Hasbro Inc. (HAS), engaged in the design, manufacture and marketing of games and toys is slated to release its fourth-quarter 2010 results on Monday, February 7. The current Zacks Consensus Estimate for the fourth quarter is 96 cents per share, representing a 12.17% year-over-year decline.
With respect to earnings surprises, Hasbro has outperformed the Zacks Consensus Estimate in all the trailing four quarters. The average earnings surprise was a positive 30.7%. This implies that the company has beaten the Zacks Consensus Estimate by this magnitude over the last four quarters.
Previous Quarter Performance
Hasbro reported its third quarter 2010 earnings of $1.09 per share, which surpassed the Zacks Consensus Estimate of $1.04. In the year-earlier quarter, Hasbro had earned 99 cents per share. The better-than-expected results were driven by tight cost-control initiatives, which more than offset the muted growth in sales.
Hasbro’s net revenue of $1,313.3 million in the quarter was up 3% year over year and exceeded the Zacks Consensus Estimate of $1,279.0 million. Excluding the impact of $16.2 million unfavorable foreign exchange fluctuation, revenues grew 4%.
Operating profit nudged up 3% year over year to $237.8 million. Operating profit margin inched up to 18.1% from 18.0% recorded in the year-ago quarter.
Hasbro experienced worldwide net revenue growth in three of its four major product categories. On an annualized basis, the Games and Puzzles category increased 2% to $387.0 million, the Preschool category grew 9% to $184.7 million, the Boys product category spiked 4% to $472.3 million, while the Girls category dropped 1% to $269.1 million.
Geographically, net revenue from the U.S. and Canada region rose 4% year over year to $825.5 million. The International segment reported net revenue of $458.9 million, up 3% year over year.
In mid-January, Hasbro announced disappointing preliminary sales results for the fourth quarter and fiscal 2010. The Pawtucket, Rhode Island–based company expects to report total revenue of $1.3 billion for the fourth quarter of 2010, down 7% year over year as demand for toys was below its expectations during the crucial holiday season.
The toy maker also projects fiscal 2010 sales to dip 1.7% from the prior year to $4.0 billion. Segment-wise, net revenue from the U.S. and Canada are expected to plunge in the fourth quarter and fiscal 2010, whereas International segment net revenue is expected to rise.
Management expects a modest year-over-year increase in earnings per share for 2010, compared with $2.48 reported in 2009, despite dilution from the joint venture with Discovery Communication. Management believes that it will be able to achieve its tenth consecutive year of earnings growth in 2010.
Yesterday, Hasbro said that it hiked its quarterly dividend by 20% to 30 cents a share. The dividend will be payable on May 16, 2011 to shareholders of record on May 2, 2011.
Agreement of Estimate Revisions
Following weak preliminary sales results, a clear negative trend was palpable in the last 30 days, implying analysts’ negative perception on the stock. Notably, 10 analysts out of 15 slashed their estimates while only one analyst moved in the opposite direction. For full-fiscal 2010, 11 out of the 14 analysts reduced their estimates while none raised the same. Severe winter and price increases by retailers are mainly responsible for this lackluster performance.
One of its peers LeapFrog Enterprises Inc. (LF) also experienced a slowdown in consumer demand during the holiday season, resulting in a reduction in its 2010 earnings outlook.
Magnitude of Estimate Revisions
In the last 30 days, estimates have moved down drastically both over the near and long term, as seen from the magnitude of the Zacks Consensus Estimate trend. Estimates for the fourth quarter and fiscal 2010 moved down from $1.08 to 96 cents and from $2.69 to $2.54, respectively. Estimates for 2011 also registered a steep decline from $3.21 to $3.11.
The current Zacks Consensus Estimates for 2010 and 2011 are $2.54 (up 2.39% year over year) and $3.11 (up 22.29%), respectively.
Hasbro’s strong product line-up for fiscal 2011 and 2012, strategic association with Discovery, signing of long-term licensing agreements, recently added Sesame Street license, growing presence in emerging geographical regions and aggressive tapping of the broadcasting media position the company well over the long term. Previously, we had noticed that the company’s expense management efforts augured well for the company’s growth in profits faster than revenue.
Post third-quarter earnings, Hasbro had indicated its medium-term operating margin goal of 15%. Management also noted that by 2015, its entertainment and licensing segment will likely account for 10% of sales but 30% of operating income.
However, we remain cautious on the stock due to the execution risk surrounding the joint venture with Discovery Communication and its dilutive effect on near-term earnings. Moreover, most of its agreements will not come to fruition before late 2011.
Additionally, the company operates in a highly competitive industry. Many of its competitors including JAKKS Pacific Inc. (JAKK) and Mattel Inc. (MAT) are also entering various deals to expand their footprints. Infact, Mattel’sfourth quartersurpassed the Consensus on both earnings per share and revenue parameters. Although dividend hike is a positive for Hasbro, Mattel is not far behind in this respect. During its fourth quarter earnings call, Mattel boosted its dividend by 11% to 23 cents.
Increasing input costs and low order placement from retailers following a large inventory after a sluggish holiday season also add to our worry. Hasbro currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are also maintaining our long-term Neutral recommendation on the stock.