Hasbro, Inc. — 2024 Q1

So we are not -- we don't give EPS guidance specifically. We've been through the models. I would say analysts are coming up pretty close to kind of our internal math. I think the one thing to keep in mind for the quarter that just finished here is that we had about $0.10 of favorability from a stock adjustment -- stock compensation adjustment that will carry forward through into the year -- into your model. But we're not getting specific EPS guidance at this point.

Eric, thanks for the question. Yes. So Arena was down a bit in Q1. Mostly that was due to not lapping a remastered set that we did last year for Shadows Over Innistrad. Barring that, it would have been roughly in line with the overall property, which was up about 4% on tabletop. So we continue to invest in Arena. We continue to mimic all the card sets that are inside of it. And we're also investing over the long term to refresh the platform. So you'll be hearing more about that over the coming couple of years because it's going to be a long-term digital project. But when you look at MAGIC and where our growth has been, a lot of that growth has been in social-based play like Commander and in collectibility. So certainly, we'll be investing in those areas on the digital platform over the long term.

Sure. Megan, good question. So as we -- let's start with the corporate segment. So there was $45 million of profit that we posted in there. About half of that is that non-stock comp adjustment that we made. And so that is roughly half of that $45 million, and it will not repeat. So when you think about our margin profile in the quarter, about 2.5 points of kind of our margin performance came from that adjustment, that's not going to carry forward as we go. As we think about the balance of the year, there's going to be puts and takes within the margin. So in Q2, we're going to still have that deleverage happening with toy in Q3, though, remember, there's the impact last year that we had in all of the digital with Baldur's Gate, Lord of the Rings, there was a lot of favorability coming into Q3 last year that we begin the comp.

Well, I think when you look at Q1, January and February and our results were pretty heavily impacted based on 2 factors: one, the reduction in closeouts; and two, not lapping a couple releases that we had with Pulse in the prior year. We had some fairly large ones. That -- those 2 factors kind of contributed to that underperformance in February and January. Starting in March, though, we saw very healthy trends on our point of sale and our Easter trends normalizing for the dates were also quite healthy. And so far into April, we're seeing those positive point-of-sale trends continue.

Rise of the Beasts, which both were pretty positive contributors to the quarter. Also, our partners at Disney had just an amazing slate of content both in streaming and in theaters. That's not going to be lapped as completely. So we're taking a little bit of a cautious tone and wanting to monitor our performance. I think the thing that helps to negate may be the impact of the entertainment-related headwinds is our marketing effectiveness. We're seeing a significant improvement in our overall return on advertising spend. We've retooled our marketing team. And so that tailwind we have to look at and monitor. And we'll get back to you guys at the end of Q2, on a potential revision to guidance if we continue to see positive trends play out.

And then the only other added, I mean, on your closeout comment. So, you're right, it's typically heavy in Q1. But given what we were going through last year and trying to clear out all of the inventory, it was a factor in all 4 of our quarters. And so that is -- that will be the huge reduction that we took in inventory last year, the fact that we don't have that overhang that will be a positive contributor every quarter that we go. We'll continue to see that close up volume being down. So I should say a positive contributor on the margin side and negative contributor on the revenue side in every quarter.

Yes. Drew, good question. If you think about our -- how we've kind of talked about our top line flow for CP, so we'll be down similarly in Q2. And we start to rebound in Q3 and we're back to growth in Q4. So I would expect our margin to follow suit. So I think we're still going to see that same kind of material [ delev ] headwind in Q2. It starts to stabilize in Q3 and then our margins. I mean, our margins are growing absent even the huge comp that we have on inventory, but then that kind of onetime margin pickup that we have will further expand our margins in Q4. So it's going to kind of follow with the top line.

Yes. So I would say Fallout has been a great set. I'm a little bit of a fan boy, so I'll try not to playing it a little bit too much. I've been playing it since the '90s. But it's probably our best-performing commander set ever, whether it's a Universes Beyond set or not. However, commander sets tend to be quite a bit smaller than our overall premier sets. So you have to wait that accordingly. I would say our view on MAGIC is pretty healthy. Engagement is -- has reached pre-pandemic levels. Our stores are all healthy. Fallout doing well. Outlaws of Thunder Junction, which is our first major release of Q2, it's early, but it's off to a promising start.

Yes. I mean, Q1 for the industry is usually around 14% to 15%. So it's still in terms of the total volume that Q1 represents. So I think it was a positive quarter. Certainly, we saw momentum exiting the quarter that's been continuing into Q2. But it's just super early. And the toy industry has been a difficult one to predict for the last 18 months or so. So we're going to continue to monitor it this quarter, particularly in light of the relative pause in entertainment that helps to drive toy sales. And that said, I think it was a good start to the year for us and for the industry as a whole. And my hope is it continues.

