Hasbro Bearish Activity - Toy Industry Getting Hit on all Sides
Is the apparent bearish unusual activity fundamented by real risk factors in current macro conditions?
Lately we caught some interesting activity in Toy Makers - but in particular we want to point out what we have been seeing in Hasbro ($HAS).
Hasbro, Inc., operates in the entertainment industry. In particular through its Consumer Products segment that engages in the sourcing, marketing, and sale of toy and game products. However, Hasbro has been growing its digital revenues substantially through the acquisition of eOne entertainment and the strong investment in online gaming through Magic the Gathering and Dungeons & Dragons IP.
Recently, our platform ZackFinds.com, found 2 interesting transactions in Hasbro - clearly both seem bearish:
1. HAS 77.50$ Put expiring Oct 21, 2022
(~9.2M $; 15.7k contracts; 116x Vol/OI; above mid side; 1 block trade)
2. HAS 95.00$ Call expiring Jun 17, 2022
(~250k $; 1.2k contracts; 5.5x Vol/OI; bid side)
What’s happening with Hasbro at the fundamental level?
Hasbro is in the middle of the storm
1st. Commodity Prices for their products have been increasing substantially. Rising fuel and raw material prices for paperboard and other components such as resin used in plastics or electronic components as well as increasing transportation, shipping and labor costs in the markets in which Hasbro products are manufactured will hit margins and reduce profitability.
2nd. Geopolitical Tensions with China - similar to what we have seen during the Trump administration - will have a significant effect in the ability to buy finished goods. Even though Hasbro is transitioning their value chains, the majority of the manufactures are still in China (~52%), with a significant amount of product sourcing also coming from manufacturers in Vietnam and a lesser amount from India.
The imposition of tariffs, quotas, border adjustment taxes or other protectionist measures significantly increase the cost of imported products and consequently shift more orders from direct import to domestic sales, increase shipping and warehousing costs, delay the time of sales to retailers and result in lost sales. In the past, leading up to tariffs by the Trump administration - Hasbro was able to opportunistically build up inventories before the tariffs came into effect - and effectively mitigating some of the short term operational risks.
3rd. Shift of consumer preferences from traditional retail to e-commerce continues to grow. E-commerce retailers tend to hold less inventory and take inventory closer to the time of sale to consumers than traditional retailers. As a result, e-comerce players time their orders so that they are being filled by suppliers closer to the time of purchase by consumers. Consequently, Hasbro is pressured to fill orders promptly and thereby shift to Hasbro a significant portion of inventory risk and carrying costs - and since the value chain has to be well oiled in order to operate under these circumstances effectively the imposition of tariffs will have a substantially negative multiplier effect.
Under this circumstances if a Toy has more success than previously anticipated, Hasbro may not have sufficient time to produce and ship enough additional products to fully meet consumer demand. Additionally, the logistics of supplying more product within shorter time periods increases the risk that we will fail to achieve tight and compressed shipping schedules, which may reduce sales and harm financial performance.
We will continue to monitor unusual activity in the name and provide updates if another relevant trade comes up.
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