Toymaker Hasbro shares drop more than 15% as tariffs boost costs and earnings fall short

Key Points
  • Shares of Hasbro dropped more than 15% after the toymaker fell short of Wall Street estimates for quarterly profit on Tuesday.
  • The threat of tariffs on toys imported from China ramped up shipping and warehousing costs.
  • The company also faced sluggish demand for its toys, as customers switch to video games or games on their tablets, phones, and computers from traditional toys and board games.

Shares of Hasbro dropped more than 15% on Tuesday after the toymaker fell short of Wall Street estimates for quarterly profit, as the threat of tariffs on toys imported from China increased shipping and warehousing costs and caused cancellations of direct import orders.

The threat and implementation of tariffs in the third quarter impacted Hasbro's shipments and ability to fully meet demand, Chief Executive Officer Brian Goldner said in the company's earnings call.

A 10% tariff on a list of items, including toys, is to go into effect on Dec. 15. It was originally supposed to go into effect on Sept. 1, but the date was delayed in early August due to concern over the holiday shopping season.

"During Q3 alone we saw multiple different dates for the enactment of list 4 tariffs come and be delayed," Goldner said during the call. "The prospect had our retailers cancel major direct import program orders, and rewrite many of those orders as domestic shipments."

Hasbro was unable to meet demand and ship all of the orders that were placed during the third quarter, many of which came late in September, as the supply chain team worked to adjust to ongoing tariff threats.

In order to meet increased demand for domestic orders, the company added air freight and shifted warehousing to build an asset-light domestic supply chain. Hasbro still acknowledges the possibility for direct import cancellations and an even greater shift to domestic orders ahead of the Dec. 15 tariffs.

The company said in early August that it hoped to have only 50% of its products coming from China by the end of 2020. In its earnings call, Hasbro confirmed it was on track to achieve this 2020 target.

"We are having good success identifying and building products in geographies, including Vietnam, India and others," Goldner said in the earnings call. "We are also sourcing 20% of our U.S. business from the U.S."

Goldner stressed that the company is actively trying to communicate to the consumer that if the Dec. 15 tariffs go into effect, the price increase will be passed along to customers to protect gross margins.

"We don't see tariffs being enacted two weeks before Christmas as giving the consumer the optimal holiday season," he said. "We're hoping through engaged dialogue with the administration that we can mitigate any impact."

Hasbro cites 'threat and enactment of tariffs' for earnings miss

Despite looming tariffs, the debut of Disney's "Frozen 2" and the latest Star Wars movie in the fourth quarter as well as its Nerf Ultra will help create strong demand to close out the year and carry into 2020.

Demand for its toys was sluggish in the third quarter, as customers switch to video games or games on their tablets, phones, and computers from traditional toys and board games.

Net income fell to $212.9 million, or $1.67 per share, in the three months ended Sept. 29, from $263.9 million, or $2.06 per share, a year earlier.

Excluding certain items, the company earned $1.84 per share, much below analysts' estimate of $2.21 per share.

Net revenue rose marginally to $1.58 billion, but missed the average analyst estimate of $1.72 billion, according to Refinitiv estimates.

Although Dungeons & Dragons brought in revenue gains alongside other Hasbro gaming titles, this was offset by poor sales of games like Pie Face and Speak Out, among others, leading to a 17% decrease in Hasbro gaming revenue.

Franchise brand revenue decreased by 8% to $779.7 million. Revenue increased for brands Magic: The Gathering and Transformers in the third quarter, but these gains were offset by poor sales in Nerf, My Little Pony, Baby Alive and Play Doh.

Partner brands revenue increased by 40% to $427.0 million thanks to revenue driven by Hasbro products surrounding the movie premieres of Frozen 2 and Star Wars. Partner brands revenue was also helped by increased sales in Hasbro products for the Avengers and Spider-Man franchises from Marvel and Disney's Descendants 3, according to the company's third-quarter earnings report.

Hasbro said it expects its acquisition of eOne, which it recently announced, to close in the fourth quarter.

"Hasbro remains on track to deliver profitable revenue growth in 2019," Goldner said, noting continued growth in the Wizards of the Coast gaming brands.

Hasbro will follow past practice and provide an updated 2020 forecast at Toy Fair in late February.

-Reuters contributed to this report.