Hasbro's (HAS) shares appear to have recovered rather quickly as a result of the pre-market correction triggered by lost sales and profits, as the market understood the main problems of weakness as short-term problems. The stock has risen more than 3%, suggesting that the market is beginning to buy management's optimism.
Hasbro (NASDAQ: HAS): Q1 EPS of $ 0.10 is down $ 0.24
Revenues of $ 716.3 million (-15, 7% Y / Y) missed by $ 103.1 million
The high profit of an EPS miss did not scare investors, and it is understandable why the sharp correction is being considered in recent weeks the unsafe effect of the Toys "R" Us bankruptcy made noticeable. Management's positive expectations have certainly helped, but we can say that the market has already devalued much of the weakness at recent prices.
Performance was weak in every major segment, with the US and Canada segment down 19% to $ 364.3 million from $ 451.6 million in 2017, the international segment down 19% and just the entertainment and entertainment sectors Licensing business (+ 21%), although the segment is too small to make a difference.
As a result of lower sales, $ 52.3 million in expenses for Toys "R" Us and higher inventory and freight costs, adjusted operating income was $ 28.9 million in North America compared to operating income of $ 64.8 million in 2017. In the international segment, the company actually reported an operating loss of $ 56.1 million, which falls to $ 44.9 million, compared to $ 11.2 million Spend dollars on Toys "R" Us. In Entertainment and Licensing business, operating income increased 23% to $ 13.9 million or 21.7% of net revenue from $ 11.3 million or 21.5% of net sales for the same quarter of 2017.
Despite a rise in debt Up to just over $ 1.7 billion, Hasbro's balance sheet remains very solid, with cash and cash equivalents of $ 1.6 billion, with almost no net debt and a net debt / EBITDA ratio of 1.9 Even without the unusually low returns of the short acceptable error appears to be Toys "R" Us.
What shocked me at first glance was the 24% increase in inventories, even though sales were down 16%, indicating a huge volume of unsold goods in the near future. Although a quarter of the increase was due to currency effects, it was not three-quarters. The management gave us an explanation as to why inventories exploded, explaining that much of this increase was the result of their conscious decision not to put some goods on the market because they did not want their new and very responsive products to come with them Liquidate compete inventory at retailers. In any case, it should not be a big deal if we think stock levels are still below 10% of sales, while management estimates that inventory levels have actually dropped.
It's Obvious That We Can not Say It Q1 performance was good, but the short-term disruption in North American industry could not have led to different results. What seems to be more important is the underlying trend, which will become more noticeable as soon as the higher inventories flow into the market and the higher advertising activity gradually fades away.
Recent Weakness and Toys "R" Us Bankruptcy
The management informed us about the implications of the bankruptcy of Toys "R" Us, which has led to short-term disruption of business in the United States and the UK, with the bulk the expected weakness should affect the business in the first phase should half-year, while the negative effects in the third and fourth quarters should subside. In the management's own words:
The management has warned investors for several quarters of the negative effects of the Toys "R" Us bankruptcy and thus the story was already largely due to the stock price discounted. As a result of this short-term headwind, sales in the US and Canada fell 19%. Management understands that the effects of Toy "R" Us's lost sales and efforts to handle retail inventory are evident in both the US and Canada and international segment results.
I understand the negative impact of short positions. With regard to schedule controls such as the bankruptcy of the third largest trading partner, I think that there could be some weaknesses that management does not mention. The company reported that sales in the international segment decreased by 17%, including a favorable impact of foreign exchange of $ 19.5 million. Latin America and the Asia-Pacific region grew, but were more than offset by a 28% decline in Europe. While the bankruptcy of Toys "R" Us certainly had an impact on UK sales, the bulk of the weakness appears to be due to the transfer of retail inventories they are working on or are the result of other sources of weakness not mentioned by the management. It is clear that the insolvency of Toys "R" Us is not a big factor in Europe, and it is strange that, despite the favorable currency effects, a decline of 28% has been recorded, much more than the decline in the North American segment. It is necessary to observe the development in Europe and on the inventory side.
Expectations and Growth Prospects
It is worth noting that, despite the short-term challenges, management holds very positive expectations of the company's growth prospects. Management confirmed the medium-term forecast split in February. 2018 is still considered a transitional year, but management expects developed economies to grow at low to mid-single digits over the next few years, while the international segment will post double-digit growth rates at local currency. In addition, the operating margin this year is expected to be 15.6% and expected to improve over the next 2 to 3 years. The main reasons for the margin expansion seem to be the expansion of higher-margin franchise brands, Hasbro gaming and entertainment and licensing, as well as increased emerging market profits and cost efficiency.
Operating cash flow in this area is expected to be in the range of $ 600 million to $ 700 million, a 10% year-over-year decline that reflects the mean of the forecast range, but only a slight decrease when we face a charge $ 59.1 million related to Toys "R" Us.
I think what has moved the market the most is management's announcement that the company will return to profitable growth as soon as next year the impact of these short-term disruptions will end. Management expects that the revenue losses suffered as a result of the bankruptcy of Toys "R" Us will be relocated to other retailers in a relatively short period of time and that the company will soon be able to use a range of catalysts to achieve revenue growth, such as 6 New Marvel films this year, along with two new Star Wars productions in two years that should take advantage of The Last Jedi's recent success to give the franchise more momentum, plus Frozen 2 next year.
It's great to see management so positive about the company's future prospects. It is clear that management teams are always in favor of the businesses they manage, but it is good to see a return to profitable growth next year and profitability in 2018 despite the negative impact of the short-term disruption. Management does not want to be accurate on sales, but the 15.6% operating margin expected by management is safely monitored. If the company could report flat sales this year, we could estimate an EPS of $ 4.85 for 2018, assuming an operating margin of 15.6%, interest expense of $ 86 million and a tax rate of 16.5%. This would translate into a current price-earnings ratio of 17.5, which is a reasonable multiple for a company with the competitive strengths of Hasbro and the prospects for EPS growth in the mid- to high-single-digit range over the next few years. I'm not extremely bullish on HAS because I think the safety margin at these levels is not huge and I'm somewhat worried about the sharp decline in Europe despite the overall better conditions of this market compared to North America, but I still think about it Given its strong competitive strength, excellent financials and the ability to see a reversal in the near future, the stock will be an appropriate complement to a diversified long-term portfolio.
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