Hasbro has a 'real big problem' to work through, analyst says

D.A. Davidson & Co. Linda Bolton-Weiser joins Yahoo Finance Live to discuss the challenges Hasbro is facing amid missing on fourth-quarter earnings, quantifying the amount of inventory that needs to be worked down, investor sentiment, and the outlook for profit growth.

Video Transcript

RACHELLE AKUFFO: Hasbro seeing a tough quarter as it misses analyst estimates on the top and bottom line. However, the toymaker expecting its operating cash flow is expected to nearly double in 2023.

For more on insights on the toy industry is Linda Bolton-Weiser, D.A. Davidson managing director and senior research analyst. Good to have you on the show here. So obviously a lot of optimism here coming out of Hasbro despite this, what they saw with the earnings here. Talk about the credibility here, especially when it comes to this CEO, and how you think that actually plays into these expectations going forward.

LINDA BOLTON-WEISER: [COUGH] Excuse me.

Yes, Chris Cox, the CEO of Hasbro, does have a bit to prove. The company is under pressure. There's some activist involvement. And so the company is under the gun. But really, some of the challenges that they're facing certainly are very similar to the challenges that Mattel is facing. So basically the expectation is for a really down first half of 2023 and then resumption of growth in the second half.

And, of course, the real big problem here, it's not so much toy demand. The problem is inventory, both at the company level as well as at the channel level. That has to be worked down. And I think investors are getting some comfort that there's some numbers that's been put around to quantify the amount of inventory that needs to be worked down.

RACHELLE AKUFFO: And we know that, I mean, expectations were already tempered after that January preannouncement, but then to then have this happen with Hasbro as well, what does that do in terms of how you're viewing the health of Hasbro?

LINDA BOLTON-WEISER: Well, you know, Hasbro has some company-specific challenges in addition to the macro challenges. So they do need to work through improving the profitability of certain toy brands, and one thing they've done is to license out the rights to those. So they're getting rid of toy brands that are actually losing money for them. Also, they've talked about they're going to divest portions of the entertainment business. That's been a very hard business to project for analysts. And they have some work to do on the cost reduction.

So there's a lot of things that they have to do, but most of all-- and the CEO emphasized this-- they do need to gain share, market share, in toys in 2023 because the toy market's probably going to be about flattish.

RACHELLE AKUFFO: And we did see that Chris Cox did talk about delivering this first billion-dollar brand in the form of Magic The Gathering and said that they did grow in some key investment areas, including licensing, as you mentioned there, direct to consumer, and also what they saw with operating profit margins. How much does that play into the growth story when you think about the digital landscape of gaming that they are also pushing into?

LINDA BOLTON-WEISER: Yes, well, the crux of the bull case for Hasbro is that they have this Wizards and digital-gaming business, which is really a significant portion of their revenue and profit. And that has, oh, 30% plus margins, whereas the toy business has a 10% margin. So when you have higher growth in digital and Wizards segment versus toys, then you're going to have a natural margin lift over time.

So that's really the long-term bull thesis for Hasbro, and I do think that can continue to work out. And even in 2023, they are guiding to 50 to 70 basis points of operating-margin expansion. So they're getting margin expansion even in a tough year in 2023.

RACHELLE AKUFFO: And obviously we saw, as with Mattel as well, talking about that tough macroeconomic environment, and we know that their gross margins were affected by their inventory-management efforts as well. How would you compare the two when you think of the offerings that they both have?

LINDA BOLTON-WEISER: Well Mattel I would say is in a little bit stronger of a footing in their toy business because it's not really a turnaround. They've had a pattern, a trend of pretty steady market-share gains. So in that sense, Mattel has been outperforming the industry, whereas Hasbro has been underperforming the industry because of some share losses. So that's kind of the key difference.

And I would say that, in general the revenue decline for Mattel in the first half of 2023 is a little bit less than Hasbro. Hasbro is more in the 20s type of revenue decline, and Mattel is more like in the 15% to 20% range-- a little bit less of a decline for Mattel.

RACHELLE AKUFFO: So then as we look ahead as we look at the toy industry-- because I know you said it's not so much a demand issue-- that it's not about the demand issue, that it's really about inventory management and things like that. What is your outlook then for the rest of the year for the toy industry, and who do you think is really going to come out on top in terms of how they manage their inventory?

LINDA BOLTON-WEISER: Well, industry experts, the companies themselves and other industry insiders are calling for a flattish market, and this is after several years of very solid growth and two years of double-digit revenue growth. This is retail sales growth. And then 2022 was flattish and 2023 flattish.

But in general, the industry is healthy. So even when consumer wallets are pinched a little bit here, the industry is really not declining. It's kind of flattish. So that's good news that consumers will always still buy toys.

But, you know, again, the challenge here is for Hasbro to try to gain market share. Mattel has been gaining more share. And so I have buy ratings on both Mattel and Hasbro, but I tell investors that I prefer Mattel here. Valuations are similar, and yet I think Mattel is a little bit on a stronger footing right now than Hasbro.

RACHELLE AKUFFO: Well, thank you for your insights. Linda Bolton-Weiser there from D.A. Davidson, thank you for joining me this morning.