly the opposite has happened.
In the meantime, Hasbro’s stock has declined, giving investors a solid opportunity for long-term income and capital gains.
