Hasbro's (HAS) New Disney Deal is L-T Positive, Though Ramp-Up Risk Remains - Fitch (MAT)

Hasbro's (Nasdaq: HAS) new strategic merchandising relationship with the Walt Disney Co. (NYSE: DIS) for the 'Disney Princess' and 'Frozen' properties is a long-term positive for the company given that the present portfolio is skewed towards boys, according to Fitch Ratings. However, we believe some short-term operational risk is likely as the company ramps up production for these fashion dolls.

Hasbro will have the rights to develop dolls based on Disney Princess stories and characters beginning in 2016. The 'Disney Princess' and 'Frozen' properties are currently held by Mattel, Inc. and press reports have focused on Hasbro's coup over its larger rival. While the announcement has no current rating impact for either entity, there could be some implications.

Toy sales related to long term-agreements with Disney through Dec. 31, 2020 covering Marvel Entertainment, LLC (Marvel) and LucasFilm Ltd. LLC (LucasFilm) characters have historically accounted for a moderate share of Hasbro's revenues. Hasbro's revenue concentration to Disney will increase to more significant levels with the new properties. Of note, the Disney contracts related to Marvel and LucasFilm will expire if Hasbro's rating falls below 'BB-', although Fitch does not expect a decline of this magnitude to occur. Disney's solid track record is positive, but any inability to continue producing a constant stream of hits related to these agreements would hurt Hasbro's growth and profits. Fitch rates Hasbro 'BBB+'.

Producing fashion dolls is both capital and labor intensive, as Fitch found in a recent visit to Mattel's design center. Hasbro's foray into this category is relatively small and at present resides mostly with the 'My Little Pony Equestria Girls' line. Hasbro will likely have to increase investments in tooling, dies and brand support, which could have a negative impact on FCF as the line is ramped for production. There could also be some negative mix implication given the attendant royalty payments.

Hasbro has ample financial flexibility and liquidity and should see solid growth given a strong toy-related entertainment slate into at least 2015. However, given a highly seasonal toy industry, several difficult holiday seasons could negatively impact Hasbro's ratings and outlook when coupled with higher investments in the new line.

The Disney ('A'/Stable Outlook) properties were not a material portion of Mattel's $6.4 billion in revenues at the LTM ended June 30, 2014. Further, as licensed properties generally have lower margins than owned intellectual properties, that metric could improve as the contract rolls off.

From an operational standpoint, the contracts' loss is a modest negative. Disney has a long history of producing hit 'princess' wide-screen entertainment providing growth to related toy properties in movie years. The latest successful foray was the 2013 movie 'Frozen,' which generated more than $1.2 billion in global box-office revenues. Related doll sales benefitted. The intermittent pop to revenues, particularly given the slow growth US market and Barbie sales, provides additional variable dollars to cover fixed costs.

For Mattel (Nasdaq: MAT), replacement relationships with Disney's consistency aren't plentiful. Nonetheless, Fitch expects the toymaker will continue investing in growth internationally and other innovations that should at least partially offset the loss in 2016. Revenues and FCF are likely to be modestly lower in 2016. Nonetheless, overall strong FCF and low leverage should continue to result in metrics appropriate to Mattel's 'A-' IDR and Stable Outlook.

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