Hasbro Set to Throttle Back Its Business

The toymaker will lay off around 2,200 workers, buy back more than 12% of its stock and absorb $141 million in charges against its fourth-quarter earnings.
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Updated from 10:12 a.m. EST

Hasbro

(HAS) - Get Report

said Tuesday that it would lay off about 2,200 workers and take a $141 million charge against fourth-quarter earnings as it discontinues some less-profitable lines of toys and expands its electronic offerings.

Excluding the charges, Hasbro said, operating earnings should still meet Wall Street's expectation of 76 cents a share for the holiday quarter and $1.41 a share for the year. The expectations are based on a survey of analysts polled by

First Call/Thomson Financial

.

Hasbro's shares were down 13/16, or 4%, at 20 5/8 in midafternoon trading. (Hasbro ended down 3/16, or 1%, to 21 1/4.)

After making the announcement, Hasbro executives told analysts in a conference call that their current earnings estimates for next year do not include the cost of launching

games.com

. The online game site is the centerpiece of the company's move into the interactive game business. Since they include marketing a new online venture, those costs are nearly impossible to predict, analysts said.

Margaret Whitfield, analyst for

Tucker Anthony Cleary

, said that ambiguity might yet forebode an earnings shortfall. Whitfield, whose firm hasn't done underwriting for Hasbro, will not raise her accumulate rating on the stock.

Two other analysts agreed. But they said investors will likely forgive the expense because of the perceived importance of moving to online commerce.

The changes exemplify Hasbro's effort to shift its business from a focus on toys to a focus on games, particularly electronic and interactive ones, analysts said.

Around 19% of Hasbro's workers, including about 1,850 in toy factories, will lose their jobs as the company shuts down factories in Tijuana, Mexico, and Ashford, England. The two factories primarily make creative learning toys and commodity toys like wood blocks, analysts said. The company will eliminate toys aimed at girls and the pre-school set to focus on interactive games and technology heavy toys like the talking

Furby

dolls, Whitfield said.

The company said it will shift production to other factories and to Asia. It said $78 million of the fourth-quarter charges stem from shutting down product lines.

Hasbro, based in Pawtucket, R.I., expects the newly announced overhaul to produce $16 million in savings before taxes this year and $23 million per year starting in 2000.

Since the end of 1997, the company has laid off about 2,500 employees in an attempt to save around $350 million through 2002, according to filings with the

Securities and Exchange Commission

. Savings have been disappointing because of smaller-than-expected sales to

Toys R Us

(TOY)

and because of changes in the company's mix of products, Hasbro wrote in SEC filings.

Hasbro said it would also buy back another $500 million in stock on the open markets and in private transactions after it completes its first $500 million repurchase program. Hasbro has already spent $415 million to repurchase more than 16 million shares.

"Positioning for continued growth and profitability improvement means we must continue to do more with less," said Herbert Baum, president and chief operating officer, in a news release.

The company has rapidly acquired other businesses over the last two decades, with the pace intensifying last year as the focus of its purchases changed. After buying famous board games from

Milton Bradley

and

Parker Brothers

in the 1980s, Hasbro has recently begun buying interactive games from the likes of the

Atari

video games division of

JTS

, said John Taylor, an analyst with

Arcadia Investment

.

"One of the things we're waiting on with baited breath is their online strategy," said Taylor, who rates Hasbro a buy. For now, cutting costs is a way of "ensuring earnings growth with or without hitting revenue targets," he said. "Increasing a games mix, which tends to have higher margins, is a component of that." Taylor's firm has done no underwriting for Hasbro.

The past year has been a backward one for Hasbro's revenues, given the May release of the film

Star Wars: The Phantom Menace

. Toy and game companies usually count on the holiday season.

The changes also reflect Hasbro's attempt to shy away from depending on hit movies and fad products, said Hayley Kissel of

Merrill Lynch

, who rates the stock a buy. Her firm participated in a $300 million debt offering for Hasbro.

As of Oct. 24, Hasbro had a total of around $860 million in unshipped orders, according to SEC filings. While that is almost $200 million more than last year, those products won't necessarily go unsold. Retailers have just been waiting until the last minute to place holiday orders, Taylor said.

The company has been offering retailers price incentives to keep

Star Wars

paraphernalia moving, Taylor said. This week, the movie began playing in theaters for a week-long pre-Christmas charity run.

While

Star Wars

sales figures have been disappointing, the

Pokemon

phenomenon should boost the company's earnings well into next year, Taylor said. "What happens after that is a huge question mark," he said. The next

Star Wars

installment isn't expected for three years.