MAT Mattel Inc

Hasbro Inc. (HAS) has reported third quarter 2011 earnings per share of $1.27, which fell short of the Zacks Consensus Estimate of $1.30 but improved from $1.09 earned in the year-earlier quarter.

Hasbro’s net revenue of $1,375.8 million grew 5.0% from the year-ago quarter but lagged the Zacks Consensus Estimate of $1,437.0 million. Foreign exchange had a favorable impact of $37.1 million. Standout performance by the Transformers brand along with continued double-digit growth in the International segment aided the revenue upside.

Hasbro continued to return value to investors in the form of a share repurchase program and dividend distribution.

Performance Highlights

Hasbro experienced worldwide net revenue growth in two of its four major product categories, namely Boys and preschool which shot up a respective 15% and 12% to $534.6 and $217.3 million, on an annualized basis. On the other hand, Girls and Games categories fell a respective 4% to $259.1 million and 6% to $364.7 million.

Geographically, net revenue from the U.S. and Canada segment declined 7% year over year to $764.6 million, while its operating profit dipped 19% to $128.8 million. The International segment reported net revenue of $563.3 million, up 23% year over year. The segment’s operating profit was $100.7 million, significantly higher than the year-ago quarter.

The Entertainment and Licensing segment also experienced a 69% year-over-year jump in revenue to $46.3 million. But the segment’s operating profit showed a much greater increment of 158% to reach $15.3 million.

We noticed a 44.6% rise in Hasbro’s royalty expenses from the prior-year period to $109.3 million. Product development expenses totaled $49.5 million, down 4.1% year over year. Advertising expenses decreased 2.4% from the prior-year quarter to $130.4 million. But selling, distribution and administration expenses increased 8.8% to $220.1 million.

Financials

At quarter end, total assets were $4.08 billion compared with $4.21 billion at the end of the year-earlier quarter. Hasbro’s long-term debt was at $1.41 billion, almost flat year over year.

Hasbro repurchased a total of 5.6 million shares of common stock during the quarter at a total cost of $211.0 million and an average price of $37.74 per share. At quarter end, $263.5 million remained available in the current share repurchase authorization.

Outlook

Management expects year-over-year growth in revenue and earnings per share for 2011.

Our Take

Hasbro’s strong product line-up, strategic tie-ups and its growing presence in emerging geographical regions will help it finish 2011 on a modest note. The upcoming holiday season should also bring good tidings for Hasbro as most of the retail companies generate a large proportion of their net revenues during this period.   

However, in an environment of steeper input costs, we believe, it would be challenging for the company to grow its earnings. An incremental cost of $7 million primarily associated with recruiting and office space at Rhode Island is expected over the next three to four quarters. Additionally, the consensus miss in the third quarter of 2011 is also expected to pull down the estimates in the coming days.

Hasbro currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are maintaining our long-term Neutral recommendation on the stock. Last Friday, one of Hasbro’s closest competitors Mattel Inc. (MAT) reported third quarter earnings of 86 cents per share, which was in line with our estimate.

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