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Can Hasbro Recover and Turn Business Around After Eliminating 50% of SKUs?
Last week, Hasbro shared its Q4 and full-year 2023 earnings report to dismay. According to its data, the toy and entertainment giant missed analyst projections for Q4/FY 2023, sparking questions about its future prospects. Hasbro reported a 23.2% decrease in revenue year-over-year, amounting to $1.29 billion. Additionally, its non-GAAP profit per share plummeted to $0.38 from $1.31 in the same quarter of the previous year.
As Hasbro grapples with its recent financial results, investors and analysts alike are pondering the company’s future trajectory. With Wall Street anticipating an 11.6% decline in revenue over the next 12 months, the road ahead appears challenging yet ripe with opportunities for strategic evolution.
Hasbro has long been synonymous with iconic toys and entertainment experiences. From the beloved Mr. Potato Head to the timeless Rubik’s Cube, the company has carved a niche in the global market, offering a diverse array of products and multimedia engagements for families and children.
In the earnings report, Hasbro executives revealed their strategic plans aimed at strengthening the company’s core business, enhancing shareholder value, and reducing debt. This includes initiating dividends, with an expected payout of $0.70 per share in May, alongside efforts to streamline operations and optimize inventory management.
Acknowledging challenges faced during the holiday season, Hasbro also announced plans to slash excess inventory by 50%, closing overflow storage locations and discontinuing 50% of unprofitable product offerings. Some iconic brands like FurReal Friends and Easy-Bake Oven will transition to licensing agreements, a strategy already employed with the Nerf Sports line.
On Hasbro’s recent earnings call, CFO Gina Goetter said, “Moving into 2024, we have eliminated about half of our SKUs. These SKUs were only 2% of our revenue and were duplicative and unprofitable, quashing the network and creating cost for us and our retailers.”
Despite a decline in toy revenue, certain brands like Transformers, G.I. Joe, and Furby performed well. Notably, Wizards of the Coast, responsible for Dungeons & Dragons and Magic: The Gathering, witnessed a 10% revenue increase, driven by successful licensing agreements for digital games like Baldur’s Gate III and Monopoly Go!. Monopoly Go! is poised to surpass minimum guarantees and generate additional revenue, while Baldur’s Gate III has maintained steady performance so far in 2024.
Monopoly Go! alone generated $800 million in revenue for its developer in the fourth quarter. Additionally, Transformers toys saw a 35% surge in point-of-sale growth, attributed to the success of the movie “Transformers: Rise of the Beasts.”
Hasbro’s modest annualized revenue growth rate of 1.8% over the past five years raises eyebrows in an industry driven by innovation and novelty. Short-term performance is equally telling, especially in an industry susceptible to rapid shifts. Hasbro’s recent trajectory has seen a departure from its already tepid five-year trend, marked by annualized revenue declines of 11.7% over the past two years.
Hasbro’s Rebuttal
During the earnings call, Hasbro’s CEO and CFO shared their insights on retail situations, cost structures, and growth prospects.
The leaders discussed the retail situation and cost structures in North America and internationally. Retail inventory in the U.S. and Europe is down about 20% year-over-year, translating to a four-week improvement in supply. The company generally maintains about 17 to 20 weeks of supply at major retailers, which is considered optimal. While there are some concerns about industry discounted merchandise, particularly in certain channels, the company’s inventory position remains strong, with little aged inventory.
In terms of profitability, North America is highlighted as the highest-margin market compared to international markets. However, efforts are underway to address factors that draw down the margin profile internationally, such as allowances and overhead structures. Initiatives like revenue growth management and cost-saving measures aim to optimize profitability across regions.
Discussions also revolved around the company’s future growth prospects, particularly in its D&D (Dungeons & Dragons) business. Despite acknowledging the inevitability of slowing growth in certain segments, leaders remain optimistic about the D&D brand’s trajectory. Key drivers for growth include continued innovation in tabletop gaming, strategic partnerships for targeted entertainment content, and upcoming video game releases. The company expects significant growth in the D&D business over the next few years, with an emphasis on expanding the player base and leveraging popular IPs like Final Fantasy and Marvel.
The company provided insights into its cost-saving initiatives and revenue guidance for the upcoming year as well. Cost productivity measures are expected to offset inflationary pressures, particularly in labor, resin, and fuel costs. Net cost savings of around $200-$250 million are anticipated, contributing to overall profitability despite revenue projections reflecting a decline.
Looking ahead, the company plans to maintain a cadence of major digital game releases, with one major release annually starting in 2026. Universes Beyond sets, featuring popular IPs like The Lord of the Rings, aim to attract new players and expand the user base. These sets represent an opportunity to tap into new audiences while leveraging existing fan bases for growth.
Despite challenges in the industry, including a decline in point-of-sale (POS) metrics, the company remains cautiously optimistic about future growth. Projections for the industry indicate a temporary downturn in 2024, with expectations of returning to low single-digit growth thereafter.
While operating cash flow is expected to remain stable, strategic investments in capital expenditure (CapEx), particularly in digital gaming, underscore the company’s commitment to long-term growth. Despite market pressures, the company remains dedicated to its dividend policy and capital allocation priorities, including debt reduction targets.
Discussion Questions
How can Hasbro use its iconic brands like Transformers and Dungeons & Dragons to sustain and revitalize its position in the toy and entertainment industry amidst growing competition from digital platforms?
