Hasbro released its first quarter 2002 numbers today, and the toy and game giant narrowed its loss to $17 million, an improvement over the unexpectedly large $25 million loss in the first quarter of 2001 (see 'Hasbro Results Cite Pokemon Decline').  The first quarter continues the improvement that Hasbro achieved with its full year 2001 results, which were recently detailed in its annual report.  Hasbro made a profit of $60 million in 2001 vs. a loss of $145 million in 2000, on declining sales.  Over-all sales were down to $2.9 billion in 2001 from $3.8 billion in 2000. 


The most interesting topics in the report for pop culture retailers were the news on WotC's retail operation, which at one time looked like it might be a major vertical play into retailing, and the implications of the year's events for the Wizards of the Coast, which appears to be losing corporate standing and authority (and possibly the ability to be as successful) as Pokemon sales decline.


Retail Segment
The Wizards of the Coast and Gamekeeper stores are a bleeding wound.  Hasbro's retail segment lost $36 million dollars in 2001 vs. a $10 million loss the previous year.  Sales were $51 million, down from $57 million in 2000.  The loss did include a $16 million charge for impairment of assets, but that still leaves a $20 million operating loss.  The report stated that there were 85 stores at the end of 2001, down from 100 at the end of 2000, so some of the costs may have been related to store closings.  Regardless, it seems unlikely that Hasbro will continue to operate stores with losses this size; eliminating the losses of this division would have increased Hasbro's profits for 2001 by over 35%, not something that can be ignored. 


Toy Segment

Hasbro's US toy sales were up 6% over 2000, to $788 million in 2001 compared to $744 million in the previous year.  The increase was attributed to Monsters Inc, JPIII, GI Joe, and Bob the Builder, which collectively brought in enough new money to offset the $71 million reduction in sales of Pokemon toys in 2001 vs. 2000.  The division was also profitable, with an $86 million profit, compared to a $145 million loss in 2000.  Sales of boys toys were down to $522 million in 2001, vs. $720 million in 2000, and $1.2 billion in 1999.  Those numbers imply that Star Wars toys must have been down considerably in 2001 vs. 2000, although we didn't see that called out in our reading of the report.


Although toy shipments tied to Star Wars:  Episode II in the first quarter were cited as a reason the toy results were better than last year's, the company is downplaying the size of the Episode II toy business vs. sales in the Episode I year.  And a Star Wars license carries a heavy price.  According to the report, 'Due to the royalties associated with this license, the Company expects that operating profits derived from sales of associated products will not increase commensurate with the revenues received from those sales.'  Elsewhere the company discloses that in 2002 it has minimum guaranteed royalty payments of $203 million for all licenses combined, of which Star Wars is undoubtedly the largest component. 


Game Segment

Hasbro's game sales fell to $1.1 billion in 2001 from $1.8 billion in 2000.  The biggest reasons for that decline were the departure of $194 million in sales with the sale of Hasbro Interactive to Infogrames, and $469 million in reduced sales of Pokemon products, primarily the Wizards of the Coast trading card games.  By our reckoning, that still left a pretty good business of just under $100 million in sales of the Pokemon CCG by WotC.  The games segment made $82 million in 2001, around half of the $163 million in profits for the segment in 2000. 


Over-all, we estimate that Wizards of the Coast was roughly a $300 million business in 2001.  We base that on the Pokemon number, above, and on an estimate of the non-Pokemon sales, as follows.  We estimated that around $157 million of Wizards' 2000 sales were non-Pokemon products.  The report mentions that Magic:  The Gathering sales were up in 2001, and we know WotC's RPG business was up substantially, with a full year of 3rd Edition Dungeons and Dragons.  A robust increase in the non-Pokemon portion of the sales brings us to that $300 million estimate. 
Despite the importance of WotC's sales to Hasbro (around 10% of over-all sales, around 25% of game segment sales), the division was dissed by the report, which devoted 5-10% of the space allocated to the games division in the color section at the front of the book to WotC.  Hasbro is also continuing to consolidate authority away from WotC (see 'Hasbro Clips WotC's Wings').  The big change this year is the move of WotC's international sales to the international segment as of 2002.  And we were recently told by a distributor that his WotC orders are now going to a Hasbro customer service rep in Rhode Island, instead of to a WotC rep in Washington. 
It would not surprise us to see further consolidation of WotC into Hasbro this year.  The problem with this is that maintaining the culture of creativity that has served WotC so well over the years is getting increasingly difficult as more and more people that were part of the fabric of the company either leave in restructurings or to get away from the turmoil they cause.  Consolidating some functions with the parent made great sense post-acquisition, but the process is now reaching the point where Hasbro risks the elimination of the home run potential that WotC brought to the company. 
For example, why did Upper Deck get the Yu Gi Oh CCG license while WotC got Star Wars?  That smacks of a decision that was made for corporate reasons (to align Hasbro more completely with Star Wars), and WotC may be the worse for it.  We will be surprised if the Yu Gi Oh CCG license does not prove to be much more profitable than the one for Star Wars over the next three years, not because it's a more powerful property in the over-all scheme of things, but because it's a better fit for the CCG business.  More importantly, has WotC lost the ability to make big bets on products that don't fit Hasbro's over-all scheme of property acquisition?