Baby Yoda and the phase one trade deal comes to Hasbro’s (HAS) recuse after a disastrous Q3 earnings call that resulted in the stock sinking 17%. Per Brian Goldner, “the threat and enactment of tariffs reduced revenues in the third quarter and increased expenses to deliver product to retail.” I feel that management was remiss when they forecasted their ability to circumvent the tariffs and then used the tariffs as a scapegoat to justify the company missing its numbers on both top-line revenue and bottom-line profit. Now the backdrop has changed in Hasbro’s favor with the phase one trade deal with China being reached and of course, the new internet sensation Baby Yoda.
The company is in a solid position moving into the holiday season, historically their biggest quarter, with blockbusters and the holidays coming into the fold. Hasbro has its Disney toy licensing deal (Marvel, Star Wars and Disney Princess lines) that should have a strong showing with Frozen 2 and the new Star Wars film with Baby Yoda debuting in Q4. Hasbro Studios (Transformers’ Bumblebee, My Little Pony, Power Rangers), E-Sports (Dungeons and Dragons and Magic: The Gathering), its legacy games (Monopoly and Nerf) and acquisition of Entertainment One earlier this year places the company in a position of strength. Hasbro has a compelling future across its portfolio with many catalysts in the near and long-term time horizons.
Figure 1 – Baby Yoda making his appearance last month in The Mandalorian on Disney+
Phase One Trade Deal
The U.S. and China came to terms on a phase one trade deal, benefiting any company that sources and manufactures its products in China. Hasbro has already migrated some of its supply chain away from China as a risk mitigation strategy due to the trade tensions between the two nations. The phase one trade deal provides Hasbro with supply chain flexibility and additional time to make any necessary adjustments to its business model. The previous quarter Hasbro lost momentum and attempted to attribute this to the tariffs. Now, this tariff headwind has been removed for the time being, allowing Hasbro stock to appreciate on the news.
Hasbro’s Q3 conference call highlighted tariffs as a major disruptor to its quarterly numbers and possible headwind for the near term.
“Hasbro remains on track to deliver profitable revenue growth in 2019, behind innovation in gaming, toys, and around Hasbro's Brand Blueprint. However, as we've communicated, the threat and enactment of tariffs reduced revenues in the third quarter and increased expenses to deliver product to retail," said Brian Goldner, Hasbro’s CEO. "The team drove continued growth in the Wizards of the Coast gaming brands, MAGIC: THE GATHERING and DUNGEONS & DRAGONS, and delivered significant new holiday initiatives. To start the fourth quarter, we are seeing a strong consumer response to the global launch of Hasbro's line for Disney's Frozen 2 and Star Wars: The Rise of Skywalker as well as the U.S. launch of the new NERF Ultra."
“Hasbro's global teams are executing within a dynamic trade environment that is impacting the timing of revenues, driving incremental expenses and putting upward pressure on our underlying tax rate,” said Deborah Thomas, Hasbro’s chief financial officer. "We anticipate disruption throughout the remainder of 2019 as retailers work to manage costs and inventory, and we are working to mitigate the impact on consumers this holiday season. Hasbro's financial position is strong and we ended the quarter with $1.1 billion in cash on our balance sheet."
Previously, Hasbro had guided that the company would migrate its supply chain out of China and circumvent any tariff-related impacts. I think the company misjudged the tariff dynamics and will effectively manage this backdrop moving forward into Q4 and beyond coupled with a second wind with the phase one trade deal in place.
Baby Yoda Surprise
Disney debuted Baby Yoda last month in the new Disney+ streaming show and took the internet by storm shortly after that. Hasbro missed the holiday toys window since Disney kept Baby Yoda a secret and manufactures were not ready with Baby Yoda inspired merchandise when the show first aired last month. Hasbro is rolling out a line of official Baby Yoda toys available for pre-order but will not ship out until May 2020 to address this demand.
Per JungleScout, Disney and Hasbro have lost out on ~$2.7 million in merchandise sales because of the lack of toys this holiday season. It found that "Baby Yoda" searches rose throughout November by more than 7,000%, and forecast that demand would increase this month. Hasbro said its line of Baby Yoda toys will include four products, including a talking plush toy and 2.2-inch figurines.
“We've been so enamored with the conversation and fan reaction surrounding 'The Mandalorian's The Child,'" said Samantha Lomow, president of Hasbro Entertainment Brands. The Baby Yoda merchandise partnership with Disney could be a nice surprise growth catalyst in 2020.
Disney Partnerships and Entertainment One Acquisition
Hasbro acquired Entertainment One for $4 billion in an all-cash offer in an effort to expand its storytelling, TV, film and long-term growth outlook. Notable assets include Peppa Pig and PJ Masks which will provide a pipeline of new band creation. This acquisition will drive Hasbro’s position as a leading entertainment company by adding these global brands with proven success and strong financial returns.
Hasbro has a licensing deal with Disney that provides exclusive rights to some of Disney’s most successful franchises, such as Marvel, Disney Princess line, and Star Wars. The company's exclusive partnership with Disney has been highlighted in past earnings calls with a strong demand for Avengers-related toys and success with innovation around Princess and Frozen dolls. Goldner sees the Disney relationship as continuing to boost its top and bottom-line numbers into that latter part of the year with Frozen 2 and Star Wars: The Rise of Skywalker coming into the fold in Q4 2019. Let’s not forget about Baby Yoda being added to the mix in 2020 as well. Goldner also sees its Disney-related initiatives continuing on into 2020 and expects a tailwind for its business throughout next year. Disney’s box office dominance has dwarfed all other competitors securing roughly a third of market share in terms of box office gross. Now that the Fox acquisition has been approved, there’s potential for Hasbro to secure other Disney properties via the Fox integration.
Conclusion
Despite the Q3 miss, Hasbro is getting tariff relief with the phase one trade deal with China approved and a surprising catalyst with Baby Yoda demand. The phase one trade deal provides Hasbro with supply chain flexibility and additional time to make any necessary adjustments to its business model. Collectively, these factors have pumped life back into Hasbro’s stock price after a disastrous Q3 earnings call that sank the stock 17%. Hasbro is well-positioned moving into the holiday season with blockbusters and the holidays coming into the fold. Hasbro has its Disney toy licensing deal that should have a strong showing with Frozen 2 and the new Star Wars film debuting in Q4. Hasbro Studios (Transformers’ Bumblebee, My Little Pony, Power Rangers), E-Sports (Dungeons and Dragons and Magic: The Gathering), its legacy games (Monopoly and Nerf) and acquisition of Entertainment One recently places the company in a position of strength. The company has many growth catalysts on the short and long-term horizon via the diversity of its portfolio and partnerships, e-sports, new Power Rangers/Entertainment One acquisitions and Hasbro Studios. 2019 has shaped up to be an inflection point for the company as it places the Toy R Us bankruptcy in the rearview and propels its business into the future with partnerships, growth initiatives, acquisitions with durable and compelling brands.
Noah Kiedrowski
INO.com Contributor
Disclosure: The author holds shares in AAL, GE, KSS, SLB, TRIP, USO and X. However, he may engage in options trading in any of the underlying securities. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of www.stockoptionsdad.com where options are a bet on where stocks won’t go, not where they will. Where high probability options trading for consistent income and risk mitigation thrives in both bull and bear markets. For more engaging, short duration options based content, visit stockoptionsdad’s YouTube channel.