How will Hasbro’s move toward licensing and digital gaming affect its long-term brand identity and consumer engagement strategies, given the importance of physical toys in childhood development and cultural nostalgia?
With Hasbro emphasizing cost-saving measures and projecting a decline in revenue, how can the company balance short-term profitability goals with the imperative for sustained innovation and market relevance in an industry characterized by rapid technological advancements and changing consumer preferences?
Poll
Loading …BrainTrust
Jeff Sward
Founding Partner, Merchandising Metrics
Melissa Minkow
Director, Retail Strategy, CI&T
2023 was not a good year for Hasbro. The nadir of the company’s fortunes came from an eye-watering $1.5 billion loss. However, most of this was from impairment charges rather than fundamental, underlying operating issues. Now that the balance sheet is cleaner, and the problematic eOne film and TV division is sold off, the company should move back into the black. However, I am not quite so sure the sales line will stabilize. A lot of Hasbro brands still don’t have that much traction in the market and are seeing less interest from kids. Even the digital gaming segment is looking weak, after a stellar year in 2023. Some of this is a function of the toy market, which remains very price pressured; but some is also a consequence of the mix of brands Hasbro has in its stable. The best hope is to bolster licensing revenue, but this isn’t a quick fix. As such, the year ahead will be one about cutting costs to balance out revenue declines. That’s not winning; it’s trying to avoid losing too much.
The good news is the culling won’t seem to affect much, since~50% of their SKU’s accounted for practically no revenue. And the bad news, of course, is that 50% of their SKU’s accounted for practically no revenue!. Let that number sink in for a moment. Reading this story was a trip down memory lane….but not in a good way: when you’re a toy manufacturer and your most well known products are eligible for Social Security, something is wrong. I wish them well, and would like to be optimistic, but, honestly, what are they suddenly going to do that they haven’t been doing already ?
Dropping 50% of the sku’s because they are contributing only 2% of the revenue is a deafening indictment of brand and product management. How long has that been going on? What amount of $$$ were invested in those completely unproductive products? “Iconic” is a nice way of saying “old”, so where was the investment in evolving top sellers for today’s market? LEGO’s…little chunks of plastic… is iconic. But they have been brilliant at staying relevant to today’s customer. Are any of Hasbro’s brands due for a “Barbie” moment? Because it’s going to take that kind of lightening strike to re-energize these brands. There are some amazing brands in the portfolio here, but market relevance is determined by today’s customer, not the prior decade’s customer.
Two thoughts. First, the physical toy is not dead and many small but targeted toy manufacturers pride themselves in marketing intelligent, developmental toys. Second, eliminating a number of toys that only contributed 2% of profits looks a good move to bolster profitability and streamline the business.
I beleive the first question to be asked is why it took so long to realize that half their SKUs were loss contributors. Was management too wedded to historical products? Or did management not keep their eye on the ball? Does current management not understand the dynamics of the toy business?
I imagine that to be successful in the toy business, a company must be creative and nimble. I don’t think today’s story plays well for HASBRO.
This is a company that needs a new hit. Good for them to get rid of non performing sku’s, that no doubt takes some cost out, but how many more transformers movies can we endure? Dungeons and Dragons…wasn’t that a thing…in the 80’s? And Mr. Potato head I am sure had a bit of a revival due to “Toy Story 1,2,3,4″…but now what?
Stick a fork in this one, it is cooked.
Hasbro has gone through some rough times recently and they are now making some smart decisions. The bad news is that it seems like some of these decisions should have been made quite a while ago. Keeping SKUs that aren’t selling is an expensive mistake that eventually results in inventory write-offs. The move to digital gaming and licensing is a smart strategy given the shifts in customer demands. There may be a couple rough years, but these changes may ultimately make Hasbro eventually profitable again.
I’m not convinced that one rough year is enough to say a brand can’t come back. The challenges Hasbro faced are more concerning than normal given how big of a year Mattel had, but overall, they have always had a significant market share in this space. If they make the right efforts and focus on innovation as well as all of the cost cutting they’re doing, I don’t see why they couldn’t recover.
Toy sales overall are down 8% YoY.
I certainly agree with some of the previous comments – the SKU reduction was a bit late in coming – but better late than never. Certainly going forward, an ongoing product review approach should make assortment management and sku rationalization a process, not an event. While most brands and retailers need some fringe sku’s to round out the assortment and attract buyers, the breadth and inventory investment must be managed closely.
Hasbro as a brand has the means to continue to leverage their popular legacy products, while also adding new and exciting merchandising for a new generation based on what’s hot and trending in today’s culture. However, there is certainly more competition in their space than ever before.
What Hasbro needs now is a hit and leveraging the Intelletual property of the toy collection history and find a way to monetize. Whether is is limited edition small volume products targeting collectors with nostalgia, or media licensing and find the next Transformers franchise to drive the next generation of customers,
Hasbro experienced a weak holiday season and fell significantly behind sales for 2022, itself a declining year.
Since Lego was up nearly twenty percent, and Mattel was flat, I cannot attribute the declines at Hasbro to an industry trend. I’m not sure if that would have been the case without the Barbie movie and “her” skyrocketing revival.
With a slow economy, high inflation, rising interest rates on bank cards, and escalating cost for food, energy, and gas prices, the toy industry faces tougher times. As much as or more than any other category of CPG, the November election may bring a return to the “good old days” for the economy, which enhances the success of the toy industry. – Db