Hasbro, Inc.
Q3 2009 Earnings Call Transcript

Published: 19 Oct 2009

[Operator:]

Good morning and welcome to the Hasbro third quarter 2009 earnings conference call. (Operator Instructions) With us today from the company is Karen Warren, Senior Vice President of Investor Relations.

[Karen A. Warren:]

Thank you and good morning, everyone. Joining me today are Brian Goldner, President and Chief Executive Officer; David Hargreaves, Chief Operating Officer; and Deb Thomas, Chief Financial Officer. To better understand our results, it would be helpful to have the press release and financial tables available that we issued earlier today. The press release includes information regarding non-GAAP financial measures discussed on today’s call and it is available on our website at Hasbro.com. We would also like to point out that on this call whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share. During the call this morning, Brian will discuss key factors impacting our results and Deb will review the financials. We will then open the call to your questions. Before we begin, let me note that during the call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management’s expectations, goals, objectives, and similar matters. These forward-looking statements may include comments concerning our product plans, anticipated product performance, business opportunities and strategies, financial goals and expectations for our future financial performance and achieving our objective. There are many factors that could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. Some of those factors are set forth in our annual report on Form 10-K, in today’s press release, and in our other public disclosures. We undertake no obligation to update any forward-looking statements made today to reflect events or circumstances occurring after the date of this call. Now I would like to introduce Brian Goldner. Brian.

[Brian Goldner:]

Thank you, Karen. Good morning, everyone and thank you for joining us. Our company has continued performed well in this very challenging global environment, as we grew both earnings and earnings per share in the quarter. Net earnings for the quarter were $150.4 million compared to $138.2 million in 2008, or $0.99 per share compared with $0.89 per share a year ago, an increase of 11% in earnings per share. The growth in earnings and earnings per share includes the dilution from the joint venture and investments we are making in Hasbro's virtual studio. Revenues were down 2%, or $22.7 million, to $1.28 billion in the quarter. However, in constant dollars, revenues grew 1% to $1.32 billion. We experienced growth in a number of key brands, including Transformers, G.I. Joe, Nerf, Littlest Pet Shop, Playdo, and Tonka. In anticipation of the holidays and as part of our ongoing engagement with consumers, we recently commissioned a proprietary survey in the key U.S. and international markets to better understand holiday spending trends and preferences. The results of this survey revealed some key learnings. First, toys and games are well-positioned, garnering the highest percentage of the survey respondents planned holiday gift budgets in each market surveyed. Second, brand matters, with the specific brand name requested by a child ranking as the most important factor in purchasing a toy or game. Lastly, confirming what has been reported in the media, the majority of consumers plan to spend at last year’s levels, with about a quarter of consumers indicating they would spend less and approximately 10% saying they would spend more. In addition, NPD data for the U.S. year-to-date through August highlighted that toys and games outperformed other consumer categories. In this time period, NPD showed a decline in traditional toys and games of just 1.4%, considerably better than other major consumer categories such as apparel and consumer electronics. Furthermore, Hasbro performed exceptionally well, relative to the industry as NPD data on Hasbro sales of traditional toys and games in the same eight-month time period increased 9.7% compared to a year ago. The data also showed that for the latest three month period, June to August, Hasbro grew more than 16% compared to a year ago, outpacing the overall U.S. toy market, which declined 2%. POS data for Hasbro's top four domestic accounts further supports these trends and during the third quarter, Hasbro's POS was up 1.8% from a year ago. In recent weeks, Hasbro's POS trends have shown further signs of improvement. While it is still very early in the fourth quarter and the data points are limited, the trends are encouraging. Now let’s take a look at how our major global product categories performed this quarter. The boys business was up 12% with Transformers, G.I. Joe, and Nerf driving the growth in the category. We had a great summer with the theatrical releases of Transformers

[Deborah Thomas:]

