Oct 20, 2008
Executives
Karen A. Warren - Investor Relations Brian Goldner - President, Chief Executive Officer, Director David D.
R. Hargreaves - Chief Financial Officer, Chief Operating Officer Deborah Thomas Slater - Senior Vice President, Controller
Analysts
Robert Carol - UBS John G. Taylor - Arcadia Margaret Whitfield - Sterne, Agee & Leach Drew Crum - Stifel Nicolaus Tony Gikas - Piper Jaffray Gerrick L.
Johnson - BMO Capital Markets Sean P. McGowan - Needham & Company Timothy A.
Conder - Wachovia Securities Thomas Russo - Gardner Russo Gardner
Operator
Good morning and welcome to Hasbro's third quarter earnings conference call. (Operator Instructions) With us today from the company is Senior Vice President of Investor Relations, Karen Warren.
Please go ahead.
Karen A. Warren
Thank you, Lacey and good morning, everyone. Joining me today are Brian Goldner, President and Chief Executive Officer; David Hargreaves, Chief Operating Officer and Chief Financial Officer; and Deb Thomas Slater, Senior Vice President and Head of Corporate Finance.
To better understand our third quarter 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 David will review the financials.
We will then open the call to your questions. Before we begin, let me note that during this 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 achieving our objectives. 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.
Before David takes you through a detailed review of the financials, let me take a moment to comment on our results. Our company continues to perform well and we are very pleased with our results in the third quarter and year-to-date.
In a challenging economic environment, Hasbro delivered revenue growth with revenues up 6% to $1.3 billion for the quarter, compared to $1.2 billion last year. Absent the favorable impact of foreign exchange, revenues were up 5%.
Net earnings for the quarter were $138.2 million compared to $132 million in 2007, with earnings per share of $0.89 compared to $0.78 per share, excluding the impact of a one-time favorable tax adjustment of $29.6 million, or $0.17 per share in 2007. As part of our longer term strategy to grow Hasbro, we continue to make investments in many areas of the business, including emerging markets, entertainment, and digital gaming.
With the current strength of our product line, we’re able to make investments that will provide value for our shareholders over the long-term while continuing to deliver earnings growth in the quarter. Now let’s review the global quarterly performance of our product categories.
Boy, girls, preschool and games were all up, which speaks to the strength of our brand portfolio. The boys business was up 7%, with many brands performing well.
Star Wars continues to be strong with The Clone Wars animated product line doing very well. The CG animated television series debuted on Cartoon Network on October 3rd and became the channel’s most viewed series premiere, ranking number one among all major kids networks in its timeslot.
The series will be rolling out around the globe over the next 12 months. As we’ve said since February, we expect Star Wars to have another very good year and tog grow compared to last year.
Transformers continues to represent a significant brand in our boys portfolio and it is having a great year, particularly given that it’s a non-movie year. As we expected, revenues were down for the quarter; however, the momentum remains strong and with the addition of the Transformers animated product line, we have seen significant growth since the second quarter.
As we look to 2009, Transformers: Revenge of the Fallen, our second film in partnership with Dreamworks and Paramount, is expected to be released on June 26, 2009. We have seen some early film footage and we are really excited about it.
We are also looking forward to G.I. Joe: The Rise of Cobra, which is expected to be released on August 7, 2009.
The filming is completed and we believe this movie is a tremendous way to reinvent and reimagine the brand. The Iron Man DVD was released on September 30th and DVD sales have been very strong over the last few weeks.
We have found that DVDs are an important driver of sales as they bring new consumers into the franchise, which bodes well for the upcoming holiday season. Iron Man will exceed our original expectations for the year.
Marvel has already announced that Iron Man 2 will be released in 2010. We continue to believe that our six major boys initiatives in 2008 can equal the three major boys initiatives in 2007.
The girls category continues to do well, with revenues up 11% in the quarter, driven by the success of Furreal Friends, Baby Alive, Easy-Bake Oven, the Littlest Pet Shops. Our tween category was down 5% in the quarter.
