In its first quarterly report of 2001, issued late last month, Hasbro reported a quarterly loss of $25 million, far worse than Wall Street estimates, and attributed the shortfall in part to rapidly falling sales of Pokemon toys and CCGs. Hasbro revenues dropped 40% from $774 million for the first quarter last year to $463 million this year. Sales from U.S. games (the division that includes Wizards of the Coast, makers of the Pokemon CCG) dropped to $190 million from $398 million for the same quarter a year ago (the rapidly declining Furby property was also part of this division).
Hasbro also attributed a portion of its poor results for all of 2000 (as reported in its annual report) to the decline in sales of toys based on Star Wars: Episode I, Pokemon and Teletubbies, partially offset by an increase in sales of Action Man toys versus 1999. The company lost $144.6 million on sales of $3.8 billion in 2000, as compared to a profit of $189 million on sales of $4.2 billion in 1999.
Just how big did Pokemon get for WotC? The annual reports lead the way. Hasbro bought WotC in September, 1999, just as the Pokemon craze was hitting maximum overdrive in the mass market. For 1999, Hasbro reported that WotC was 14% of its game revenues. Hasbro games revenue totaled $1.936 billion for the year, so the WotC number was $271 million. Recall, however, that this was for the fourth quarter alone. Elsewhere, Hasbro reports that its sales would have been around $398 million higher had WotC been part of the company for all of 1999. The total of those two numbers is an astounding $669 million in WotC sales for 1999. WotC sales were around $155 million in 1998, based on the same pro-forma analysis in the annual report. If other product lines were relatively stable, the Pokemon boom accounted for around half a billion dollars of WotC sales in 1999! This is consistent with the disclosure elsewhere in the report that non-Pokemon products accounted for around 30% of Hasbro's growth from the WotC acquisition.
In 2000, the Pokemon CCG accounted for 15% of total Hasbro revenues, according to the report, which comes out to around $568 million in sales of the game. Throwing another $150 or so million into the mix for WotC's other products lines would bring the WotC total to over $700 million for the year.
And profits? The pro-forma information is informative here as well. Hasbro indicates that its profits would have been lower by around $29 million in 1998 had WotC been part of Hasbro. The 1999 numbers reflect a huge turn-around, however, indicating that in the first nine months of that year, WotC earned around $81 million, or around 20% of sales for the period. We're not particularly surprised at the profitability of the Pokemon boom; we are somewhat surprised at the implied losses in 1998, a year when WotC sold over $150 million worth of games. Although we have no information to indicate that it's the case, it's possible that losses related to cleaning up the Gamekeepers mess could have been part of 1999's poor results.
A comparison to Hasbro's flagship property--Star Wars: Episode I --is instructive. Hasbro reports the percentage of its sales that are attributable to its Star Wars toys for 1999 and 2000. In 1999, Star Wars accounted for around $508 million of Hasbro's sales, a number that is approximately the same as the Pokemon CCG sales for the year. Last year, the Pokemon CCG actually passed Star Wars toys--$568 million to $454 million!
Here's a summary of the estimates discussed above:
Year 1998 1999 2000
Hasbro sales $3.3B $4.2B $3.8B
Hasbro profits $206M $189M ($144M)
Est. WotC Sales $155M $669M $725M
Est. WotC profits ($29M) $81M+ ?
Est. Pokemon CCG $500M $568M
Est. Star Wars toys $508M $454M
(Notes on the above chart--WotC profit estimate for 1999 is only for the first three quarters of the year; Hasbro 1999 sales include one quarter of WotC sales, 2000 includes the full year.)
The spike in sales and profitability apparently contributed to post-closing adjustments to the purchase price for WotC, making the deal even more profitable for the company's owners. The original price that Hasbro paid for the company was $325 million. Adjustments to the purchase price made in 1999 and 2000 brought the total price by the end of 2000 to $492,574,000 -- a major-league cash-out by any standards. This is consistent with prices paid in other toy company acquisitions of around one times revenues. All of the principals of the company, including Adkison and Garfield, who have since departed (see 'Magic Creator Steps Back,') have done very well as a result of this transaction. And compared to the $600 million they reportedly paid to acquire the rights to rent the Star Wars property, the $500 million to buy WotC probably looks like a bargain to Hasbro.
There is one other matter of great importance to pop culture retailers that's discussed in the various Hasbro reports--WotC's retailing operation. At the end of 1999, WotC had around 70 stores, including both WotC and Gamekeeper stores. By the end of last year, that number had climbed to 100 stores. Hasbro has indicated that as part of its belt-tightening, plans to expand that number in 2001 are being shelved. This may slow the vertical integration of WotC through the supply chain that has been undertaken over the last few years, as WotC has taken control of more of the distribution of its products directly to retail stores and expanded its sales to consumers through its stores and website. With WotC starting to look like the U.S. version of Games Workshop (UK), it's probably a plus for U.S. game distributors and pop culture stores to get a chance to consolidate and prepare for more competition from above down the road.