Thanks, Brian and good morning, everyone. I am pleased that we were able to grow earnings per share, improve operating margin in the quarter, as well as to continue to invest in our business for the longer term, despite the continuing challenges of the global economy, and having revenues which were down due to the impact of foreign exchange. We were able to achieve EPS growth despite a $0.03 dilution per share from our joint venture with Discovery, financing costs associated with the recent issuance of long-term debt, and the initial investments we are making in Hasbro's virtual studio. For the quarter, we delivered worldwide net revenues of $1.28 billion, compared to $1.3 billion last year, a decrease of 2%. Excluding the impact of foreign exchange, revenues were up 1% or $13.2 million. Operating profit improved for the quarter to $230.7 million, or 18% of revenue. This compares to $215.9 million, or 16.6% of revenue last year. Moving to our segments, the U.S. and Canada segment net revenues at $791.9 million, were down 4% compared with $821 million last year. As Brian mentioned, we had a strong performance in the boys category, offset by declines in girls, preschool, and the games and puzzle categories. U.S. and Canada operating profit for the quarter was $129.1 million compared to $131.9 million last year. As a percent of revenue, operating profit was relatively flat at 16.3%. Net revenues in the international segment were $444.1 million, compared to $460.6 million a year ago. Revenues grew 4% absent a negative foreign exchange impact of $34.3 million. The results reflect growth in boys and the preschool categories, offset by declines in girls and the game and puzzles categories. The international segment reported operating profit of $64.1 million compared to $65.8 million last year. As a percent of revenue, operating profit was relatively flat at 14.4%. The entertainment and licensing segment net revenues were $41.6 million compared to $18.3 million a year ago. This is primarily due to growth in Transformers and G.I. Joe, as our brands continue to expand outside of traditional toys and games in new categories. The entertainment and licensing segment reported operating profit of $19.8 million compared to $6.3 million last year. The increase is primarily due to growth from licensing programs related to entertainment properties. Now let’s take a look at earnings -- for the third quarter, we reported net earnings of $150.4 million, or $0.99 per share. This compares to $138.2 million or $0.89 per share a year ago. As I mentioned earlier, this also includes a $0.03 per share impact from the television investment. During the quarter, average diluted shares outstanding were $152.9 million, compared to $156.2 million last year. Earnings before interest, taxes, depreciation and amortization were $286.9 million compared to $261.8 million a year ago. Gross margin for the quarter was 57% compared to 55.9% a year ago. The improvement is primarily due to a more favorable product mix, with a greater amount of entertainment driven product sold in 2009. These products typically have a better gross margin but also often incur higher royalties. As we’ve said previously, for the full year we expect our gross margin to return to our historical levels of approximately 58%. Turning to expenses, operating margin improved due to lower spending in R&D, advertising, and SG&A. The only expense line that increased was royalties, which was a function of product mix. As we manage the business in these challenging economic times, we believe it’s important to continue to invest for the long-term, such as in our virtual studio, the joint venture with Discovery, and our emerging market initiative. That said, we are also managing our discretionary expenses carefully and will continue to do so going forward. Below the operating profit line, interest expense increased by $5.9 million to $17.6 million, primarily due to the new long-term debt we issued related to our investment in the joint venture with Discovery. Other income net totaled $4.8 million compared to an expense of $2.7 million a year ago. Other income in 2009 includes $1.5 million in earnings, representing our 50% share in the joint venture with Discovery. Our underlying 2009 tax rate is 29.7%, compared to our 2008 full-year underlying tax rate of 32.8%. Before moving on to the balance sheet, I wanted to mention that we anticipate dilution of $0.04 to $0.05 per diluted share in the fourth quarter related to the company’s investment in the joint venture with Discovery Communications and Hasbro's virtual studio. Year-to-date, there’s been dilution of $0.09 per share. As we’ve stated previously, in 2010 our expected dilution is $0.25 to $0.30 per share. Now let’s turn to the balance sheet. At quarter end, cash totaled $297.4 million, compared to $356.5 million a year ago. In the last 12 months, we generated significant cash from operations and we raised $425 million through a debt offering. However, in the last 12 months we have also invested $300 million for our 50% investment in the joint venture with Discovery, $95 million to extend our agreements with Marvel and Lucas, paid a $25 million royalty advance to the joint venture network, and reduced our securitization levels. We also resumed our share repurchases this quarter. We repurchased $1.1 million shares at a total cost of $30 million. As of quarter end, there was $222.2 million remaining in the current share repurchase authorization. Our receivables at $1.1 billion were up $169 million compared to $946.9 million last year. At the end of the third quarter, given our cash balances from our recent debt issuance, we did not securitize receivables. In the prior year third quarter, we securitized $172.6 million in receivables. Excluding securitization, DSOs were 79 days compared to 77 days last year. We are very comfortable with the overall quality of our receivables. Inventories decreased to $399.9 million, compared to $461.6 million a year ago, as we continue to work to reduce our inventory levels. In closing, we will continue to focus on managing our business efficiently while investing for the long-term. As we look to the remainder of the year, the environment is expected to remain challenging. That said, we believe we can grow revenues in 2009 if our consumer retail takeaway continues to improve in line with recent fourth quarter trends. We also continue to believe that the underlying strength of brands and our commitment to our strategies will enable us to grow earnings per share in 2009, even with the expected dilution from our television investment. With that, Brian, David and I would be happy to take your questions.

