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3 Reasons Why Investors May Want to Steer Clear of Hasbro


Hasbro, Inc. HAS has been losing sheen of late. Not exempting the current fate of toymakers in the United States, the company is plagued with declining consumer demand and sales crunch.

A look at Hasbro’s price trend reveals that the stock has witnessed an unimpressive run on the bourses in the past year. Shares of the company have lost 16.7% against the industry’s rally of 21.3% in the same time frame. This reflects investors’ pessimism on the stock, given uncertain sales environment. Moreover, over the past two months, earnings estimates for the current quarter and year have been revised downward by 29.6% and 6%, respectively, reflecting analysts’ doubt surrounding the company’s future earnings potential.

Lower Demand Hurts Revenues

For quite some time, Hasbro is facing declining demand for its products. Like most other traditional toymakers, the company has to fight a broad array of alternative modes of entertainment including video games, MP3 players, tablets, smart phones and other electronic devices. Due to shift in demand patterns of kids, Hasbro’s revenues are pressurized and are not likely to recover soon. In the first quarter of 2018, net revenues declined 16% from the year-ago level. Also, the Zacks Consensus Estimate for 2018 revenues is pegged at $4.9 billion, suggesting a year-over-year decrease of 5.1%.

Rising Costs Affect Profits

Hasbro has been heavily relying on partnerships, mergers, product innovation and digital invention to revive sales. While such initiatives may aid profits in the long run, related costs would hurt the company in the near term. As it is, selling, distribution and administration expenses, as a percentage of net revenues, increased to 45.8% in the first quarter of 2018 from 28.7% in the prior-year quarter. These costs in turn are hurting the company’s earnings. Subsequently, the consensus estimate predicts earnings to fall 11.5% in 2018 from the previous year.

Toys ‘R’ Us Woes Likely to Linger

The U.S. toy industry was dealt a heavy blow when the country’s largest independent toy seller, Toys "R" Us filed for bankruptcy last September. Adding a nail to the coffin, Toys “R” US said that it is liquidating its U.S. operations, leaving toymakers like Hasbro, Mattel MAT and JAKK Pacific JAKK in a mess as they used to derive a considerable portion of their revenues from sales to Toys "R" Us. Although retailers like Amazon AMZN had come to rescue these toymakers, they currently don’t have shelf spaces as big as Toys “R” Us, which is a concern.

Meanwhile, despite testing waters with new distribution methods, development of digital-play components and exploration of ventures with other industries, Hasbro is unable to revive sales. In fact, owing to the liquidation, sales of Hasbro across every branddeclined in the first quarter of 2018.We believe that the effect of this liquidation will linger further as Toys “R” Us was the last major chain fully dedicated to selling toys. Owing to this, the overall industry is expected to grow at a much slower pace for quite some time.

Hasbro carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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