Investors essentially took a wait-and-see approach with Hasbro (NASDAQ: HAS) following its fourth-quarter earnings report, which missed estimates by a wide margin. Although shares initially tumbled after the report, they've since made up all of the lost ground and trade at the same level they did before the release.
That may be because it wasn't unexpected that the toy maker's business would be hit so hard by the bankruptcy of Toys R Us. Although the 22% decline in sales in Hasbro's gaming segment indicated that the impact of the toy seller liquidating its inventory was much greater than anticipated, it also means it's likely a temporary setback.
With Hasbro scheduled to report first quarter earnings on Tuesday, April 23, before the market opens, investors will get a glimpse into how the company is positioning itself in a post-Toys R Us world.
A Magic: The Gathering Tournament. Image source: Magic: The Gathering.
There are some challenges Hasbro still faces beyond the toy seller's demise. Last year, for example, was one devoid of many big blockbuster movies, a phenomenon that drives sales with tie-in products. The toy maker suffered annual declines in sales from partner and franchise brands without a release from Walt Disney for any of its Frozen and Princess lines, and with the Star Wars franchise struggling over the back-to-back Last Jedi and Solo misfires, movies that were widely panned even though they made a combined $1.6 billion in worldwide box-office receipts.
This year isn't looking any better. Hollywood is having one of its worst starts in years, with domestic box-office receipts down 17% through April 15 compared with the same point last year, grossing just $2.76 billion compared with more than $3.33 billion in 2018.
Hasbro also had to address an international market that had shifted, particularly in Europe, where sales tumbled 22% in the fourth quarter but were down an even worse 24% for the year. The toy maker said "changing consumer shopping behaviors, a rapidly evolving retail landscape, and reduced retail inventory, amid challenging economies in key markets" made 2018 a tough year, but a good portion of the foreign market decline could also be laid at the feet of Toys R Us, which was Hasbro's second biggest customer in Europe (it was third largest in the U.S.).
An e-sporting chance
To deal with the new dynamic, both here and abroad, Hasbro identified $50 million to $55 million in cost efficiencies it can achieve this year and a total of $70 million to $80 million in 2020.
Moreover, as the esports industry begins to explode, Hasbro is going to ride its coattails by expanding one of the few flagship brands that actually grew last year. Magic: The Gathering has always been a competitive gaming adventure, but in December, Hasbro unveiled MTG Arena, which takes the tabletop game and integrates it into a new digital platform. There's also a new Magic Pro League that will offer 32 of the top-ranking Magic players from around the world contracts of $75,000 to compete in competitive matchups and tournaments.
In all, there is some $10 million in prize money at stake this year across digital and tabletop Magic games, which also offer opportunities for esports partners and sponsors. The first event, a $1 million invitational, was held at the end of March, so we may get an update on how this new initiative is being received (I obviously chose the wrong way to spend my idle time as a kid).
It's not a straight path to growth, though. Valve's Artifact has all but collapsed, though its pay-to-play -- and then pay some more -- model is the polar opposite of Magic's free-to-play-and-grow model, one that has 25 years of success behind it. Still, Activision Blizzard is the leader even if its own free-to-play game Hearthstone is flagging.
Hasbro doesn't provide guidance, but analysts forecast revenue to grow about 4% year over year to $746 million, with earnings of $0.16 per share, a surge of 60% over the year-ago period. It may prove that simply biding one's time until Hasbro sorts out the new toy landscape may be the best approach of all.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard, Hasbro, and Walt Disney. The Motley Fool is short shares of Hasbro. The Motley Fool has a disclosure policy.