Hasbro’s (NYSE: HAS) stock price tanked last week after Mattel (NYSE: MAT) missed analysts’ EPS and revenue forecasts. Mattel linked the decline in earnings to a challenging environment led by a slowdown in the toy category in the United States and foreign exchange headwinds. Also, the company blamed competition which led to product markdown to attract more customers. After the release, investors dumped the category leading to a weekly decline in Hasbro’s stock price. To the contrary, today, Hasbro released its Q4 earnings that beat analysts’ forecasts by $0.37 (EPS) and $130 million (revenues). In the quarter, the company earned revenues of $1.63 billion and EPS of $1.64. As shown below, Hasbro has a good track record of beating analysts’ forecasts.
Source. Seeking Alpha
Summary of the report
Hasbro’s Q4 net revenues went up by 11% to $1.63 billion with net earnings going up by 10% to $192.7 million.
For the full year, the company’s net revenues increased by 13% to $5.02 billion albeit with a $61 million currency impact. Geographically, the company’s revenues grew in all areas with US growing by 15%, Canada by 11%, and 11% internationally. Entertainment and licensing grew by 8%. The same growth was reported in the games category which grew by 9%, franchise brand by 2% and partner brand by 28%. In the press release, Brian Goldner said the following about the company’s 2017 outlook.
Hasbro’s foresight to build brands led by storytelling, consumer insights and innovation, combined with the relentless execution of our Brand Blueprint including investments in entertainment and digital gaming, is driving our business and creating long-term strategic differentiators for Hasbro. We are well positioned for a successful 2017 and the continued advancement of Hasbro’s brand-building capabilities for years to come.
The Trump Factor
Donald Trump ran his campaign with a promise to do a number of things: cut corporate and personal taxes, corporate tax reform, reducing regulations, and job creation. These policies are positive for a company like Hasbro whose growth partly depends on the economy. As an international company with vast operations abroad, Hasbro would benefit in foreign capital repatriation. Corporate tax reforms would also help the company save a good amount of money. In addition, with personal taxation eased, parents will be at a good position to buy toys for their kids.
Optimism in the company also grew with the recently released non-farm payrolls growing to 227,000 beating the analysts’ forecasts of 175,000. Though the unemployment rate slightly went up to 4.8%, the number is still considered good for the economy. Average wage growth also went up by 3 cents. The small business optimism index also went up by most since 1980 as shown below. A combination of an improving economy with more people working is good for Hasbro because people have a disposable income to buy toys.
While the outlook for the company is good, the challenge ahead is on how to navigate the new administration. One policy Trump and the Republican-majority House have suggested will likely affect the company’s growth. Republicans are proposing a border adjustment tax. In a border adjustment tax, imported goods are taxed while exports are exempted from taxation. This taxation is intended to encourage manufacturers to produce in the United States.
For Hasbro, this is a major problem since most of its customers are in the United States while most of its production is done overseas in China and Ireland. A small fraction of the products is manufactured in Massachusetts.
If the border adjustment tax is imposed on imports, the results would be dire for the company. For margins sake, the company would be forced to hike prices on its products. With high prices, chances are that volumes in the United States would decline. Presently, HAS has a profit margin of 15.35% compared to MAT’s 9.47% and operating margins of 16.30% versus MAT’s 9.51%. Remember, the toy industry is very competitive and very price sensitive. A small hike in price would discourage people from buying the products.
Hasbro managed to beat analysts’ forecasts in Q4. The management also offered optimistic views in the coming year. As noted above, the proposed border adjustment tax would not be viable for the company because of the price sensitivity of the toy market. Therefore, I would advise investors to be cautious about the company because of this risk.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.