Hasbro, Inc. (HAS) Earnings Call Transcript & Summary

Good morning, and thank you, everyone, for coming. I'm Chris Horvers, JP Morgan's Retail and Toys analyst. Thank you for joining us today. I'm very pleased to welcome Chris Cox, Hasbro's Chief Executive Officer, and Deb Thomas, who is -- sorry, Deb is from Investor Relations is also in the audience with us. So we'll do some prepared Q&A and then we'll leave some time at the end for audience questions, and then we also have potentially people online with us. And so please feel free to raise your hand at the end and ask a question. We'd like to make this as interactive as possible.

So maybe setting the table starting at a very high level. You've been in the role for a little over a year. Can you share with us what have been the biggest deliverables during that time? And what your high-level priorities are going forward?

Great. Well, first off, Chris, thanks so much for having me. Let me make sure I adjust my Phil Donahue style microphone to make sure everyone online can hear me. So a couple of things. So I've been in role now for about 14, 15 months. Shortly after I started in March of last year, we started a strategic review of the business. And I think the biggest thing that we've delivered is the results of that strategic review, which is effectively repositioning Hasbro based on what's made Hasbro successful for our first 100 years to position us for our next 100 years. And that's play. We're a very diversified play and entertainment company. But at the end of the day, what makes Hasbro special is our brands. And what makes our brand special is engaging fans as early as the age of 2 or 3 with some of their favorite play experiences and extending that through a lifetime, aging up those play experiences, making them more diversified with a blueprint of engaging opportunities with them, whether that's storytelling base, location-based, entertainment-based games or toys or other merchandising opportunities. So as part of that strategic review, we determined a couple of things. And I think this kind of talks about some of the other deliverables that we did. First and foremost, we decided that we were going to really lean into fewer bigger brands and categories that we lead in and that we can continue to lead in and drive our profitability and drive our share. Our franchise brands constitute 7, each of them kind of anchor a core category for us across a diversified slate of toys and games experiences. The second thing we did is we decided, hey, we really need to hang out an open for business sign with our consumers and just as importantly, with our partners. So leaning in very aggressively to direct-to-consumer, working with our retailers to drive our retail experiences, working with inventors to make sure that they bring their best ideas to Hasbro to enrich our innovation pipeline. And then last but not least, really driving our consumer understanding through increased data analytics and effectively a more than doubling of the investment we make in direct-to-consumer and consumer data. And then last but not least, and I think you're already starting to see some significant impacts from this. We also identified significant opportunities to improve our operational excellence and the discipline in which we run the company. So we identified $250 million to $300 million cost savings goal that we call an operational excellence program that will manifest over the next 3 years. We're on track to comfortably hit $150 million of cost savings this year. We already achieved $35 million in Q1. And that cost savings initiative is helping us to grow our operating profit margins, help to pay down some of the inventory management programs we have underway that is common across the toy industry right now, but I think Hasbro is a bit more front-footed on and help us reinvest in the core business to grow our gaming business, to grow our digital initiatives and to grow our ability to connect with our consumers and kind of drive that open for business message across our partner ecosystem.

So maybe can you talk a little bit about you've recentered Hasbro around play thematically. Can you overlay what exactly that vision is and contrast it to the strategy of your predecessor?

Yes. So my predecessor, Brian Goldner, he's a great CEO. He was in charge of Hasbro for over 13 years. He came up with a strategy called the Brand Blueprint. And the Brand Blueprint is effectively a classic on the media engagement strategy with consumers, where you take a brand and you engage them across a variety of product experiences, merchandising, licensing and entertainment. Effectively, we will continue to do that. I think that's a good kind of evergreen strategy for an IP company like Hasbro. I think the biggest pivot between Brian and I is kind of the emphasis between if Hasbro is into play and entertainment, I think the biggest pivot between Brian and I is maybe he was more oriented towards entertainment and I'm more oriented towards play. Play has been the thing that's driven our brand relationships with consumers, just go inside of any of your homes. And I'd be willing to wager that if you have kids or you know people who have kids, they have a number of Hasbro products inside of their houses. If you go back and think about your own childhood, chances are, you started engaging with one of our board games or one of our preschool items at the age of 2 or 3. And you've probably continued to engage them, whether it's through your kids or with family and friends or if you're a collector like me in terms of some of our higher-end, more mature oriented products like MAGIC: THE GATHERING and D&D. Emphasizing play, I think, is where the strategic advantage of the company is. When you look at where we generate our operating profit, where we generate our growth, it's really been in our games business and our older oriented collectibles that have really driven a lot of value for us over the last 5 or 6 years, and I think will continue to drive value for us, doesn't mean entertainment won't be a part of our story moving forward. I just think it will be a rightsized portion of our -- of how we think about our cash and how we think about investing. And I think as a result, we're going to be able to grow our business faster than what we've been growing it over the last 5 or 6 years. And I certainly think we're going to be able to drive our bottom line profitability a lot more aggressively. Because if you look at businesses like games, games is a $2 billion business for Hasbro. The games industry has generally been growing at a mid-single-digit to upper single-digit growth CAGR. And Hasbro is a $2 billion business in that, that generates 30% operating profit today. Looking out, we see that games business growing significantly. And we see by reorienting on operational excellence, the ability to significantly improve our profitability in our toy business, such that if you look out 3 to 5 years for Hasbro, we probably will have better-than-average toy and game growth prospects, call it, mid-single digits but probably in the 9% to 10% range in terms of operating profit growth by focusing and scaling our business, by leaning into games and leaning into higher-margin play opportunities.