[Operator:]

(Operator Instructions) Our first question, we’ll hear from Tony Gikas with Piper Jaffray.

[Tony Gikas:]

A couple of questions -- could you review the entertainment slate for 2011, as preliminary as it might be? And you mentioned that Transformers looks like it is coming that year -- any visibility on the actors in the movie? Also, Brian, maybe you could just help us out with a little bit of what you are seeing at retail and how much channel fill is taking place right now, in your opinion? And then I have one follow-up.

[Brian Goldner:]

All right, good morning. For the slate in 2011, currently the plan is Stretch Armstrong April 15th of ’11, Spider-man 4 May 6th of ’11, Thor May 20th of ’11, Transformers 3 the first of July in ’11, The First Avenger

[Tony Gikas:]

Channel fill at retail, could you just characterize how much is taking place?

[Brian Goldner:]

What we are really seeing at this point is, as you know, we’ve managed the inventory down thus far this year. We are starting to see consumer and retail takeaway increasing versus the third quarter and so again, we won't comment specifically on what we expect the fourth quarter revenues but if it continues as it is, we feel good about the fourth quarter.

[Tony Gikas:]

And then Deb, do you have the trailing 12-month cash flow number that you mentioned?

[Deborah Thomas:]

Yes, I do. From a free cash flow percentage, we had a -- give me one sec, I’m going to find that. Our free cash flow was $284 million use of cash in the last quarter and that will be in the last nine months, and that will be in our 10-Q that comes out within the next couple of weeks.

[Tony Gikas:]

Okay, thank you. Great job.

[Operator:]

Your next question comes from the line of Robert Carroll with UBS.

[Robert Carroll:]

Looking at spending for the JV, are you guys able to break out what specifically was spent, kind of where that is on the P&L?

[Deborah Thomas:]

Well, the majority of it, Rob, would be in the interest category. I think that if you look at the debt that we issue, that is the biggest piece of that and from a dilution standpoint. And then we also from a year-to-date standpoint, we also had some acquisition costs and tax benefit, so if you look at the interest, that’s the largest piece. And as we mentioned in other income, we had $1.5 million from the joint venture itself in net earnings.

[Robert Carroll:]

Okay, so there’s no material spending on the virtual studio showing up anywhere else?

[Deborah Thomas:]

That’s correct -- there’s no material spending on the studio impacting the --

[Brian Goldner:]

The teams are beginning to be assembled and we’ll give more updates to you as you come in for the November 5th analyst day.

[Robert Carroll:]

Great, and then will we have I guess sort of a preview of what the initial content will look like at the analyst day?

[Brian Goldner:]

We’re going to certainly give you a sense really for all of that. It’s becoming a very good lineup for us. We’ll give you an early sense of that.

[Robert Carroll:]

Great, and then just breaking out the other income line, would you mind just kind of going into a little bit of detail about what’s in there, other than the JV?

[Deborah Thomas:]

Sure. I think if you’ll recall last year in the third quarter, we had an impact of some foreign exchange losses that we said that we would be mitigating so really what’s in the -- what the impact is from last year to this year is really -- we don’t have those losses again this year. We’ve got the JV impact and we also have interest income that flows in through that line and that is a bit lower this year than it was last year.

[Robert Carroll:]

All right, thanks a lot, guys.

[Operator:]

Your next question comes from the line of Margaret Whitfield with Stern Agee.

[Margaret Whitfield:]

Good morning, everyone. You commented that G.I. Joe might do north of $100 million this year, Brian. If you could comment on your expectations for Transformers.

[Brian Goldner:]

Well, Transformers has continued to perform exceedingly well. As you know in 2007, we reported $484 million and then in ’08 we said that it was the lowest decline of any boys property we had. I won't comment specifically except to say certainly the movie has performed exceedingly well, the DVD drops tomorrow, and we expect Transformers to continue to sell well throughout the year.

