Hasbro, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 25, 2022; each comprised 13 and 39 weeks, respectively. Comparative periods ended September 26, 2021. Amounts are in millions of dollars except per-share data.
Business context and financial performance
Hasbro operates through Consumer Products, Wizards of the Coast and Digital Gaming, and Entertainment. Q3 results weakened across all three segments, with management citing lower sales volumes, product-cost and freight pressures, inventory obsolescence, foreign-exchange headwinds, and differences in entertainment and game release timing.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenues | $1,675.9 | $1,970.0 | $4,178.2 | $4,407.0 |
| Operating profit | $194.3 | $367.9 | $533.4 | $591.8 |
| Operating margin | 11.6% | 18.7% | 12.8% | 13.4% |
| Net earnings attributable to Hasbro | $129.2 | $253.2 | $332.4 | $346.5 |
| Diluted earnings per share | $0.93 | $1.83 | $2.39 | $2.51 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $262.2 | $685.6 |
Q3 net revenue declined 15% (12% excluding an unfavorable $53.7 foreign-exchange impact). Nine-month revenue declined 5% (3% excluding $103.8 of unfavorable currency translation). Q3 cost of sales was 35.0% of revenue versus 30.9% a year earlier, reflecting higher product costs and obsolescence charges. Nine-month cost of sales rose to 31.9% of revenue from 28.2%.
Segments and material period changes
- Q3 Consumer Products: Revenue of $1,160.8, down 10%; operating profit of $136.8, down 35%. Revenue fell in North America and Europe; price increases partly offset lower volume, sales allowances, obsolescence, and product costs.
- Q3 Wizards of the Coast and Digital Gaming: Revenue of $303.5, down 16%; operating profit of $102.2, down 36%. The comparison reflected tabletop release timing and lower digital-game revenue; development investment, royalties, and D&D Beyond amortization weighed on profit.
- Q3 Entertainment: Revenue of $211.6, down 35%, and operating loss of $28.9 versus profit of $22.4. Fewer film and television deliveries and $26.8 of non-core business/project charges contributed to results.
- Nine-month comparison: Consumer Products revenue declined 2% and operating profit declined 47%; Wizards revenue declined 2% and profit declined 6%; Entertainment revenue declined 19%, while its operating loss narrowed to $2.4 from $74.3. The 2021 Entertainment comparison included eOne Music revenue and a $101.8 goodwill impairment charge related to its sale.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $262.2, down from $685.6, principally due to increased working-capital needs, including higher inventory spending and cash used for payables and accrued liabilities. Investing cash flow was $(265.8), including the $146.3 D&D Beyond acquisition and $130.7 of capital expenditures. Financing cash flow was $(443.0), including $288.6 of dividends, $125.0 of share repurchases, and debt and production-financing activity.
- Cash and cash equivalents, including restricted cash, were $551.6 at September 25, 2022, versus $1,181.2 a year earlier. Current assets were $3,260.5 and current liabilities $2,356.9. Accounts receivable was $1,188.8; inventory was $844.5, up 55% year over year.
- Long-term debt had a $3,872.5 principal balance, including $122.6 current and $3,725.1 reported as long-term debt after deferred financing costs and current portion. Short-term borrowings were $122.3, associated with production financing. The company reported compliance with its debt covenants and no borrowings under its $1.5 billion committed revolving credit facility; approximately $1.5 billion was available.
- Hasbro stated that available cash, operating cash flow, commercial paper and credit facilities, and production financing were expected to meet working-capital needs and obligations for the next 12 months. It expected to repay outstanding production-financing loans by Q3 2023.
Outlook, commentary, risks, and unusual items
- On October 4, 2022, after the quarter-end, Hasbro announced Blueprint 2.0: focus investment on selected profitable franchises, expand licensing and branded entertainment, grow games, digital and direct-to-consumer, and exit certain non-core activities. Management targeted $250–$300 of annual run-rate savings by the end of 2025, with approximately $200 of cash charges through 2024. It expected about $20 of those cash charges in 2022, $120 in 2023, and $60 in 2024.
- The company recorded $55.3 of pretax strategic-review charges in Q3, including a $23.1 loss on assets held for sale, $21.3 in severance and employee charges, $7.2 in consulting fees, and $3.7 in project impairments. These charges reduced Q3 earnings by $49.4 after tax, or $0.36 per diluted share. The businesses being exited were not considered material to operations.
- Supply-chain constraints began to ease in the U.S. and Europe, but inventory remained elevated after accelerated purchases. Hasbro planned additional holiday promotions to reduce inventory at the company and retailers. It cited continuing risks from inflation, freight and material costs, consumer demand, retailer inventory and order patterns, seasonality, foreign exchange, entertainment release timing, and reliance on external partners and manufacturing sources.
- Hasbro had paused shipments and new content distribution to Russia. It reported 2021 Russia revenue of $115, mostly in the second half, and said it had exhausted local inventory, collected receivables, and released reserves by the 2022 nine-month period.
- The quarterly dividend declared was $0.70 per share, up from $0.68. The company repurchased $125.0 of stock in the first nine months and had $241.6 remaining under its authorization at quarter-end. Management said Inflation Reduction Act provisions were not expected to have a material impact. The company reported no material change in previously disclosed risk factors, no legal proceedings it considered material, and effective disclosure controls.
Important facts for investors to verify
- Whether Q4 holiday demand and promotional activity reduce Hasbro’s elevated inventory without further material discounts, obsolescence, or margin pressure.
- Progress against the Blueprint 2.0 savings targets, the timing and cash cost of restructuring, and whether exits or investment shifts affect revenue and profitability.
- Segment trends, especially Consumer Products margins and Wizards’ release-dependent revenue, alongside the mix and timing of Entertainment deliveries.
- Operating cash generation, working-capital needs, debt repayment, and continued covenant compliance as the company funds dividends, repurchases, and business investment.
- The continuing effects of inflation, currency movements, supply-chain conditions, and Russia-related restrictions on results.