Fantastic. So maybe as a dovetail question. So as you think about the entertainment assets, like how is -- how would you leverage the entertainment assets? The eOne obviously, is going on, you can only talk limited fashion about that. But how does the entertainment portion now interface with the core consumer products and the gaming businesses?

Well, today, we have 3 business units. We have entertainment. We have toys and games, which we call consumer products. And then we have Wizards of the Coast in digital gaming. Right now, we're in a sales process for a lot of that entertainment business, particularly the film and TV business that focuses on non-Hasbro-oriented IP, things like the Rookie, the Naked and Afraid kind of reality TV series. Those are aspects or assets that are for sale. And right now, we spend probably about $600 million to $700 million a year in content investments on businesses like that. There's no guarantees, but right now, we have a sales process in going for that and probably that will be externalized from the company. And so what will result will be a much smaller footprint smaller of entertainment-related investments, so call it roughly 10% of that overall amount going towards Hasbro-oriented IP. Our investments will be very focused on the mission of play in driving merchandising associated with driving entertainment. So things like animated content or feature films or streaming series that directly tie into a merchandising platform for brands like TRANSFORMERS or D&D or PEPPA PIG. And as a result, I think organizationally, you'll see us kind of consolidate into 2 business units. We'll have a games business unit that will drive that $2 billion plus 30% operating profit business. And then we'll have a Toys business unit that will drive kind of our core kind of classic Toy IP, grow those IP and really focus our operational excellence efforts there to really enhance the margins there. And then we'll have a series of -- if those are our 2 primary business units or verticals, then we'll have some horizontals that will help support those from how we commercialize with retailers to how we think about entertainment that helps support those businesses, digital games development and digital licensing to help kind of take advantage of the next wave of entertainment around console, mobile, AR, VR opportunities and then direct-to-consumer platforms that we're building out as well.

And so sticking on the consumer product side, you're focusing on fewer bigger brands, maybe expand on that a little bit. And you sort of teased us a little bit about some innovation in the back half of the year. So can you orient us on what it means to focus on fewer bigger brands? And how are you thinking about driving innovation across the enterprise.

Yes. So at a high level, when you look at our fewer, bigger, better strategy, it really is a -- it's really trying to be #1 or #2 in any category we compete in, which is a very classic business strategy. You look at the 5 super categories that we're leaning into. First and foremost, we're leaning into games. Again, that's a big business for us, very high growth, very high profitability for us. We've got 3 power brands inside of that, what we call franchise brands. On the board game segment, you have MONOPOLY, which is a big kind of consumer product, also a great kind of digital initiative with the new product MONOPOLY GO! that we've released with our partners at Scopely. You got MAGIC: THE GATHERING, which is one of the leading trading card games in the world and one of the biggest strategy games. It's also our first $1 billion brand at Hasbro, a very profitable, very vital business for us. And then last but not least, you have Dungeons & Dragons, which really leads kind of like the role playing subsegment. We just had a very successful movie, Dungeon & Dragons: Honor Among Thieves. We have the TV series coming out for it and a series of video games around the D&D brand. So that will be one of our biggest growth brands over the next 3 to 5 years. And then you have several toy categories that we lean in. So our fastest-growing category is preschool right now. We have PEPPA PIG. We have great partnerships with The Walt Disney Company on things like Spidey and His Amazing Friends, which was the fastest-growing new IP inside of the preschool space in 2022. This year, we think we'll have one of the fastest-growing new IP releases in preschool with Star Wars: Young Jedi Adventures that we're partnering with the Disney company on. You have creativity, which is anchored by PLAY-DOH. We see that as a nice kind of high margin, decent growth business that has a lot of white space associated with it that Hasbro can bring in our unique licensing relationships and story-based play into to really kind of change the nature of the category. You have outdoor, which is anchored by NERF, which today is really focused on the blaster category, which is one of the biggest subsegments of outdoor but we believe NERF has resonance outside of blasters. It can really be big in water-based play and other outdoor activities that kids might do in a play field or in their backyard. And then last, but certainly not least, we have action figures. And action figures has been a category that Hasbro invented back in the 1960s with the G.I. Joe brand. We have Transformers. We're the licenser for Marvel and Star Wars and BEYBLADE, and that is certainly one of our biggest and most vital categories that we think we can continue to grow into.

I guess on the innovation side, have you -- under your leadership, have you changed sort of how innovation occurs inside? Or is it more you've refocused the innovation more directly on the fewer number of brands?

