Hasbro, Inc. (NASDAQ:HAS) initially fell in Monday morning trading on a disappointing first-quarter report. Hasbro earnings missed estimates by a staggering 24 cents per share. Revenues for HAS also missed by substantial margins.
Also, the Pawtucket, Rhode Island-based toy company now must find new retail outlets as Toys “R” Us faces liquidation.
Despite the huge Hasbro earnings miss, HAS recovered from its initial decline and is now up 2.1% from Friday’s close. I don’t expect this rise to last, however. Hasbro needs a change in strategy, and this earnings report emphasizes that point more than ever.
Hasbro Earnings Missed by Large Margins
HAS reported Q1 earnings of 10 cents per share. Analysts had been looking for 34 cents per share. In the same quarter last year, Hasbro earned 54 cents per share. Revenues of $716.3 million missed Wall Street expectations by $103.7. million. That also represents a drop of 15.7% from year-ago revenue figures. The company blamed the lowered revenue on retail liquidations and inventory overhang.
If one word characterizes the reasons for Hasbro’s decline lately, it’s “electronics.” Due to electronic commerce, a primary retail outlet is on the way out. Hence, it must now depend more heavily on online retailers such as Amazon.com, Inc. (NASDAQ:AMZN). Moreover, children nowadays prefer electronic games. Companies such as Activision Blizzard, Inc. (NASDAQ:ATVI), Electronic Arts, Inc. (NASDAQ:EA), and Take-Two Interactive Software, Inc (NASDAQ:TTWO) dominate that market.
Fundamentals also offer few reasons to buy HAS stock. The company currently offers a 3% dividend yield. However, as analysts revise earnings estimates, that dividend looks less than stable. Christmas sales are also a meaningful gauge of dividend sustainability. And if Santa does not deliver as many physical toys to kids in future years, holders of HAS stock will have to fill stockings with less generous dividend payments.
Furthermore, HAS stock trades at a future multiple of 15 times earnings. This may appear reasonable for an old-line company. But given the questions about Hasbro’s ability to survive, this is a more dangerous multiple than Amazon’s 330 times earnings.
Hasbro Has No Future in Its Current Form
Hasbro needs a new strategy to survive in this market. One of the more popular ideas has been to take a page from its classic board game Monopoly and acquire, Mattel, Inc. (NASDAQ:MAT). In Monopoly game terms, it would arguably stand as the equivalent of owning the monopoly on Mediterranean Avenue and Baltic Avenue without being able to afford hotels. But since any creator can now invent a board game and sell it on a Shopify Inc (NYSE:SHOP) platform, one can argue that Hasbro merging with Mattel would still have limited monopoly powers.
Still, market precedents indicate this strategy could work. Despite the popularity of online books and electronic music, physical books and vinyl records still sell. Also, no electronic game replaces the experience of squeezing Play-Doh or putting an ear or eye on a Mr. Potato Head.
An electronic game company could see this reality and attempt to buy Hasbro as well. Since Amazon has made several forays into the brick-and-mortar retail market, such a move would not be unusual. However, because electronic game companies would likely only be interested in HAS at a much lower stock price, I cannot recommend the “hope for a buyout” strategy to stock investors.
The Bottom Line on HAS Stock
The Hasbro earnings miss serves as an indication that the company needs to remake itself in some form. Earnings of 10 cents per share fell well below the earnings seen in the same quarter in 2017. The disappearance of much of its retail footprint and the increasing popularity of electronic games have left HAS without much of its market.
The physical games for which Hasbro has become known are fast becoming a niche. The company could play Monopoly in an attempt to become the dominant board game producer. Hasbro’s only other alternative is to find an electronic game company who wants a part of the board game market.
Either way HAS has little future in its current form. Until it finds its place in the current game and toy markets, I recommend looking for gains elsewhere.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.