[Margaret Whitfield:]

So presumably it should exceed the ‘07 number?

[Brian Goldner:]

I’m not going to give you specific guidance but certainly we’re on the right trend.

[Margaret Whitfield:]

And you said something earlier, you know, I didn’t -- I would like you to elaborate on G.I. Joe, that expectations are high and we need to do a better job. Where do you think you were off in terms of the Joe numbers? That sounds like it was more international than U.S.

[Brian Goldner:]

Well actually what I was really -- what I am really referring to is I don’t think we can expect that every motion picture we put out to be Transformers, and Transformers is a very rare property and yet you can have many successful motion pictures -- G.I. Joe both for the studio as well as for Hasbro is a very successful launch and will lead us to -- and we are working on a sequel, so we are just saying we want to manage expectations. Everything that we do is not going to deliver the kinds of revenues that Transformers delivered in the movie year and yet it can be exceedingly contributory to the company as we go forward. We just want to make sure we manage people’s expectations.

[Margaret Whitfield:]

Okay, and for Deb, I wondered if you could break down further the sources of the licensing segment operating profit. I know it includes a lot of areas -- you know, lifestyle, digital licensing and so forth. What were the leading contributors to that?

[Deborah Thomas:]

I would say as we talked about last year, you know, when we were just introducing or entering into the key revenue driving period of our relationship with Electronic Arts, so if we look to the different components, obviously our licensing programs on Transformers and G.I. Joe were very strong this period but in addition to that, we are also seeing a benefit from the digital relationship we have with Electronic Arts. So I would say from a key contributor standpoint, the strength of Transformers and Joe and beyond that, the leveraging of the relationship with Electronic Arts.

[Brian Goldner:]

You know, you are really seeing brands like Monopoly accelerate across that segment as well, so it’s not just related to the entertainment piece. But as you develop more immersive experiences, I don’t know if you saw over the weekend the number of commercials that were being broadcast for the Monopoly program at McDonald’s, all the different touch points for the ways you can play Monopoly now, and our gaming business in Monopoly all contributing to increases in the entertainment licensing segment.

[Margaret Whitfield:]

Okay, just two small questions -- what was the currency impact on the bottom line in Q3 and what was the share count, diluted share count at the end of the quarter?

[Deborah Thomas:]

The currency impact on the bottom line wasn’t significant. I think as we say in the past, you can generally assume that it’s 10% of the impact on revenue and the average amount of shares outstanding at the end of the quarter were $139.8 million.

[Margaret Whitfield:]

Thank you.

[Operator:]

Your next question comes from the line of Jake Hindelong with Monness Crespi & Martin.

[Jake Hindelong:]

I’ve got a few questions -- just first on the gross margin, it came in pretty strong this quarter. Can you talk about if there was much in there on the positive side besides the impact of oil and what that might have been?

[David D. R. Hargreaves:]

In terms of the gross margin, I think one of the things that we’ve seen is some abatement in commodity costs from their peak last year, although we tend to be relatively isolated from short-terms ups and downs because the way we do our costing is we don’t manufacture in the Orient. We primarily buy finished goods from third parties or actually buy the underlying commodities. And once they give us a price, it’s really kind of set in for the year. So it really is reflecting where we stood at the beginning of the year when we costed all of our product and those prices have held pretty well throughout the year.

[Jake Hindelong:]

Great, and then rolling that forward to the fourth quarter, is it fair to assume roughly the same type of impact?

[David D. R. Hargreaves:]

Yeah, you are not going to see any short-term impact due to commodities. You know, we do have products -- you could see variation in gross margin due to product mix. We have some product lines such as games that make well above the corporate average and we have some such as preschool that makes below the corporate average. So I would say that any variation in the gross margin during the fourth quarter is more likely to be attributed to product mix than it is to commodity costs.

[Jake Hindelong:]

Okay, great, thanks. And then just on the share repurchase, obviously some in the third quarter and it seems to be ongoing. Can you tell us what’s driving that decision and what the priorities are for capital allocation over the next couple of years?

[Brian Goldner:]

Well, as we said once we’d come through our joint venture and acquisition with Discovery, we felt in conversations with our board that going back into the market, given the share price of Hasbro, going back into the market at a modest level was a good idea, good utilization of cash and a good return to shareholders, so we’ll continue that type of program. We have an open authorization, several hundred million dollars, and our plan will be to continue to go forward based on our share price and at this modest level.