Well, I think we've done all of the above. So first off, we have those 5 focus categories. So we're really focusing our innovation investments in those areas. We're doing it on a balanced basis across our own IP as well as partner-based IP. So I think you're going to find Hasbro is more aggressive in working with licensors to build out business opportunities inside of those focused categories. And then we're also getting much more aggressive with inventors. We have a plan to double our inventor business over the next 2 to 3 years, which just kind of brings in new opportunities to power up those franchise brands and those partner brands inside of action figures and board games and creativity and outdoor. And then last but not least, we brought in new leadership for each of those categories. So Cynthia Williams runs the Wizards of the Coast business, that's a business that she took over from me. We have a fairly sophisticated R&D operation and data analytics operation there with a pretty mature phase gate process, which we're continuing to deploy in that business. That business has been great, it's been growing at about 14% annual CAGR for the last 5 years in a row. We continue to see that having nice upside opportunities. She'll be taking over board games and starting to apply that kind of methodology into our board game business as well. And then we just hired a fellow named Tim Kilpin, who's a 40-year industry veteran. He's worked at Disney, Activision and Mattel. He has helped to found some of the biggest brands inside of the toy industry. And he'll be bringing that kind of rigor and methodology that he's explored over his 40-year career to kind of light up our toy innovation as well. And I think you'll see more and more results of that as we get into 2024 and 2025.

And can you talk about the -- your excitement level on the entertainment slate this year? And how are you thinking about the lift that could provide your business as you look out over the next year?

Yes. So for this year, we have one of our best entertainment slates that we've arguably had in probably the last 10 years. So Transformers: Rise of the Beasts comes out in the early part of June, that's based on the early tracking that we're seeing, that should be one of the top 5 releases of the year. We're seeing nice momentum in point of sales on TRANSFORMERS in a [ down ] toy market is up 8% or 9% year-to-date, and it's really been picking up in March and April as anticipation for the film. And as we start to kind of scale out our animated TV series, EarthSpark, is driving that. Spider-Man: Across the Spider-Verse is coming out, I think, in the early part of July. That also is tracking very well and Spider-Man tends to be one of the best performing superhero IP out there. So we feel pretty good about that. And then when you just look across the other spectrum of movies and TV show releases, I think we have something like 7 or 8 major feature films between us and The Walt Disney Company, either that have released already, or will be coming out for the balance of the year. And something like 15 or 20 TV shows between kids animated series and new live-action series. So we're just kind of wrapping up with the Mandalorian, we saw a nice little kind of boost for our Star Wars business. We have Star Wars Ahsoka coming out later this year. We have Young Jedi Adventures, which I mentioned, which is for the preschool audience, which is doing really well and just a host of other great IP that I think will help to support kind of our overall action business. And also some side opportunities we have in other focus categories.

Great. And can you talk about retail order patterns are shifting back to normal from a crazy COVID time frame. Can you talk about where you are in terms of getting the channel clean, and how do you think about sort of the order flow into the back half?

So I think we exited 2022 a little heavy in retail inventories. I think we probably were better off relatively speaking, versus the rest of the toy and games industry. So we saw good progress in Q1, cleaning up our retailer inventories. Our inventories at retail were down 15% by the end of Q1. We think we'll be at a fully clean level, mostly by the end of Q2. There might be a couple of brands here or there, a couple of SKUs that we need to go into Q3 on. But if anything, our situation at retail right now is we have too little inventory rather than too much. You can go through a Target, and there might be 70% in stocks, which is probably 25 points below what we'd like to be, particularly when we have these big entertainment windows happening. So -- and that's natural. I think the retailers are all trying to like clean up their overall categories and overall aisles and they see that we're leaving a little bit of money on the table at the moment, and I think they'll be leaning in, particularly as they see results of our entertainment and our innovation coming to market. So that's good. In general, we see 2023 kind of reverting to a more standard buying pattern from our retailers. Last year, it was like closer to a 55-45 H2 to H1 sell-in. Typically, it's more like 65-35, maybe even 68-32 is what a typical year will have. And so we see that manifesting this year. How that's happening is we're tending to have less direct import orders in the first half of the year. That will likely be more back half oriented. Last year was a little heavy in terms of some retailer positions that they took at the end of Q2. We expect those orders to manifest in Q3 and Q4. And generally speaking, I think the whole industry, Hasbro included, is preparing for a holiday, which is a bit more like 2019, where roughly about 40%, 45% of demand for the year kind of takes place in that last 6 or 7 weeks of the holiday period. And so we're setting up our promotions and our retailer activities and our inventories and open buys for that scenario.

It's a good dovetail into sort of your overall view on the health of the consumer. I cover the retailers, target cut 2Q, comping down mid-single -- low single-digit quarter-to-date. Walmart's a little I think, more conservative in terms of their view of the consumer. And as we look forward, how are you thinking about the health of the consumer? And then how does that present any risk to what you just laid out for the back half?