Hasbro, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Hasbro, Inc. is a global play and entertainment company, known for its portfolio of toy brands, digital gaming experiences, and content production and distribution.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Hasbro’s business is segmented into three main areas: Consumer Products, Wizards of the Coast and Digital Gaming, and Entertainment. Each segment contributes a unique aspect to the company’s overall revenue and strategic goals.

Consumer Products: This segment is focused on the traditional toy and game business. It develops, markets, and sells a wide array of toys, games, and related products across the world. Hasbro has a licensing business where the company gives rights to their Intellectual Property to third party companies to sell their products based on it. This generates revenue for Hasbro as royalty payments.
Wizards of the Coast and Digital Gaming: This segment focuses on trading card games, such as MAGIC: THE GATHERING, and digital versions of them like Dungeons & Dragons and other digital gaming initiatives. This segment is also focused on developing a global brand presence and creating a community for their various games and IPs.
Entertainment: This segment involves the development, acquisition, production, distribution, and sale of television and film content. The company’s growing movie and series catalog creates new business opportunities through licensing, content creation, and strategic partnerships.

Key elements of Hasbro’s strategy include innovation in gaming and toy design, leveraging their brands, expanding their digital footprint, and directly connecting with consumers and fans through multi-channel marketing.

Revenue Distribution

Hasbro’s revenue distribution across segments has varied over the past few years. Revenue in the Consumer Products segment is down due to declines in the traditional toys category. The company has a large reliance on sales to Walmart and Amazon, creating a concentrated customer base that makes the business more volatile. The Wizards of the Coast and Digital Gaming segment has been on an upward trend, however. Meanwhile, the Entertainment segment was heavily affected by some production shutdowns due to the covid-19 pandemic.

Geographic Revenue Mix:

Hasbro has a global reach, and derives a substantial portion of revenues from North America. The geographic mix of revenues changes with the different business divisions. Consumer Products division is mostly North America. Wizards of the Coast and Digital Gaming are very successful internationally, with both North America and Europe seeing huge popularity.

North America: This region is the biggest portion of revenue in the Consumer Products segments and overall for the company.
Europe: A sizable market share of the Consumer Products and Wizards of the Coast and Digital Gaming segments.
Latin America: Emerging market with good growth in some product lines.
Asia-Pacific: Growing market, especially for digital gaming.

Trends in the Industry

The toy and entertainment industry is in a state of flux, and Hasbro is trying to position itself as a leader in this change. They are investing in digital gaming, direct-to-consumer platforms, and a portfolio of more diversified brands. The toy market is becoming increasingly competitive as toy companies are challenged to adapt to a changing consumer base. In digital gaming, the rise of new platforms has also increased competition, as well as the change from single purchase games, to microtransactions and recurring revenue models for free-to-play games. The entertainment industry is a mixed bag, as the demand for movies and TV has had a comeback after the covid-19 pandemic, but streaming has started to change some aspects of profitability. Companies must focus on building engaging franchises that have appeal across different platforms and demographics.

Financials in Depth

The most important financial parameter that I am looking into is Return on Invested Capital (ROIC). I am looking for companies with high ROIC for a long term sustainable period of time, as this is a great indicator of future growth and potential returns for investors. To do that we first have to understand NOPLAT which is basically, earnings before interest and taxes (EBIT) adjusted for taxes. Then we can compute ROIC by using NOPLAT/invested capital, I calculate invested capital by removing any excess cash from assets and non-interest bearing liabilities from liabilities side. Note: I have made a lot of adjustments in order to be consistent.

Profitability

Hasbro’s profitability metrics reveal a mixed picture. While the company has managed to increase revenues, profit margins have been quite erratic. The gross profit margins are in the 50s range, but operating and net margins are at low single digit or even negative in recent quarters. There are a lot of one-time charges, impairments and provisions that cause fluctuation in the net income. As of 2023, most of the expenses are centered around cost of goods, advertising and production costs.

Revenue Growth: Over the years, sales has seen a declining trend in the traditional toys segment. Digital Gaming is growing at a fast pace, and now contributes most of the operating profit for the company. A lot of the revenue growth has been achieved due to mergers and acquisitions. Organic growth figures are often much lower than the aggregate numbers.
Gross Margins: Gross margins have been somewhat stable over the years, but are heavily influenced by supply chains, pricing changes and foreign currency fluctuations.
Operating Margins: While the operating profit in some years has been above the average, they are very volatile. Large swings in margins are because of restructuring efforts and impairment charges.
Return on Invested Capital (ROIC): Hasbro’s ROIC has generally been between 10 to 15 percent excluding goodwill, with only a few spikes. Their acquisitions often lower their ROIC due to goodwill impairments and other non-cash charges. The main driver is the change in operating profit, as investment and fixed capital have been relatively stable for years. Their low ROIC might indicate that they have weak moat and the company does not have the ability to take pricing power over competitors.

Financial Health

Hasbro’s balance sheet reflects a moderate level of financial health. The company has been adding a lot of debt lately, to finance acquisitions and buybacks. The company has a lot of intangible assets as well, such as goodwill and trademarks, because of past acquisitions.

Leverage: The debt-to-equity ratio has grown to about 2 and debt has been increased consistently in recent years, which has increased financial leverage and risks.
Liquidity: Cash and marketable securities are moderate. Days sales outstanding are about 80 days. In combination, there are reasons to be concerned about their current cash position and how they will cope with near-term obligations.
Cash Flow: The company has solid operating cash flows but a lot of the free cash has been used for acquisitions and buybacks, and not for reinvesting in the business. Their operating cash flows have also had periods of negativity due to various issues like one-time payments, impairment charges and restructuring plans.