[Jake Hindelong:]

Okay, great. Thank you.

[Operator:]

Your next question comes from the line of Gerrick Johnson with BMO Capital Markets.

[Gerrick L. Johnson:]

Good morning. First question on the status of where you are in opening your sales offices in emerging markets, the ones you’ve talked about in the past and are there any new ones coming on board in the future?

[David D. R. Hargreaves:]

Yeah, in certainly last year we talked about opening offices in Brazil, which we did last year. We talked about opening an office in Russia, which we actually just opened about two months ago. It takes a bit of time to get things done in Russia. We opened in the Czech Republic and we -- and of course, China. For this year, we have approved the opening of a new office in Romania, which is happening at the moment, and we approved the opening of a new office in Peru, which will probably happen in the early part of next year.

[Gerrick L. Johnson:]

Okay, great. And can you just briefly describe the inventory situation in the channel? How does that look for both your core brands as well as your movie related properties?

[Brian Goldner:]

Overall, Gerrick, we feel good about our inventory levels, the amount of promotion and marketing that is going against our brands, both from Hasbro as well as partners, as the DVDs come into the market in the fall. The family game night promotion, the things going on with Monopoly, so overall we feel good. Obviously our inventories year-to-date are down 7.5% versus 2008 and we have been managing those inventories and we feel very good about our prospects for the fourth quarter.

[Gerrick L. Johnson:]

Okay, and finally one last question, more specific on product -- are you implementing the annual games riser program at Target this year? I’ve yet to see that one.

[David D. R. Hargreaves:]

We did that earlier in the year, which is what we normally do. It’s usually in the first half activity.

[Gerrick L. Johnson:]

Okay, I thought it was usually an October event.

[Brian Goldner:]

No, no -- it’s normally a first half piece and that gets executed starting in the middle of the year.

[Gerrick L. Johnson:]

Okay. All right, thank you.

[Operator:]

Your next question comes from the line of Sean McGowan with Needham & Company.

[Sean P. McGowan:]

Thank you. I have a couple of questions, some of them are pretty quick here -- Deb, could you go over again why accounts receivable would be up, given the drop in sales and thanks for adjusting for the securitization but was this an issue of timing during the quarter?

[Deborah Thomas:]

That’s exactly what it was, Sean. It’s really just timing of when the collections come due. That’s why we had said we are very comfortable with the quality of the receivables and the collectability. It’s timing and then the fact that we didn’t [securitize] obviously has a big impact.

[Sean P. McGowan:]

Right. Okay, Brian, you mentioned that Joe did more revenue outside the U.S. -- were you referring to the box office or referring to your own shipments?

[Brian Goldner:]

No, the box office was about 51%-49% international to domestic. On our shipments, it’s about 70-30 domestic.

[Sean P. McGowan:]

70-30 U.S.?

[Brian Goldner:]

Yes, 70-30 U.S. to international because we are just beginning to introduce many countries around the world to G.I. Joe.

[Sean P. McGowan:]

Okay, thanks for clarifying that. And when you said that Star Wars was a significant contributor, did you mean to imply that it was up in the quarter?

[Brian Goldner:]

No, it’s not up in the quarter but given the size of the business and the fact that we were seeing as we launched the new Star Wars episodes in October, which is outside of the quarter, the way the product is selling and the way it’s been selling throughout the year, although it’s not up in the quarter we felt it was a major contributor and it should be noted.

[Sean P. McGowan:]

Okay, now there was some talk a while ago about a live action TV series -- has that been shelved?

[Brian Goldner:]

No, I understand that development is ongoing and that is should come in the future.

[Sean P. McGowan:]

Okay. A couple of other things -- did you say in your comments how much the POS was up for games year-to-date? You know your actual measurable -- you know, your top four accounts or whatever, how much of that is up for games?

[Brian Goldner:]

Games POS is up -- if you look at family games, children’s games, adult games, up overall year-to-date, had been flat and we are seeing acceleration now with family game nights just beginning, so that’s really where you are starting to see the acceleration in POS, and it’s up pretty strongly based on that.

[Sean P. McGowan:]

Okay. A couple of others -- Deb, on the JV, is it fair to say then of the $0.03 dilution, maybe $0.01 of that is, or rather -- there actually was $0.01 of profit from the JV’s operation itself and the rest of it is the interest and other expenses?