Yes, I'll start, and then I'll turn it over to Gina. So I'll maybe do a little bit of thematics and then turn it over to Gina to go into the details of your question, our P&A. I think what you're seeing in Q1 is kind of our overall strategic thesis playing out, which I think will play out knock on wood through the rest of the year and for the foreseeable future. And I think that is that Hasbro is the games, IP and toy company effectively in that order. And I think our margins will start to shape around those style of industries, style of TAMs and growth opportunities. And so what you're seeing in Q1 is, wow, when you have a healthy games business, when some have some -- when you have great IP like we have and great partners that you can leverage it through and you start to get your act together on your cost structure and your operational efficiency in your underlying toy business and start to address kind of some of the marketing deficiencies you have, good things happen.

And when you kind of [ lateral ] that up with how it will play out by quarter. So if you kind of look at the pieces in Q1, that mix and that as we continue to shift into gaming and into digital is going to continue to be a tailwind for us as we move through the balance of the year. The fact that supply chain productivity is going to more than offset inflation. That trend is going to continue as we move throughout the year. And then operating expenses and all of the work that we're doing on purchase cost reduction, people cost reduction that, that benefit will continue to impact us as we move throughout the year. So the one quarter that we'll just have to watch is Q3 because of how strong it was in Q3 of '23. So it's still going to be a very healthy margin, but there was just so much positivity last year at that time that there could be a slight dip year-over-year, but all of the underpinnings of the cost structure that is going to hold and carry with us for the year.

Q3 is going to be have the big Baldur's Gate 3 launch time.

Correct. And the MONOPOLY GO! started to hit -- the minimum guarantee started to hit for MONOPOLY GO!.

Yes. I mean the short answer is it's just really too early in the year to call it out. But to your point, the trends are favorable if they continue to play out in the way that everyone is watching and some of the other variables that are out of our control kind of break our way and become positive contributors. We absolutely did see that there could be upside. We just want to watch and play out here as we move through Q2 before we officially take guidance up for it.

The challenge within our P&A is it's really a comp one. And so we just need more time.

Yes. It's a material amount of money. Yes, the other half is all due to the operational excellence program. And I would think of it as a timing element of where it sits. So it's real money. It's purchase cost savings, it's people cost savings. And sometimes within the quarters in the year, it just settles out in corporate. As we move through the balance of the year, that's going to be allocated back. That favorability will be allocated back to the 2 segments of CP and Wizard. So that will kind of flush its way through. It's just a timing element of where it sat at the end of Q1. Last year, in the corporate P&L, I believe it was roughly $20 million annually of operating profit. I would expect maybe a little bit more just given that stock comp adjustment, but that's how you should think about Q1. Half of it was the stock comp, half of it was just some timing stuff that will get flushed back through the segments.

No, it's about $0.10 of earnings per share. Yes, it was right about that.

About half 45%, which translates to around $0.10 a share.

I don't think we're prepared to give you a sizing on it. As Gina said, if current revenue trends and the current advertising spend to revenue continues it will be quite favorable for us. And we'd likely exceed the minimum guarantee within Q2.

Well, I think it's a pretty simple rubric that we're using, which is spend where we can measure, which is primarily digital. We have traditionally been a little traditional in our media planning. It's worked, but we haven't been able to really refine it down to the SKU level and down to the partner level. So we're spending a lot more in digital. We're spending a lot more with our retail partners near the point of sale or near the point of decision. And we're seeing a significant multiple effect in terms of the effectiveness of the spend. Still early in the year, and we still have to scale it, but certainly positive for us. I would say the majority of that will go to top line inside of CP if it continues to work like what we're hoping. And I think that's part of the thesis that we have for our Q3 and Q4 projections. And then that top line, particularly given the cost structure efficiencies we're driving and supply chain efficiencies we're driving, that will have a nice flow through to bottom line results, which again, I think kind of goes to the margin comment that Gina made earlier.

Yes. Good question. For us, every kind of the whole the Red Sea, all of that is really been immaterial on our business. I think in the P&L in Q1, it was less than a couple of hundred thousand dollars of impact and even since then, our team has been doing a good job of navigating around and finding productivity to offset. So it is not a factor that I would call out as impacting our business right now. Overall, what we're seeing across freight is some moderation capacity is opening up. We're seeing rates come down. So that is absolutely benefiting the P&L part of our guidance. We said that there was going to be 2 points of inflation in the year. So it's playing within that but the environment is much more rational for us this year. And our team has done a really nice job renegotiating rates, renegotiating our contracts and then getting after our network in a way that benefits the P&L.

Yes. And I think an important thing to keep in mind about us, when you think about things like the Red Sea and exposure, maybe toy dominant companies would have is most of our profit pools are nearshore. Magic Board Games, PLAY-DOH almost all of our licensing business has very little sea freight dependencies associated with it. because they're either made in market or they're made in markets that really aren't affected by kind of like a traditional Southeast Asian or Chinese freight lanes. So I think that's a competitive advantage of us -- for us in a world that has a little bit of tumult on the freight lanes.

