MAT Mattel Inc

Hasbro Inc. (HAS) has reported third quarter 2012 adjusted earnings per share of $1.28, surpassing the Zacks Consensus Estimate of $1.20 per share. However, on a GAAP basis, earnings per share were $1.24, slightly lower than $1.27 per share in the year-earlier quarter.

Hasbro’s net revenue of $1,345.1 million fell 2.2% from the year-ago quarter and missed the Zacks Consensus Estimate of $1,379.0 million. Foreign exchange had an unfavorable impact of $47.4 million. The Girls market was the main savior of quarterly revenue.

Hasbro continued to return value to investors in the form of share repurchases and dividend payments.

Performance Highlights

Hasbro experienced worldwide net revenue growth in only one of its four major product categories -- Girls -- which increased 17% to $302.3 million, on an annualized basis. The new initiatives like the Furby and One Direction product, launched during the quarter together with the introduction of several new holiday products supported growth in revenue in the reported quarter.

Boys and Preschool categories fell 12% to $471.1 million and 5% to $206.0 million, respectively. In the Boys category, Marvel products continued to report solid year-over-year growth. However, the Transformers and Beyblade brands declined in the reported quarter after witnessing instability in the first quarter of 2012. On the other hand, the Preschool category gained from persistent growth in some product lines like Playskool Heroes, and more, partially offset by a decline in Sesame Street products.

Revenue at the games category remained flat year over year at $365.7 million. The Boys Action Gaming product line coupled with other gaming products such as Twister, Battleship and more, sustained to perform well in the reported quarter.

Geographically, net revenue from the U.S. and Canada segment increased 1% year over year to $774.5 million and its operating profit registered growth of 20% to $154.2 million.

Net revenue at the International segment dipped 7% year over year to $524.1 million. However, excluding the adverse effect of currency translation, revenue grew 1% in the quarter. Revenue in the International segment reveals a tailwind from Latin America but headwind from Europe and Asia-Pacific. The segment’s operating profit was $85.5 million, down 15% year over year.

The Entertainment and Licensing segment revenue declined 7% year over year to $43.1 million. The segment’s operating profit also experienced a decline of 30% to $10.7 million on a year-over-year basis.

As a percentage of net revenue, Hasbro’s royalty expenses dipped 130 basis points (bps) to 6.6% and selling, distribution and administration expenses declined 30 bps to 15.7%. Advertising expenses were 10.0%, up 50 bps year over year as a percentage of net revenue. However, cost of sales and product development expenses remained flat year over year at 43.6% and 3.6%, respectively. All these culminated to an operating margin improvement of 60 bps to 18.6%.

Liquidity

At quarter end, total assets were $4,446.3 million compared with $4,084.7 million at the end of the year-earlier quarter. Hasbro’s long-term debt was $1,398.9 million, compared with $1,405.1 million at the end of the prior year quarter.

Share repurchases & Dividend
    
Hasbro repurchased a total of 142,336 shares during the quarter at a total cost of $5.2 million. At quarter end, $212.2 million remained available in the current share repurchase authorization. The company spent $46.9 million in cash dividends.

Outlook

Management expects its fourth-quarter revenue growth to be driven by the launch of innovative products coupled with an increase in marketing initiatives. Consequently, management expects year-over-year growth in revenue and earnings per share for 2012, excluding the impact of foreign currency translation.

Our Take

Hasbro’s strong product line-up slated for the last quarter of the year, strategic tie-ups, and its growing presence in the emerging markets bode well for future growth.

Management’s plan to shift shipments nearer to the peak buying season in the fourth quarter in the U.S. should prove beneficial. We heard a positive tone from Hasbro regarding its Holiday initiatives. However, we prefer to remain on the sidelines at the current level until we see any definite sign of materialization of the aforesaid initiatives.

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. As a point of reference, one of Hasbro’s major peers, Mattel Inc. (MAT), surpassed the Zacks Consensus earnings per share and revenue estimates in its third quarter 2012.

 
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