[Deborah Thomas:]

I haven’t done the math to make sure --

[Sean P. McGowan:]

Okay.

[Deborah Thomas:]

-- said, but I think that [inaudible] was profitable and [inaudible] you could --

[Sean P. McGowan:]

Okay, and then the last question, and I’m not trying to over-analyze your comments, Brian, I’m just trying to relate back to about a year ago -- I think what you said around this time a year ago was if current trends continue or if current retail sales continue, we should be able to grow sales and EPS and now what you are saying is if current -- if retail takeaway continues to improve, is that a subtle difference or are you essentially saying the right thing and I am reading too much into it? It sounds like you are saying things need to get better in order for you to have that result. Is that not right?

[Brian Goldner:]

I think what we are trying to be very clear -- you know, now we are sitting in the -- we are sort of sitting in the season versus a year out and all we are trying to be clear about is clearly as we all know, the back-to-school season was not very good and so what we are now starting to see are the kinds of POS results we would expect in order to grow our business, so we’re just giving you a level of specificity around this quarter, our trends that we are seeing, and our belief that we can grow our business.

[Sean P. McGowan:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Timothy Conder with Wells Fargo.

[Timothy A. Conder:]

Thank you. Brian, just on the last note, are you saying the trends that are improving, are you seeing anything more than what you would anticipate on a seasonal basis or just picking up seasonally and again to what you need to grow your business, as you said?

[Brian Goldner:]

I think it’s more the latter. I think what we were all not entirely surprised about but certainly had seen in the August/September period was really a lack of robust consumer response and we all know and it’s been across a number of consumer categories. Toys certainly has performed better than other consumer products categories, and we’ve tried to note that as well as the industry’s down just a bit versus other major categories. In our business again, we had seen some trends in third quarter where our POS was up 1.8% but we are now starting to see an improvement versus that and we are starting to get the kinds of trends that would tell us we can grow our business.

[Timothy A. Conder:]

Okay, so again in line with what you are thinking from a seasonal pick-up and what you need to hit your goals?

[Brian Goldner:]

That’s exactly right.

[Timothy A. Conder:]

Great, okay. And then along that line, I think you alluded to this in one of the earlier questions in response, and some comments from a competitor on Friday -- the seasonal or the normal discounting that you see out there, or co-op money, however you want to term it, is that materially different on a normalized basis this year than what you have seen from a historical basis? Maybe throw out last year, obviously, that was kind of a different year but are you seeing anything different? And again, in context of the -- what would appear to be on the surface a greater promotional activity among some of the larger retailers?

[Brian Goldner:]

No, our discounts and allowances is very in line with longer term historical trends, not like last year. And certainly most of those major discounts happened in the fourth quarter, if you’ll remember all the news had come out mid-September through the beginning of October and then we had seen the majority of the markdowns or the allowances. So for us, you know, really we provide to the retailers promotions, discounts, and then they use them as they wish to to execute their strategies. We’re not seeing anything out of the ordinary.

[Timothy A. Conder:]

Okay. And another clarification on Star Wars -- is it fair to say that that’s performing better than your expectations for this year, given some of the responses to questions you’ve had so far? Just to make sure I’m interpreting that correctly.

[Brian Goldner:]

Yeah, no, you are and I am glad I’m clear -- it is performing. It’s held up really well this year. It’s performing very well this year, although I can't say it was up in the quarter but overall it’s a major contributor for us and we continue to see great vitality in the brand.

[Timothy A. Conder:]

Okay, and then one for David and one for Deb -- David, the pricing, you really didn’t comment, or nobody really commented too much on the pricing front. In the second quarter, you mentioned that as some of the input costs have come down, you’d given back a little bit of the pricing that you had taken then. Could you just sort of update us what happened in the third quarter and your expectations for the fourth?

[David D. R. Hargreaves:]

Yeah, as you know, we took two price increases last year and another 3% roughly price increase in February this year, and the retailers were pushing back a bit on that, particularly seeing as the commodity costs are starting to trend down. And what we really did when we took the 3% price increase is said that to the extent that we get significant reductions in commodity costs, we would pass those through back to the retailers and we didn’t unwind the 3% price increase we took but selectively working with retailers on a very much a rifle as opposed to a shotgun approach, to the extent that we had broken a barrier at retail like $20 seemed to be a key barrier, so to the extent that we had gone $19.99 to $21.99 and it was hurting sales and we could see that, we rolled back. So to the extent that we got some reduction in commodity costs, which was helpful to us, we worked with our retailers to selectively pull some prices back where we could see it was impacting the business.