Recent Concerns and Issues

Hasbro’s recent earnings calls have shown worries about declining sales in the consumer product segment. As a response the company has put more efforts into the direct-to-consumer approach and restructuring and cost-cutting initiatives. There are some concerns related to the company’s large intangible asset position and whether they can bring value to the bottom line, since the recent goodwill impairments have not done well for the company’s prospects. Another source of worry is how the changing market environment is affecting their business model. As consumers embrace different methods of consumption of games and entertainment, they might be unable to adapt as fast as required, with old IPs showing signs of stagnation. The rising interest rates and inflation are also posing potential headwinds. There are also increasing calls to address sustainability and ethical sourcing in the toy and entertainment industry, and HAS has to comply to all of those or risk losing market share.

Moat Rating: 2/5

Hasbro’s economic moat is rated as a 2 out of 5. It has some areas of advantage but also has some serious areas of weakness that prevent it from being a moatier company. The key to finding a durable competitive advantage is in having strong moat that allows the company to maintain high returns on capital for years to come.

Here is the explanation for giving it a rating of 2:

Intangible Assets: Hasbro owns a portfolio of well-known brands like Monopoly, Magic: The Gathering, Transformers and My Little Pony which are very valuable and recognizable among consumers. This brand portfolio gives the company some competitive advantage against smaller competitors, but in terms of long-term sustainability, there are reasons to be wary. Consumer taste is ever-changing, and a toy that is relevant today, could be a completely uninteresting choice in the future. While brands are a source of customer lock-in, consumer preference might change and go towards new products from new players, so they are not reliable source of economic moat on their own.
Switching Costs: There are some switching costs within the gaming segments, as switching from a well-known trading card game might involve a cost of time and resources to start a new one. However, other segments of the company do not have notable switching costs, so customers can switch to a new toy or a new brand relatively easily.
Network Effects: There are very little network effects present in Hasbro’s business operations, which limits their competitive advantage.
Cost Advantages: There are no significant cost advantages to the company. They have to use third party manufacturers in China to produce many of their toys, thus losing the power to have much cost advantages, apart from the efficiency of manufacturing. Overall, their cost structure is comparable to other global manufacturing companies.

Risks that Could Hurt the Moat

Despite having some competitive advantages, HAS has a lot of challenges that can create trouble for the company and erode any existing moats:

Brand Obsolescence: Shifts in consumer tastes and trends could erode the company’s brand value. As we have seen before, a brand can very quickly lose popularity if it becomes stale or uninteresting for the new generations.
Technological Disruption: The rapid pace of innovation in both entertainment and gaming could make current offerings outdated and irrelevant. Digital gaming is also shifting rapidly with new technological advancements. If they do not innovate fast enough, or keep up with trends in technology, the moat might erode with time.
Changing Distribution: The shift towards direct-to-consumer platforms may reduce the importance of their retail partners, making their distribution advantage weaker.
Economic Conditions: Downturns or recessions could affect consumer spending on discretionary products like toys and games, which could hurt the company’s financials and their moat.
Increased Competition: The toy market has become extremely competitive, with many small players that could come up with new innovation. The new entrants can use lower margins to aggressively gain share and push out older, established companies like HAS.
Inflation and rising debt: Rising inflation and higher debt rates will reduce consumer purchasing power and increase the company’s overall cost of capital. The resulting decrease in revenue and higher expenses can reduce profitability and erode the economic moat.

Business Resilience

Hasbro demonstrates moderate business resilience, which stems from a diverse brand portfolio and a fairly broad geographic diversification. They have a mix of evergreen franchises, like Monopoly, and more niche brands like Peppa Pig, that allows them to cope well in changing markets. However, they have low flexibility in terms of operations and investments, as most of their production is reliant on foreign suppliers. If consumer tastes shift radically or their products become commoditized, it would make it difficult for them to grow and maintain good results.

Understandability: 2/5

I will rate this company a 2 out of 5 in terms of understandability. Even though the company has some brands that are famous, the operational and accounting nuances are fairly complicated to understand. The company operates in different segments and also has a lot of joint ventures and complex business structures. There are a lot of acquisitions which makes the financials more difficult to analyze, especially because of the large share of goodwill. For an outsider, understanding where this company really makes its revenue and where they spend money is a bit difficult. The complicated financial statements, and a lack of information of the underlying competitive landscape further adds to the confusion. Also, the entertainment sector is extremely unpredictable and has its own share of uncertainty, which makes it hard to see long term stability and performance in this division.

Balance Sheet Health: 3/5

Hasbro’s balance sheet gets a rating of 3 out of 5. While it isn’t in a bad state, it isn’t the best either. They have been increasing their leverage to finance acquisitions, which has made them more vulnerable to rising interest rates. They also carry a lot of intangible assets on the balance sheet, some of which may be difficult to monetize if the underlying business performance deteriorates. While the company is not in any immediate danger, I am not fully comfortable with their balance sheet either, as higher debt and lower cash flow might give trouble in the future.

Conclusion

In summary, Hasbro has some unique assets and advantages that allow it to stay afloat and compete in the toy, game and entertainment industry, but at the same time, their moats are not strong enough to give them a good enough advantage that will provide sustained returns. There are also some notable risks in this space that the company will have to manage to stay competitive and innovative for years to come.