According to research from Nielsen, 70% of kids under 12 in households that own tablet computers use those devices. Nielsen’s figures looked specifically at the fourth quarter of 2011 and found a 9% increase in children’s tablet use from a year earlier.
More interesting is how kids are using these devices: according to Nielsen, 77% use them to play games, 57% for educational purposes, 55% for entertainment while traveling, 43% to watch TV shows and movies, 41% for entertainment at a restaurant or event and 15% for communicating with friends and family.
A recent study by research firm NPD Group backed up these findings, reporting that use of tablets by kids from four to 14 years of age rose 13% in 2012 vs. only 3% growth in 2011. Despite that growth, NPD found that portable video game systems remain the most popular devices owned by kids themselves, with six being the average age that most get their first game console.
Is Rising Tablet Use a Threat to Hasbro?
All this points to rapidly shifting terrain for makers of toys and games, with one analyst sounding the alarm that traditional toys, like dolls and puzzles, could be on their way out.
“The two top guys, Hasbro (NasdaqGS: HAS) and Mattel (NasdaqGS: MAT), they are terrified,” Sean McGowan, managing director of equity at Needham & Co., told the Financial Times on December 23. “They should be terrified, but the official party line is that they’re not terrified.”
The question for investors is whether the rising use of tablet computers represents a threat or an opportunity for toy makers. Here’s a look at how Hasbro should fare as more children embrace these devices. The company reported its quarterly earnings, which included the all-important Christmas season, just last week.
Weak Global Economy Weighs on Hasbro
Hasbro makes a number of toys and games under brands that include Transformers, Nerf, Playskool, My Little Pony, G.I. Joe, Magic: The Gathering and Monopoly. The company also owns a studio division that develops programs based on these brands and distributes them to markets around the world.
In the fourth quarter, Hasbro’s sales fell 3.4% from a year earlier, to $1.28 billion, missing the consensus forecast of $1.32 billion. Net income declined 10.5%, to $130.3 million, or $0.99 a share, from $139.1 million, or $1.06. Setting aside restructuring charges, the company earned $1.20 a share in the latest quarter, also falling short of Wall Street’s estimate of $1.28.
Hasbro Is Seeing Strong Growth in Media
Hasbro’s sales are roughly balanced between North American and international markets, and weakness overseas dragged down the company’s overall sales. But one place where Hasbro is benefiting from increased consumption of content through a range of devices is through its Entertainment and Licensing division.
This business licenses the company’s brands to movie and video game makers. In the past few years, Hasbro has signed movie deals for its Transformers and Battleship brands. (The Transformers films have grossed $2.6 billion worldwide, according to The New York Times.) This summer will also see a new G.I. Joe film starring Bruce Willis and Channing Tatum that has a good chance of cashing in at the box office.
On the video game side, the company teamed up with Activision Blizzard (NasdaqGS: ATVI) last year to make the Transformers Prime game, based on the television show that Hasbro Studios makes for the Hub network in the U.S. It has also partnered with Electronic Arts (NasdaqGS: EA) to make Family Game Night, a package of interactive versions of Hasbro board games including Life, Boggle, Sorry and Monopoly.
The Entertainment and Licensing division remains a small part of Hasbro’s sales (about 5% in the latest quarter), but it’s growing quickly: revenue rose 3% from a year ago, and operating profit jumped 23%. For the full year, sales rose 12% and profits increased 24%.
In the longer term, rising consumption of content, be it through tablets or other devices, should draw attention to the company’s brands and translate into new licensing opportunities. Hasbro will, however, have to keep pursuing licensing deals and finding new ways to adapt its toys to mobile devices.
Innovation Is Key to Hasbro’s Success
A good example of recent progress on this front is Hasbro’s partnership with social gaming service Zynga (NasdaqGS: ZNGA), under which it is developing new board games based on Zynga’s titles, which users play online for free. Hasbro recently released a Cityville-branded Monopoly game, Words With Friends (which is really a spin on Hasbro’s own Scrabble game) and a FarmVille-branded version of Hungry Hungry Hippos. This is a good way for the company to breathe new life into these games and introduce them to younger players.
The company doesn’t skimp on developing new toys and games: its product-development spending jumped 21.8% from a year ago, to $57.7 million. That amounts to 4.5% of its total sales. Hasbro currently holds $849.7 million of cash and cash equivalents on its balance sheet, up from $641.7 million. Long-term debt remains stable at $1.4 billion.
Hasbro also boosted its quarterly dividend by 11% last week, to $0.40 a share, for a high 4.0% yield. In addition, it bought back 2.7 million of its shares last year for $100.0 million; it has $127.3 million remaining on its current buyback authorization.
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