Hasbro’s Restructuring and Weak Retail Create a Noisy Start to 2023; Long-Term Profitability Intact

We plan to lower our $114 per share fair value estimate for narrow-moat Hasbro by around $10 after incorporating weak fourth-quarter sales and a 2023 revenue outlook that is short of our preprint projections. We still view shares as attractive at a more than 40% discount to our updated value. Hasbro previously announced that fourth-quarter sales were set to fall 17% to $1.68 billion, hurt by soft results in the consumer products (down 26%) and entertainment (down 12%) segments, which together comprised 80% of period net sales. Impressively, the adjusted operating margin of 16% printed more than 500 basis points of expansion, benefiting from mix of sales and cost-savings initiatives.

Outside of fourth-quarter results, we expect three main changes to our outlook. First, we expect to lower our 2023 sales outlook from 4.5% growth to trend in line with Hasbro’s low-single-digit decline guidance. Given the hesitancy of retailers to replenish inventory considering the macroeconomic environment and the overhang of holiday season product, first-quarter sales are slated to contract 25%, providing some near-term concern from investors. Next, we plan to increase our 2023 operating margin from our 15.5% preprint projection to above 16%. Hasbro anticipates even with top-line pressure it can capture 50-70 basis points of operating margin expansion, as $150 million in run rate savings should manifest from operational excellence initiatives and which should primarily benefit gross margin (forecast to rise) and operating expenses. Lastly, we will nudge our 2027 operating margin projection up from 18% as we think there will be incremental upside from a restructuring of the product portfolio and as Hasbro stayed firm on its 2027 20% operating margin target.

Despite a weak near-term shipment outlook, Hasbro has held firm on its long-term sales forecast for mid-single-digit growth through 2027, in line with our existing 6%-7% average growth forecast, which we plan to maintain.