Hasbro: On Top of Its Game

The toymaker is posting strong sales and profit growth, and has avoided the product-recall woes plaguing rivals

by David Bogoslaw

The holiday shopping season is a source of elevated anxiety for all retailers trying to attract increasingly cash-strapped customers, and Hasbro Inc. (HAS) is no exception.

But Hasbro is luckier than most. DVD releases of popular kids' films such as The Transformers and Spiderman 3, which comes out next week, promise to bolster interest in related merchandise, making for a very merry sales outlook. What's more, sales are expected to continue into 2008 thanks to a follow-up animated television series based on the Transformers, Hasbro CEO Alfred J. Verrecchia said on Oct. 22.

And while competitors such as Mattel Inc. (MAT) took a beating in the third quarter due to lost sales and costs associated with multiple product-line recalls, Hasbro has so far steered clear of these problems.

The Pawtucket, R.I.-based toy manufacturer reported a nearly 64% jump in profit to $161.6 million, or 95 cents a share, from $99.6 million, or 58 cents a share, a year ago. Excluding a favorable tax adjustment of $29.6 million, or 17 cents a share, the company would have earned 78 cents a share in the latest quarter. Analysts had estimated a profit of 71 cents a share on $1.14 billion in revenue.

Hasbro's shares moved 0.4% lower Oct. 23 to close at $28.29.

So far, Hasbro says it hasn't seen any measurable drop-off in business as a result of the lead-paint related recalls. Larger economic factors, like the effects of high oil prices, are more likely to take a substantial bite out of retail sales than worries spurred by the recalls, Verrecchia said on a conference call to discuss the latest results.

Instead of being an industry-wide issue, the recalls ultimately come down to how stringent each company's testing and inspection processes are, he said.

Since the recalls, Hasbro has stepped up the frequency of its own testing, but that hasn't materially raised its costs or caused delays in getting toys to market, he said. He also stressed that the recalls had affected a very small portion of the three billion toys that are sold in the U.S.

Concerns about recalls of magnet products produced before 2007 have apparently led consumers to avoid Polly Pocket toys, but "Hasbro may capture some of the lost sales with its girl's lines, which include Littlest Pet Shop and My Little Pony," Margaret Whitfield, an equities analyst at Sterne Agee & Leach in Birmingham, Ala., said in a research report on Oct. 17.

Hasbro hasn't hiked its marketing and advertising budget to counter any potential negative impact from the recalls. It does plan to spend more in the fourth quarter than it did a year ago, but that's been the plan all year, Verrecchia said.

If Hasbro does have any problems with any of its products, the company would "address it quickly, openly and decisively," he said.

Net revenue for the North American business rose 10% to $822.7 million, led by shipments of the Transformers and Marvel product lines, and growth in other Hasbro brands such as Furreal Friends, My Little Pony, Monopoly and Scrabble. Operating profit for the segment reported climbed 20% to $134.0 million from $111.6 million a year ago.

He said he was slightly surprised by how broad-based the sales growth was in the third quarter, including a 14% increase in its board games, which include Monopoly and Scrabble.

The company's licensing agreement with Marvel Entertainment (MVL) has resulted in sales that have exceeded expectations and could account for as much as 8% to 10% of worldwide revenue for the full year, he said.

"We see Hasbro as better positioned than Mattel with its focus upon older age groups in boys along with a large board game business," the Sterne Agee note said. "