Hasbro loses $112.5M in Q1, blames Toys R Us liquidation

Dive Brief:

Hasbro reported a net loss of $112.5 million in Q1 2018, attributing $61.4 million of that loss to the Toys R Us liquidation, citing bad debt expenses as the primary reason for the loss.
The toymaker also attributed a net charge of $47.8 million "related to U.S. tax reform," specified as "related to an increase in the Company’s repatriation tax liability and a reversal of tax benefits no longer permitted under the new guidance. The Company expects its full-year underlying tax rate to be at the high end of its previously projected range of 15% to 17%."
Despite the rough Q1, CEO Brian Goldner described it during the company's earnings call as "near-term disruption" and expects Q3 and Q4 to dramatically improve.

Dive Insight:

The Toys R Us liquidation hit its suppliers hard, and despite Hasbro's strong financial health rating (FHR) from RapidRatings (clocking in at an 89 in 2017 with a very low default risk), the toymaker is still reeling from the blow.

The good news is, it's likely just a hiccup for Hasbro, especially given the toymaker's smart approach to assessing and meeting consumer expectations, something Toys R Us never quite figured out how to do.

Hasbro has successfully tapped into pop culture trends with Marvel and Star Wars-themed toys, and that's why the toymaker is in better financial shape than Mattel and is likely to rebound from the Toys R Us liquidation much faster.

As a result of the liquidation, excess inventory remains a concern for Hasbro, but Goldner said the company is "working to clear the excess inventory."

"This transformation is already evident in the U.S., and over the past 3 years, we have grown our retail distribution by more than 21,000 doors net of recent store closures at traditional retailers, and we have developed our digital and content to commerce capabilities," he said.

Sitting on excess inventory usually drives up costs for the retail industry and suggests a lack of accurately gauging consumer expectations, but Hasbro understands that principle, which is why the toymaker has focused so much on expanding its distribution network to dilute unnecessary inventory.

But some of that inventory is stockpiled to meet upcoming demand.

To its credit, Hasbro has aggressively capitalized on Beyblade, Marvel and Star Wars-themed toys. The box office success of Marvel's Black Panther, for example, is boosting Hasbro despite the Toys R Us setback.

"Point of sale of Hasbro items from Black Panther are performing well, ahead of everyone's expectations," Goldner said. "We couldn't be more excited about the success of Black Panther. And early on, we agreed with MARVEL that this property had strong potential. As a result, the Black Panther product line is the broadest line we have ever created for a Marvel Studios origin film."

As CFO Deborah Thomas clarified in the earnings call, some of the excess inventory is Avengers: Infinity War and Star Wars: A Solo Story themed toys, which the company is holding to meet demand as the movies are released.

"So what we're seeing in our inventory is all good inventory," she said. "Part of it was from our deliberate decision not to put some into the market because we didn't want to have a lot of our good, new initiatives competing with liquidating inventory at our retailers. So we will see that inventory moving into the market throughout the year, and we're not worried about it at all."

Despite the success of Hasbro's Marvel and Beyblade segments and growth in the Hasbro Gaming segment (which includes Dungeons & Dragons and Jenga) the company noted that other brands, such as Magic: The Gathering, declined in revenue, which certainly didn't help as the company recovers from the Toys R Us liquidation.

But Hasbro's cost structure efficiency is very good, as is its net profitability and cash flow, according to RapidRatings, and according to the earnings call, the company's "cash flow outlook remains intact."

Even with a rough start to the year, Hasbro's Q1 2018 results and strong FHR reveal a willingness and the ability to focus on consumer needs, which suggests the toymaker's recovery should be swift.