The Toymaker's Transition: This Toy Stock is Evolving
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Toymakers have brought joy to children for generations -- but as the popularity of tablets and mobile devices increase, toymakers find that they must adapt to the changing technology. This means offering a combination of digital and physical products that are tailored to the newer generation. Among these toymakers is Hasbro (NASDAQ: HAS). The company has been making toys since 1923, but past performance isn’t worth much without a plan for the future.
Hasbro has recently made steps to improve its presence in the digital market by purchasing 70% of the fast-growing game developer Backflip Studios for $112 million. Founded in 2009, Backflip has developed popular games such as Dragon Vale, Paper Toss, and OutWorded. The studio boasts 300 million downloads for its most popular games and has won awards for its corporate growth .
According to Hasbro CEO, Brian Goldner, “The acquisition of Backflip fits perfectly into our strategy of extending our brands into all forms and formats.” Following the acquisition, Backflip will continue development of its intellectual property as well as create mobile version of Hasbro’s popular brands.
In addition to the Backflip acquisition, Hasbro recently extended its mobile gaming agreement with EA for another 4 years. EA has helped Hasbro create mobile games such as Monopoly Hotels and Scrabble and under the new terms, EA will continue to develop mobile versions of Hasbro’s popular board games.
In addition to increasing its digital market, Hasbro continues to work on expanding its physical toy and game sales. During the first quarter of 2013 Hasbro saw revenue increase 2% driven by the girl’s toys and board game products offsetting a disappointing 20% revenue decline in boy’s toys. Hasbro is focusing more on boy products to remedy this decline. The company has performed global consumer research focusing on the modern boy, and is innovating new products based on this information.
Hasbro is working with studios and filmmakers to create new products to accompany new blockbuster movies for the summer and future. Marvel product revenue increased 20% during the most recent quarter, and the company will continue to release products with upcoming Marvel movies like Thor: The Dark World and The Wolverine. Hasbro hopes that the popularity of these movies and products will help drive the boys' toys segment.
To increase earnings, Hasbro has started a cost-saving initiative working towards $100 million in annual savings by 2015. So far, the focus of this initiative has been from a 10% reduction in workforce that includes an early retirement program. The company has experienced a higher participation rate in the early retirement program than expected, and will incur pension charges of up to $10 million.
On a bright note, the higher-than-expected retirement rate will give Hasbro an opportunity to recruit more talent to high-growth areas of its business. Ultimately, savings will come from strategic process improvements, facility consolidation, and further expense reductions in addition to workforce reduction.
The restructuring does not come without a cost. During the first quarter, Hasbro recognized $28.9 million in pretax charges associated with restructuring. That equates to $0.14 and is largely responsible for the company’s loss of $0.05 per share. When you take away restructuring charges and tax adjustments, Hasbro has positive earnings of $0.05 per share.
Mattel is the industry leader in the design, manufacture, and marketing of toys and other family products. The company recently had successful quarterly sales and revenue growth of 7% and 7.20% respectively that beat expectations. This success was primarily driven by American Girl and Monster High products. The company owns historically popular brands such as Barbie and Hot Wheels and partners with entertainment giants like Disney and Pixar to create new toys to accompany movies and TV shows.
Founded in 1995, Jakks is a newer company that is struggling to turn a profit. In its most recent quarter, the company managed to increase revenue 6.4% to $78.1 million, but had a loss per share of $1.26. Like Mattel, Jakks partners with Disney to create products such as Princess and Fairy Dolls.
Hasbro, Mattel, and Jakks have gross margins of 49.66%, 54.20%, and 29.90% respectively. This further separates Hasbro and Mattel from Jakks. Jakks also has a lower dividend yield of 2.50% compared to Hasbro and Mattel’s of 3.40% and 3.20% respectively.
Of the two, Mattel is Hasbro’s largest competitor. Mattel has had solid sales growth thanks to its massively popular brands but it is not investing in technology and digital games like Hasbro. Digital integration will be what puts Hasbro ahead of Mattel in the long run.
It is a time of transition for modern toymakers and Hasbro has made good headway in combining physical toys and games with digital ones. With its recent acquisition and contract extension, the company has made significant investments for a digital future. It returns wealth to investors with dividends and has $107.1 million left in its share-repurchasing program. This, combined with its cost-saving initiative and popular brands, makes Hasbro a buy.
Ben Popkin has no position in any stocks mentioned. The Motley Fool recommends Hasbro and Mattel. The Motley Fool owns shares of Hasbro. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!