For Wizards in Q2 is going to be probably pretty favorable from a top line standpoint and a bottom line, so it's going to look pretty consistent, just given the release schedule that we have on the top line. So we expect there to be another kind of growing quarter. And then on the bottom line, again, just given the mix that we're seeing within the business and the shift towards digital, we'll see consistent trends there. I would say, for both businesses, for both CP and WotC, we've got the benefit from operating expenses that will continue to flow in as well throughout the quarter.

And then there should be a nice royalty benefit in Q2 as well for MAGIC, Modern Horizons 3 is not royalty bearing. Lord of the Rings did fantastically, but there was a royalty associated with it.

I think in Q1, you saw a bit of Outlaws of Thunder Junction, which is the colorful name for our first major Q2 release, a bit of that shift in Q1, and I think that helped. For the balance of the year, I don't think there are any huge quarter-over-quarter shifts. You'll probably see a bit lighter release schedule in Q4 which I think might affect that quarter as you think about things. But Q2 should be reasonable for MAGIC, Q3 should also be reasonable and then Q4 will probably be the light one.

Yes. Good question. I know it's confusing to just given some of the timing components. Last year in '23, it was roughly $20 million. When all kind of get settled out, it was roughly $20 million. I would say we'll probably be around that plus or minus a bit just given that we have this stock comp adjustment sitting in there. It's really held as a lot of our corporate costs sit within there. It's trying to represent kind of that corporate overhead structure, but then much of it gets allocated back as we go throughout the year. And all of that just given all of the work that we're doing in that area is a little bit as you can imagine, it's moving. It's agile this year as we make all those changes. So I would say, call it, $20 million, $30 million by the end of the year [ in terms ] of profit.

I would say in Q2 and -- Q2 to Q3, you're not going to have that $20 million adjustment for the stock comp in there. And so then you're looking kind of plus or minus a few million dollars moving in and out. So it really becomes an immaterial impact as we move through the next few quarters.

Got it. Yes. I think we feel based on what we delivered in Q1, really good about our ability to deliver that 4% to 6% guidance range. And to your point, a big drag that we saw in Q1 was the [ eOne ] And as we kind of push past that and move into growth in Q4. You're going to see some nice underlying profitability within the business. As we move then into 2025, we've publicly said that. Our goal is to get this as close to double digits as we can through 2025. And it's going to be some of the same levers that you're hearing us talk about, continued focus on cost structure, continuing to refine our supply chain, getting really smart with our product mix and how we're pricing in markets.

No, It's not create the same rate in fourth quarter. Particularly, you got to keep in mind we had that big inventory adjustment last year that becomes a huge benefit for us in the fourth quarter.

Good question. Yes, we wouldn't call it deflation per se. So we are seeing a couple of points of inflation. The 3 areas I'd call it, one is labor. That's our biggest cost in the P&L. We're continuing to see that inflate a few points. The second, then when you think about our largest kind of ingredient that we're purchasing in Horizon, that also is inflationary in the year. But those are kind of the big 2, I would say. I mean, our logistics cost there's pluses and minuses. Overall, we're managing logistics pretty well. For the year, in the quarter, we saw about 2 points of inflation. That's what we think that is going to play through the rest of the year, about 2 points of inflation.

Yes. Just on an apples-to-apples, I'm not sure how other companies are talking deflation. When we talk about it, we talk about it as productivity based on our teams working with our vendors. And so our productivity is significantly scaling past underlying inflation in the supply chain to a pretty healthy manner, which is driving our gross margin productivity.

No. I mean I think it's validating that we made the right choice. Two years ago, we outlined what our selection criteria would be basically can we generate $50 million in revenue at a 10% OP. And can we grow to $100 million or more revenue at a 15% OP on a line. And so basically, we've chosen the lines to outsource that we don't think meet those thresholds. But another company with maybe a different cost structure or a different set of expertise could still make a really nice business with even if it was sub-$50 million. So I think we're basically done without licensing. We certainly will be driving cross-licensing and leveraging our brands for category expansion and new product opportunities. like we're doing with LEGO, like we're doing with Mattel, like we're doing with location-based entertainment. But I think Power Rangers is probably a -- it's probably the last brand that we will outsource.

Yes. Easter gave a modest lift in the quarter, maybe, call it, 1 or 2 points based on it being earlier. Finally, though we're seeing April kind of continue to positive trends even barring kind of like what's going on with Easter. I think we were up in the last week our total global POS in the last week of April that we measured, we were up 7% without our divested brands included and up about 4% when you even include those divested brands. So while we think Easter would help in Q1, it wasn't really a decisive help.

Yes, about 50% or so of our...

40% -- when you add in Wizards, we're about 40%.

About 40% of our total volume is built in China today. But only 5% or 10% of our total profit is sourced out of China.