The fourth quarter always is a crucial time for Pawtucket-based toymaker Hasbro Inc. But rarely has it loomed so large.
During a conference call with analysts last week to discuss its third-quarter results, Hasbro executives conceded that the company faces a few key uncertainties during the final months of 2002: the labor dispute in the West Coast ports and forecasts of a sub-par holiday shopping season.
But against that backdrop, a galactic question looms: Will the release of a slew of new Star Wars toys – to coincide with the November release of the video, DVD and IMAX versions of “Episode II: Attack of the Clones” – be enough to meet lofty expectations for the product line?
Beyond Cash Donations: How New Forms of Giving Are Transforming Not-for-Profit Accounting
Evolving Funding Landscape for Not-for-Profits Not-for-profit organizations are being asked to do more with less,…
Learn More
“While we have had a great initial response to many of our (Star Wars) products…we do need to get momentum from the DVD and video release in order to achieve our plan for the year,” said Alan G. Hassenfeld, Hasbro’s chief executive officer.
But much more may be at stake for the world’s No. 2 toymaker, according to analysts. Indeed, some observers say the fourth quarter is such a make-or-break time for the Star Wars line that its performance in coming months could shape the future of Hasbro’s license agreement with Star Wars creator George Lucas’ licensing firm, which runs beyond the 2005 release of Episode III.
“The fourth quarter’s revenue and earnings from the Star Wars line will tell the tale for Star Wars going forward, in terms of Hasbro’s contractual agreement with Lucas,” said David Leibowitz, managing director of Burnham Securities brokerage in New York who has covered Hasbro for more than 35 years. “It will have a bearing on Hasbro’s plans vis-a-vis Episode III.”
In 1999, Hasbro reportedly agreed to pay up-front royalty fees of $600 million while ceding to Lucas a 7.4 percent stake in Hasbro for the license to make toys for the space-action trilogy. For Hasbro to profit from the license, earnings from sales of Star Wars toys must eclipse those costs. Sales of Hasbro merchandise tied to “Episode I: The Phantom Menace” fell far short of Wall Street’s expectations.
While Hasbro officials on the conference call repeatedly emphasized the importance of fourth-quarter Star Wars sales, they at the same time seemed eager to put the Star Wars question behind them. Eighteen months ago the company outlined a plan to wean itself from the blockbuster – and expensive – licenses tied to popular movies in an effort to focus more on core brands such as G.I. Joe and Mr. Potato Head.
Hasbro President and Chief Operating Officer Alfred J. Verrecchia, who earlier this year told analysts flatly that “Hasbro is more than just Star Wars,” reiterated that stance last week.
“Our strategy for core-brand volume growth is more of a slow build, as opposed to a short-term quick fix that a hot license can sometimes provide,” Verrecchia said. “But over the long term, we are confident that core brands are the key to reliable, sustained growth and profitability.”
To underscore their progress, company officials ticked off the latest strong sales figures from its flagship toys: G.I. Joe, up 82 percent in the quarter and 39 percent for the year; Transformers, up 79 percent this year; and Playskool higher by 50 percent this year.
“Earnings are up, debt is down and we are growing our core brands,” Hassenfeld said.
Despite those assurances, some analysts have questioned Hasbro’s ability to drive top-line growth through core brands.
Margaret Whitfield, a toy industry analyst who covers Hasbro for Brean Murray & Co., noted that while Hasbro’s revenue dropped 8 percent in the most recent quarter, No. 1 toymaker Mattel’s revenue grew 6 percent. Mattel also has staked out a core-brand strategy in recent years.
“The question is can (Hasbro) achieve its goal of building brands in house, without having to rely on a hot entertainment license?” Whitfield said. “They have not been as successful as Mattel at building their core brands.”
As for Hasbro’s fourth-quarter Star Wars prospects, Whitfield’s outlook is equally bleak.
“My retail sources are telling me that there is some doubt as to whether Star Wars will return in terms of demand when the video and DVD are released,” she said.
She added, “If (Hasbro) doesn’t see demand in line with their plan, it could force them to rethink their long-term outlook for the license.”
Hasbro’s stock price hovers around $10 a share, which is near a 10-year low. Hasbro Chief Financial Officer David D. Hargreaves said during the conference call that if Star Wars sales fall “significantly short” of expectations this quarter, then “we would have to make a write-off in the fourth quarter.
“But clearly, with everything yet to happen around the video, the IMAX (release), the new products…it’s certainly too early to make that determination,” Hargreaves said.
Hasbro officials are banking on an expected wave of retail Star Wars promotions in November to help drive sales.
Although weak sales of robotic toys and trading cards helped drag Hasbro’s third quarter sales lower, the company was able to squeeze out net income of $55.8 million – a 10 percent gain over the same period last year. The earnings fell short of Wall Street’s expectations, but analysts said the growth in the face of slower sales signals that Hasbro’s cost-cutting measures and debt-reduction efforts are paying off.
