Hasbro Continues to Take Incremental Share in 2017
Despite slowing toy category sales in the first quarter, hindered by a later Easter, narrow-moat Hasbro (HAS) appears to be continuing its share grab from Mattel, specifically in North America. While global sales for Hasbro increased a lackluster 2%, lapping stronger Star Wars and Marvel product sales in the year-ago period and ahead of film releases later in 2017, this compares with narrow-moat Mattel’s 15% sales decline in the same period. Given the stronger holiday season Hasbro achieved, we think retailers were more willing to take new inventory from the company that didn’t have to clear holiday products, which weighed on peer Mattel’s wholesale demand. We don’t plan any material change to our $91 fair value estimate based on current-period results. Hasbro reiterated its full-year outlook, reiterating cost expectations that were laid out at Toy Fair in February, including slightly higher cost of goods sold, and product development and advertising costs, along with flat royalty and selling, distribution, and administrative expenses (our full-year outlook called for 5% sales and 3% earnings per share growth). However, in anticipation of U.S. tax reform, we will decrease our federal statutory tax rate to 21% from 25% beginning in 2018, which should add about $4 to our fair value estimate.
Our long-term prognosis for Hasbro is intact, incorporating low-single-digit top-line sales growth domestically and high-single-digit sales growth internationally, which should help the company take modest share of the toy category. Our more recent concern has been the ability to capture robust growth on the heels of Star Wars: The Force Awakens success, which has led the 2017 earnings multiple to expand to more than 20 times, while earnings per share rise at a single-digit pace. Longer term we forecast EPS growth at a high-single-digit pace as operating leverage and share buybacks help improve SD&A expenses, leading to operating margins around 18% from 16.4% in 2016.
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