Toy manufacturer Hasbro reported sharply lower third-quarter earnings, citing tariffs on Chinese products and higher supply chain costs.
“The threat and implementation of tariffs negatively impacted our quarterly results,” said Brian Goldner, chairman and chief executive officer, on Oct. 22.
Hasbro reported adjusted net earnings of $213 million in the third quarter of 2019, 19% below third-quarter 2018 earnings of $264 million. Net revenues were virtually flat — $1.575 billion in the third quarter of 2019 versus $1.570 billion for the same period in 2018.
Speaking to securities analysts during an earnings call, Goldner said tariffs “in certain instances impacted our shipments and our ability to fully meet demand.”
President Trump announced on Oct. 11 the U.S. will keep the 25% tariff on Chinese products imported into the U.S. on lists 1, 2, and 3 instead of raising the rate to 30% on Oct. 15. The value of those products is estimated at $250 billion. He kept in place a 15% tariff that went into effect Sept. 1 on $120 billion worth of other Chinese products on list 4A. As to the proposed 15% tariff on an additional $160 billion on the items on list 4B, due to take effect Dec. 15, the administration held out the possibility that it might be averted if a trade deal with the China is reached.
Hasbro said while some of its games are on list 3, most of its products are on list 4B.
Because of changes to dates on which tariffs on list 4 products were to go into effect, Goldner said, Hasbro saw retailers “cancel major direct import program orders and rewrite many of those orders as domestic shipments. The impact of the shift was that July and August total shipments were lower and September shipments were far higher than a year ago.”
“Given the location of our inventory in Asia to satisfy direct import orders during July and August, we ultimately were unable to replan the orders and rewrite all of the orders from direct import to domestic orders all within the quarter,” he said. “We were also unable to ship all the orders, many of which came late in September, by the end of the quarter. Our supply chain team worked to rapidly respond as our domestic shipments increased to 59% of orders this year versus 51% of the U.S. and Canada segment this quarter last year.”
Further direct import cancellations and shifts to orders fulfilled by warehouses in the U.S. are in prospect, Goldner said, as the Dec. 15 imposition of the list 4 tariff draws closer for most of Hasbro’s product lines.
He said Hasbro gave priority to some toys, such as Star Wars Triple Force Friday, Frozen 2 and NERF Ultra, which he said “are off to very strong starts — in line with or ahead of our plans. To meet demand, we added air freight and shifted warehousing at an incremental expense to ensure shelves were stocked as the promotion builds for these initiatives.”
Goldner said Hasbro “has built a domestic supply chain that, like much of our approach to product manufacturing and distribution, is asset light. We have historically used a balance of customers’ shipments and our own domestic shipments through third-party suppliers to manage our costs and make our supply chain most effective and cost efficient. In this current environment, we’ve been transitioning and redesigning our U.S. supply chain at pace.”
Hasbro is “actively moving our strategic sourcing footprint,” Goldner said, and is “on track to achieve our target of sourcing 50% for the U.S. out of China by year-end 2020.” That’s down from 67% in 2018, Goldner said in an interview in July with Jim Cramer on his Mad Money program.
The Journal of Commerce listed Hasbro as the 53rd-largest U.S. importer of ocean container cargo, 30,253 TEU, in 2018.
The company is successfully manufacturing products in nations such as Vietnam and India, Goldner said. He also said the company is sourcing 20% of its products from the U.S.
Other trends affecting Hasbro is the shift to online retailing and retailers reducing their inventories.
In its 10-K annual report Hasbro noted “We depend upon a relatively small retail customer base to sell the majority of our products. For the fiscal year ended December 30, 2018, Wal-Mart Stores, Inc. and Target Corporation accounted for approximately 20% and 9%, respectively, of our consolidated net revenues and our five largest customers in the aggregate accounted for approximately 38% of our consolidated net revenues. In the U.S. and Canada segment, approximately 60% of the net revenues of the segment were derived from our top three customers.”
Hasbro added that e-commerce companies like Amazon are among its largest customers, and that “traditional brick and mortar retailers face challenges to their businesses from the disintermediation caused by the expanding prevalence of online shopping.”
Goldner said during his call with securities analysts that “U.S. retail inventories declined in the quarter mid-single digits, and European inventories were down more than 20% to meet the just-in-time needs of retailers, and we anticipate inventories will remain lower through the fourth quarter,” Goldner said.
Deb Thomas, Hasbro’s chief financial officer, said the company’s costs were higher because of an increase in shipping and warehousing costs, “primarily in the U.S., from higher costs on rerouting shipments to customers initially expected to be taken through direct import. This required moving inventory into U.S. warehouses to ultimately ship domestically, as well as higher warehousing costs to store domestic U.S. inventory.”