[Timothy A. Conder:]

Okay, and then -- so again, that continued through the third quarter and --

[David D. R. Hargreaves:]

Well, really we were done by then so there was nothing really new in the third quarter over and above that.

[Timothy A. Conder:]

Okay. And then Deb, I apologize, your comment about the 58% gross margin goal, just could you state that again and go over that briefly?

[Deborah Thomas:]

Certainly. As Brian and David have talked about, we are pricing our product to achieve our costs and we expect that our gross margin will return to our historic 58% level, approximate 58. We tend to be on a full-year basis 58% plus a little bit on an historical basis on gross margin, so our expectation is for the full year that we will be around that level.

[Timothy A. Conder:]

Okay, great. We’ll see you on the 5th. Thank you.

[Operator:]

Your next question comes from the line of Drew Crum with Stifel Nicolaus.

[Drew Crum:]

A couple of questions on the entertainment properties -- Brian, to the best you can quantify the number of SKUs you have for Toy Story, and then on Star Wars, is there any opportunity to put Lucas related content on the JV?

[Brian Goldner:]

So on Toy Story, we have really a full array of Toy Story games, as well as our line of Mr. and Mrs. Potato Head, and you will see that both as mostly co-branded games and there’s a lot of really great innovations we’ll share with you guys on what that line looks like. I don’t have the number of SKUs in front of me but we’ll follow up and make sure you guys have that. But again, a nice broad array and we are very excited about that property coming in June next year. And Star Wars for Lucas, you know, at the end of the day, it will be up to Lucas as they develop new series and properties. Given that Clone Wars is on television ongoing, it’s really contributing to our business. We’ve talked about Friends of the Family coming on to the JV network and you will see Friends of the Family come on to the network. We don’t have any specific decision on, or any specific conversation on Lucas or Star Wars coming on to the network.

[Drew Crum:]

Okay, fair enough. And a question on the costs, the advertising down 11% in the quarter and the revenue guidance implies that you are going to be up high single digits in the fourth quarter. Can you talk about plans for advertising as it relates to television? You know, we are seeing CPMs down, there’s greater reliance on the scatter market and just given those dynamics, can you talk about how you are approaching advertising in the fourth quarter?

[Brian Goldner:]

One of the things to look at as you look at the P&L is if you were to look at royalties, which obviously for us is both our own properties where we are paying royalties to studio for making motion pictures supporting our brand as well as others, and you add that to advertising, we are actually 18.4% of revenues this year up against 18% a year ago. And if you look year-to-date, it’s actually pretty consistent. We look at entertainment properties as certainly an investment and continuing to contribute to advertising and so that formula works for us. In an entertainment heavy year, you might see that mix between the two change but that’s in order to accomplish getting our entertainment out in the market.

[Drew Crum:]

Okay, and one last question -- Deb, can you talk about the driver behind the -- I guess reduction and dilution from the JV? I think you were originally forecasting $0.15 to $0.20. Now it looks like $0.13 to $0.14.

[Deborah Thomas:]

I think it’s largely been due to the timing, as Brian mentioned. We’ve now got the team in place and it’s continuing to be amassed, so it’s really due to the timing of the expenses and as we’ve gotten more into it seeing what this year would look like, we continue to keep our expectations the same for next year.

[Drew Crum:]

Okay. Thanks, guys.

[Operator:]

Your next question comes from the line of Greg Badishkanian with Citi.

[Greg Badishkanian:]

Just wondering, in terms of your customers, as you speak to them, toy buyers at your biggest accounts, how are they approaching Christmas and holiday? Are they planning to have higher or lower inventories than last year? And has that mood changed over the last few months with the economy seeing signs of picking up?

[David D. R. Hargreaves:]

I think clearly they are aiming to finish the year with lower inventories than they had at the end of last year and they are taking a very cautious approach. That said, I think whilst they are cautious overall, they are looking to Hasbro to maybe outperform the market. I think with the DVDs of Transformers and G.I. Joe coming, with the television programming Clone Wars episode 2 starting during the fourth quarter, we have things like the family game night promotion, we have things like the Monopoly promotions going on. I think the retailers to some extent are looking to Hasbro to help drive their business during the fourth quarter and they are willing to sort of reach out and take a fair amount of our product in. But overall, we are clearly looking to finish the year with less inventory than they did last year, so they are taking a cautious approach and I think things will come later rather than earlier during the quarter.

