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Hasbro Posts Strong Earnings, but the Market Sends Shares Tumbling 9.4%

Toymaker Hasbro (NASDAQ: HAS) reported strong second-quarter 2017 results before the market opened on Monday. Revenue grew 10.6% and adjusted earnings per share increased 26.8% from the year-ago period. Moreover, the company's outlook remains quite positive.

The market wasn't feeling playful, sending Hasbro shares tumbling to a closing loss of 9.4% on Monday. The dynamic at play here appears simply to be short-term profit-taking after a huge run-up in the stock this year. The stock had returned 50.8% in 2017 going into earnings, versus the S&P 500's 11.7%, so expectations were sky-high. After Monday's haircut, shares have returned nearly 37% this year.

Image source: Hasbro.

Hasbro's key quarterly numbers 

Metric

Q2 2017 Result

 Year-Over-Year Change

Revenue 

 $972.5 million

 10.6%

Net income 

 $67.7 million

 29.9%

Earnings per share (EPS)

 $0.53

 29.3%

Adjusted EPS 

 $0.52 

 26.8%

Data source: Hasbro.

Reported earnings include an EPS benefit of $0.01 compared with the year-ago period stemming from a new accounting rule related to employee stock shares. The adjusted comparison excludes this benefit. 

For some context -- though long-term investors shouldn't place too much importance on Wall Street's near-term estimates – analysts were expecting adjusted EPS of $0.46 on revenue of $972.37 million, so Hasbro sailed by the earnings consensus and met revenue expectations. It's probably safe to assume the fact that the toymaker "only" met revenue expectations was the primary reason behind the market's reaction.

Category and segment results

Franchise brands -- which are the company's key internal brands -- was the quarter's growth engine with year-over-year revenue jumping 21%, while Hasbro gaming helped out with its 6% growth. (This is the second quarter for Hasbro's new revenue reporting categories; its previous categories were boys, girls, games, and preschool.) 

Image source: Hasbro.

Powerful growth in franchise brands was driven by Transformers, Magic: the Gathering, Nerf, and Monopoly. Partner brands were helped along by growth in Beyblade, DreamWorks' Trolls, Marvel (a Disney brand), and Hasbro's biggest partner, Disney (NYSE: DIS). Transformers and Marvel were powered by the releases of Transformers: The Last Knight and Guardians of the Galaxy Vol. 2 in the quarter. Disney Princess revenue also increased in the quarter, CEO Brian Goldner said on the analyst conference call. 

Partner brands' results will be lumpy because this category is driven by movie openings. This category's first-half performance is better than the above number suggests; the category had an extremely tough first-quarter comparable due to the phenomenal performance of Star Wars toys in the first quarter of last year following the release of Disney's megablockbuster Star Wars: The Force Awakens

Hasbro gaming experienced growth across the category from new games to digital gaming to classic gaming. The drop in emerging brands was driven by declines in Playskool, Super Soaker, and Easy-Bake Oven. 

Revenue grew across geographies, with the U.S. and Canada segment up 16% and international up 6%. Within international, emerging markets' revenue grew 7%. Revenue in the entertainment and licensing segment dipped 1%, though was up 10% in the first half. This is a small segment -- accounting for less than 6% of first-half revenue -- so year-over-year results are prone to be lumpy. 

Looking ahead

Hasbro turned in another great quarter -- reinforcing my choice last December of its stock as the best consumer goods stock for 2017 -- with the only notable weak spot being emerging brands. The company's franchise brands are much more important for its long-term growth than its emerging brands, as Hasbro leverages its franchise brands across media. 

There are plenty of near- and long-term catalysts for growth on the horizon. Notable near-term catalysts include the third-quarter release of Disney's Spider-Man: Homecoming, which opened earlier this month, followed in the fourth quarter by Disney's Thor: Ragnarok, My Little Pony: The Movie, and -- the biggie -- Disney's Star Wars: The Last Jedi.

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Beth McKenna has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Hasbro and Walt Disney. The Motley Fool has a disclosure policy.