Hasbro, cost cutting and digital Monopoly to sustain margins

The goal, over the whole year, is to reach around 300 million. More generally - it should be remembered - Hasbro last year managed to bring home 'savings' of $220 million ($20 million in 2022). This is a process that - against the additional 210 million in savings expected in 2025 - should enable the Peppa Pig group to achieve around 750 million in cumulative gross savings in four years. The pressing, moreover, concerns the company's own 'inventory'.

The company's inventories, which had risen too high in the wake of the booming demand for toys during Covid, were brought down. In the second quarter of 2024, the stock stood at USD 358 million. That is: a level, on the one hand, 51% lower than in the same period of 2023; and, on the other hand, down 37% when compared to the second quarter of 2019. The dynamics described above, indeed, and - it must be added - inevitably, lent a hand to the recovery in margins, especially in the last quarter. In the second quarter, Earning per share (EPS) was $1.22. This was better than market estimates (78 cents per share) and more than doubled the 49 cents EPS of the same quarter in 2023.

In short, all as easy as drinking a glass of water? The reality is more complicated. First of all, it should be noted that the toy industry, globally, is not doing too well. In 2023, the sector dropped by 2% compared to the previous year. The same 2024, according to the big companies, should be marked by a modest decline.

This is - analysts explain - the retreat of the long wave linked to Covid. During the pandemic, confinement at home had given a lot of impetus to the whole world of toys. Now the propellant has disappeared. Not only that. The trend in the sector - according to some experts - is also made problematic by the trend in customer stocks.

Why? It happened that - precisely because of the euphoria in the sector in the wake of the pandemic - too many retailers 'hoarded' toys and overstocked them. As a result, a generalised 'de-stocking' started in previous years, which, however, would not be completely finished. True! Hasbro emphasises, to date, that it has noticed encouraging signs of demand, gaining good support from retailers for new products planned for the second half of 2024 (among others, the animated film 'Transformers One'). Beyond this, however, perplexity about the total cleanliness of customer inventories remains. Which contributes to the volatile mood of operators regarding the recovery of the toy industry. At least, in 2024.

But it is not only a question of the target market. Past bad moves by Hasbro also play their part. One of them is the acquisition of e One in 2019 for about USD 4 billion.

The deal was described by the activist fund Ancora as 'a misstep in capital allocation (...) that has become a distraction' in running the business. The definition seems apt. In 2023, the group finalised the sale of eOne to Liosgate for $375 million. That is, a much lower price than that paid for the purchase. Of course! The Peppa Pig franchise, as dowry to eOne, remains in the hands of Hasbro. Moreover, it should be remembered that eOne itself produces many films or TV series (Grey's Anatomy among others) which are not related to the Monopoly manufacturer's toys. With which, disposing of them is a logical and rational step.

Nevertheless, the fact remains that the accounting weight of the transaction is not negligible. The group indicates that, at the turnover level, the decline in the second quarter without the e One effect would have been 6% (and not 18%). On the other hand, the operating margin includes EUR 37 million of depreciation and amortisation, losses on disposal, and costs associated with the transaction. In short: the accounting impact of e One is mainly in 2023. However, the effect of the wrong strategy is still being felt now and it is not easy - especially in a weak market environment - to put this behind us.

So far, some considerations on cost cutting and increased operational efficiencies. Hasbro, however, also looks at the first line of the balance sheet. Here - apart from the focus on fewer, larger (revenues over 25 million) and more profitable brands (operatin margin not less than 25%) - the group wants - among other things - to exploit the phenomenon of the so-called 'kidult' (a cross between the English words 'kid' and 'adult').

That is, purchases of toys that are not for children, but are made by more adult persons. The company, in this sense, has indicated that more than 60 per cent of sales are made by people over 13 years of age. With this in mind, the presence of the HasbroPulse site dedicated to its adult world is not surprising. It is, on closer inspection, a digital platform that enables various operations. An example? Crowdfunding aimed at financing the production of action figures. That is: collectible toys in limited numbers, built based on stories (often films or TV series) narrating the exploits of (more or less well-known) heroes.

Yes, more or less well-known. The company aims - also - to leverage its most prestigious brands: from 'Transformers' to 'Magich: The gatering' to 'Monopoly'. The strategy, aimed at strengthening the player communities or expanding their number, is articulated. One example is the effort on digital. Here, Hasbro recently launched 'Monopoly Go!', the smartphone and tablet version of the famous board game.

Not only that. The same 'Magic: The Gathering Arena' and 'D&D Beyond'. which are the bit transpositions of the famous games of the same name, are enjoying great success. On closer inspection, those mentioned are just a few examples of how the company - which saw its 'Wizards of the Coast and Digital Gaming' division grow by 20% in the last quarter - is betting strongly on the non-analogue business. A challenge that - also thanks to technological partnerships - the group wants to face in order to complete the 'turnaround'.

With this in mind, what then is the outlook for 2024? Hasbro expects the "Consumer Products" segment to have revenues declining between 7 and 11% with the Adjusted Operating Margin between 4% and 6%. The 'Wizards of the Coast' division, on the other hand, is expected to have an Ebit margin of approx. 42%, while the Adjusted Operating margin of the 'Entertainment' segment is estimated to be around 60%.

Finally, group adjusted EBITDA: at the end of the current year, Hasbro estimates the accounting item at between USD 975 and 1,025 million.

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