[Greg Badishkanian:]

Right. Last year things were pretty dire, so -- and toy overall sales weren’t a disaster so I’d imagine they might be a little bit more optimistic than last year.

[David D. R. Hargreaves:]

You know, I think they are cautiously optimistic, so I think they’ve ordered inventory and set their expectations expecting that things won't particularly get a lot better but if things, if the consumer does show up more so than back to school, I think they will probably get more upside than downside, given the cautious approach that the retailers are taking.

[Greg Badishkanian:]

Right, and also maybe internationally, if you can -- maybe some key differences in terms of retail sales trends versus what we are seeing here in the United States, and also just currency impacts, I don’t know if I missed that one, for the fourth quarter.

[David D. R. Hargreaves:]

You know, it’s a mixed bag internationally. The Mexico, Spain, and the U.K. -- the U.K. partially impacted by the closing of [Woolworth], which was a big toy retailer -- those three markets are down. They’ve been down all year. We’ve done better and the market has been better in places like France, Germany, Australia, and Canada have held up fairly well, and some of our emerging markets like Brazil and Chile, we’re still making significant growth year-on-year. So it’s kind of a mixed bag. I think by product line, one of the areas we’ve talked about being down more significantly in Europe than the U.S. was games. Thus far this year the market is down about 8% but we are outperforming the market. We’ve gained market share in the U.S., U.K., France, Germany, and Italy. So I think that’s the main difference. And then really the fourth quarter currency impact, Deb, do you want to answer that one?

[Deborah Thomas:]

As we said at our analyst meeting in February, we expected currency to essentially be flat in the fourth quarter, the impact, but if we see current trends continuing, we may get a little bit of a benefit from it.

[Greg Badishkanian:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Jeff Blaeser with Morgan Joseph. And our final question will come from Hayley Wolff with Rochdale Securities.

[Hayley Wolff:]

I have just two questions for you. First, the aggressive pricing that is coming out of Walmart and Target in the toy category, how do you think about that as it pertains to your business and the overall toy sales? Do you think it drives toy sales or do you think it becomes a share battle?

[Brian Goldner:]

I think it does drive toy sales and albeit it’s at more of a value-oriented price point, which is consistent with what we are seeing in consumers desires this fall.

[Hayley Wolff:]

And does that factor into your optimism coming into the fourth quarter?

[Brian Goldner:]

You know, we’ve seen -- across the board, we’ve started to see the kind of momentum you need to see in a holiday season in order to achieve a fourth quarter result and it’s come across very strong POS even in our preschool business, our games business, girls business, so broad POS increases that you would like to see in the season.

[Hayley Wolff:]

Okay, and the second question is looking out to 2011 and given the movie slate that you have, how do you think retailers will manage having that many movies in the theaters and the associated product? I mean, is it -- do we think of it is as purely incremental? Do we think of it as somewhat of a zero sum gain?

[Brian Goldner:]

Well, having been in the boys toys business for a very long time, I would actually say boys toys among categories is very elastic based on great characters and great stories and great entertainment and the elasticity in the category can grow that category pretty considerably. And based on that plus great strategic plans we put together with retail partners around the world and the great efforts of all these different studios and our own properties as well as other people’s IP, we feel very good about the year and our ability to execute. We continue to hone all of the elements of our strategy from marketing to supply chain in order to achieve that. But again, I think that there’s great elasticity in that category and it should be a great year.

[Hayley Wolff:]

So you think that they have the capacity on the shelves to stock all the different SKUs with five or six movies?

[Brian Goldner:]

Sure, I mean, even this year if you look at all the different brands that are supported at retailers, there’s linear footage for a lot of different brands. I think that these are going to be some of the headliners for 2011 and certainly the retailers can accomplish that and we’ll partner with them to ensure that all these different brands get great opportunities for launches and the marketing throughout the years, as well as during the DVD period.

[Hayley Wolff:]

Okay. All right, thank you.

[Operator:]

At this time, I will turn the conference back over to Karen Warren.

[Karen A. Warren:]

Thank you, Rochelle. I would like to thank everyone for joining the call today. A replay of the call will be available on our website in approximately two hours. Thanks so much.

[Operator:]

And that will conclude today’s call. We thank you for your participation.