Expectations were high going into Hasbro's (NASDAQ: HAS) second-quarter earnings report Tuesday morning. Following a first-quarter blowout, investors were looking to see if the company could maintain its upward momentum through the first half of 2019, and the quarter was all they hoped for.
“Our investments are differentiating Hasbro’s portfolio and delivering profitable revenue streams,” Brian Goldner, Chairman and CEO of Hasbro, said in a statement.
Hasbro stock soared as much as 10% in Tuesday afternoon trading in the wake of its better-than-expected financial results, though the stock has more recently been trading up about 8% overall. Let's take a look at four factors that had investors celebrating the latest earnings results.
Image source: Hasbro.
1. Revenue jumped
Hasbro's net revenue was far better than expected, coming in at $984.5 million, which is up 9% year over year. It easily topped analysts' consensus estimates, which called for a 6% increase. Absent a $20.7 million foreign-currency exchange headwind, second-quarter revenue actually climbed 11%.
“We grew revenues in the U.S. and Europe," Goldner said, "and we believe we are well-positioned to deliver against our target of profitable growth for the full-year 2019.”
The results were driven higher by strong performance by franchise brands like Magic: The Gathering, Monopoly, Play-Doh, and Transformers toys that increased 14% year over year. Emerging brands soared 28% powered by Power Rangers, Furreal Friends, and Playskool brands. Partner brands got a boost from Disney, as Marvel's Avengers: Endgame set the all-time box office record and sparked increased demand for action figures and other toys related to the hit movie. Shoppers were also snapping up toys related to Disney' recent Aladdin movie.
Sales in the U.S. and Canada segment increased 14% year over year, while international sales declined by 1%. Excluding the effect of currency exchange rates, international results actually increased by 5%.
2. Operating income soared
Hasbro's operating results were another reason for investor enthusiasm. The company's operating profits soared an incredible 47% year over year to $128.3 million, or 13% of revenue, up from $87.6 million, or 9.7% of revenue, in the prior-year quarter.
Management's cost control efforts s are bearing fruit. While Hasbro originally planned for savings of between $30 million and $40 million by 2021, the company executed on its plan much better than expected, and now plans to reap $50 million in expense reductions in this year alone.
3. Net income fell, but...
Net income for the quarter declined to $13.4 million, resulting in earnings per share (EPS) of $0.11 -- but further explanation is required. Hasbro took a one-time, pre-tax charge of $110.8 million to settle its U.S. pension liability.
Excluding this one-time charge, net income increased to $99.3 million, up a massive 65% year over year, generating EPS of $0.78 -- soaring past analysts' expectations for $0.50.
4. Digital gaming and esports
Hasbro has been making a big push into the realm of digital gaming with its popular fantasy card game Magic: The Gathering. The game, which is thematically similar to Dungeons and Dragons, has been moving to the digital realm, and Hasbro has been testing a beta version since late last year. The PC-based video game, dubbed Magic: The Gathering Arena (MTGA), has been a big hit with players.
Hasbro CEO Brian Goldner revealed on the conference call that 400 million MTGA games were played this quarter, and the overall total has now surpassed 1.1 billion games played since the beta opened last September, showing the massive potential that could be realized by moving the game online.
The biggest driver to the 28% year-over-year growth in Hasbro's entertainment, licensing, and digital segment was digital gaming, led by Magic: The Gathering Arena.
The company is investing heavily in this online move, which has captured the imagination of players. User engagement is high, with players logging about eight hours per week, making the game a top-10 esports brand on video game streaming site Twitch. Hasbro has also been sponsoring big esports tournaments for Magic, where elite players can bank six-figure incomes playing professionally.
This is potentially a huge growth area for Hasbro. Even though gamers play for free, each one has been spending on average about $75 annually on digital currency -- called "gems" -- to use in the game.
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Danny Vena owns shares of Hasbro and Walt Disney and has the following options: long January 2021 $85 calls on Walt Disney and long January 2020 $50 calls on Hasbro. The Motley Fool owns shares of and recommends Hasbro and Walt Disney. The Motley Fool is short shares of Hasbro and has the following options: long January 2021 $60 calls on Walt Disney and short October 2019 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.