2023-10-04 16:18:32 ET
Summary
- Hasbro's FY23 guidance may need to be revised due to weak traction, which could lead to a decline in stock value.
- The company's revenue is divided into consumer products, Wizards of the Coast & Digital Gaming, and entertainment, with the latter facing a significant decline.
- The consumer product segment needs a second-half rebound in demand to meet FY23 projections, but there has been no improvement in point-of-sale trends so far.
Overview
My recommendation for Hasbro ( HAS ) is a hold rating, as I believe there is a sizable chance that management will need to revise its FY23 guidance given the weak traction so far. Suppose 3Q23 does not see any positive traction. I believe the market will further punish the stock as investors go into risk-off mode, given that 4Q23 will likely need to be very strong in order to meet guidance.
Business
HAS is a toy and gaming company that sells a wide variety of games, including more traditional board and card games, video games on DVD, and portable electronic gaming systems. Dungeons & Dragons, Transformers, Play-Doh, and Magic: The Gathering are just a few of the household names produced by HAS. Within the business, the revenue stream is being divided into 3 parts: consumer products (61% of revenue), Wizards of the Coast & Digital Gaming (22.6% of revenue), and entertainment (16.4% of revenue). Of which, Wizards of the Coast and Digital Gaming account for the large bulk of operating income (69%) vs. consumer products at 28%.
The growth driver of HAS's business is effectively tied to consumer spending, as they are HAS's primary customer group. As such, it was no surprise to see performance being significantly impacted over the past few quarters, where revenue was down more than 10% consecutively (except in 2Q23, where it was 9.6%, an improvement from the prior 3 quarters).
Recent results & updates
In light of HAS's impending earnings report, I thought I'd share my thoughts on the company's recent update and whether or not I think management will be able to meet its guidance. For 2023 as a whole, management lowered its revenue forecast from a low-single-digit percentage drop to a range of 3-6 percent in the 2Q23 earnings report. Entertainment is expected to face a very tough near-term headwind, which is the primary reason for the downward revision (from low single digits to a 25-30% expected decline in revenue). The impact of the writers' and actors' strikes on production deliveries was the root cause of such a significant revision. Given the state of things , I believe the magnitude of growth is a lot more uncertain, and it certainly would not be pretty for this segment. Although this is a relatively minor market, the magnitude of the decline could be much greater than anticipated, having an effect on the expansion of the company as a whole.
As for the consumer product segment, guidance remains unchanged at a mid-single-digit percentage decline for FY23. With consumer products down 16% in 1H23, the company will need to see at least flat revenues in 2H23 compared to last year in order to meet its full-year 2023 projections. Here lies my concern, where there seems to be a great deal of uncertainty in this guidance. Management stated at the recent sell-side organized conference that the guidance is predicated on an increase in consumer demand in the second half of the year and that September would be crucial for observing movement in category trends that would help them achieve their guidance. However, as of September 6 (when management has had 5 weeks of 3Q23 data), there has been no discernible improvement in POS trends, which means growth is most likely still in the range of mid- to high-single-digit decline. As a result, in the next three months and four weeks, growth needs to pick up speed from "flattish" to positive compared to the same period last year. Viewed another way, at the rate things are moving (down mid to high single digits for 3Q23), 4Q24 would need a major acceleration to 16% in order to meet the mid-single digit decline for FY23. While this is possible, this adds additional risk to HAS meeting guidance given the macro uncertainty.
It is unclear whether or not HAS will be able to drive such acceleration due to the underlying inventory situation at the retail level. In spite of management's assurance that stock levels will improve significantly in 2024, the company has noted receiving conflicting reports from its retail partners. While some stores appear more optimistic about toys as a category, others are more wary and may still be experiencing some hesitancy due to the retail trends of the previous year. If the macro environment tips for the worse, I believe retailers will pull back their spending on shoring up inventories, which will present a major challenge for HAS to meet its guidance.
Valuation and risk
Author's valuation model
According to my model, HAS is valued at $58.50, representing a 7% decrease using FY23 numbers. The aim of my model was to show that the stock is fairly valued at best, even if it hits management FY23 guidance. Which means things could turn south very quickly if they fail to meet guidance, which, based on my assessment, has a high degree of occurring given all the uncertainties.
HAS is now trading at 13x forward PE, which I believe is a reflection of the uncertainty that HAS is facing in the near term. It is unlikely for multiples to re-rate upwards in the near term until at least early or midway through 4Q23, where the 3Q23 earnings call will take place, thereby providing a chance for investors to inquire about FY23 guidance and traction thus far. Until then, valuation should remain at this level in my view.
Summary
My recommendation for HAS is a hold rating, as I have doubts about the company's ability to meet its FY23 guidance based on current trends. Recent updates indicate challenges in the entertainment segment, with a significant revenue decline expected due to strikes in the industry. The consumer product segment also faces uncertainties, with management relying on a second-half rebound in consumer demand to achieve its FY23 projections. However, as of September 6, there has been no notable improvement in point-of-sale trends, increasing the risk of falling short of guidance.
Valuation analysis suggests that HAS is currently fair-valued at best, even if it meets its FY23 guidance. The stock's trading multiple reflects the prevailing uncertainty, and it is unlikely to see upward re-rating until greater clarity emerges during the 3Q23 earnings call. Investors should exercise caution and await more information before considering an investment in HAS.
For further details see:
Hasbro: I'm Skeptical It Can Meet Its FY23 Guidance