Although Nerf was up a strong 30%, it was not enough to offset the decline from last year’s Power Tour Guitar, which is no longer in our line. The preschool category was up 15%, with core Playskool segments performing well and In The Night Garden also contributing to the growth in the category.
Our games and puzzle business was up 4% for the quarter. During the quarter, we had successful global game launches with Monopoly, Here and Now: The World Edition and the Trivial Pursuit 25th Anniversary Edition.
We also launched the Trivial Pursuit game show in late September. With placement in over 90% of the U.S., it’s off to a good start with solid ratings.
Traditional board games were up 7%, with a number of games performing well in the quarter, including Scrabble, Trivial Pursuit, Twister, and Guess Who. In our Wizards of the Coast trading card business, both Magic: The Gathering and Duel Masters were up significantly.
As more people are choosing to stay home and spend time together, our games are even more relevant today. That’s why earlier this year we developed plans to relaunch Hasbro's family game night.
Based on consumer insights, the new family game night promotions emphasizes the tremendous economic value of our games and creates a way for families to get together. Complementing our program is the Electronic Arts launch of family game night on the Wii and PlayStation 2, featuring reimagined versions of some of Hasbro's classics, like Connect Four, Battleship, Yahtzee, Boggle, and Sorry.
This new title from EA showcases the power and versatility of our games brand and the family game night platform. We are also working with EA on a number of integrated promotional programs for the fourth quarter that will support the launch of both our toys and their digital games, including efforts for three of Hasbro's most popular brands, Littlest Pet Shop, Nerf, and Monopoly.
We couldn’t be more pleased with the success of our partnership with EA and by the end of 2008, EA and Hasbro will have launched over 30 games, with great Hasbro brands appearing on every major platform from PlayStation 3 to the Wii to Xbox 360 to the iPod and iPhone. Next year we will launch even more games based on a broader range of brands.
As we have said, revenues from our EA strategic alliance in 2008 will not be material, since product launches tied to major platforms are occurring later in the year. However, as EA's portfolio of Hasbro brands increases over the next few years, our revenues will increase as well.
Shifting to another investment area, our emerging market strategy, as we have said, we believe that there are significant growth opportunities in emerging markets. To facilitate our growth plans, we have been increasing our investments in a number of new markets this year, including opening offices in Brazil, Russia, China and the Czech Republic.
Our brands have proven worldwide appeal and as we increase our presence around the globe, we expect to grow our emerging market business significantly over the next few years. The strength of our product portfolio and the diversity of our world-class brands not only benefits Hasbro in emerging markets, it also serves us well in a challenging economic environment.
With the breadth and depth of our portfolio, we have something to reach every consumer, from infants to seniors -- whether it’s Playskool, Littlest Pet Shop, Transformers, or our wide array of games, Hasbro has it. Consumers have come to expect from Hasbro a product line that delivers great innovation and value for their money.
That’s why we have done well in good and not-so-good economic times. We have consistently delivered innovation across all our major product categories around the globe and with the majority of our products selling for $20 or less at retail, we have historically been recession resistant.
In closing, as we have said at the beginning of the year, we believe we will grow revenue and earnings per share in 2008. While the current environment is challenging, we have not changed this expectation.
We believe that over time we can grow revenues 3% to 5%. This has not changed.
Our medium to longer term operating margin objective is 15% and this has not changed. We continue to develop the management team, marketing programs, and innovation that will serve Hasbro, its customers, its consumers, and its shareholders well for today and the future.
Now let me turn the call over to David and talk more about our third quarter results. David.
David D. R. Hargreaves
Thanks, Brian and good morning, everyone. I too am very pleased with the results we reported today.
For the quarter, we delivered worldwide net revenues of $1.3 billion, compared to $1.2 billion last year, an increase of 6% or $79 million. Excluding the favorable impact of foreign exchange, revenues were up 5% or $60 million.
Operating profit for the quarter was $215.9 million, or 16.6% of revenue. This compares to $209.7 million, or 17.1% of revenue last year.
Before looking at our results in more detail, I would like to take a moment to address one of the questions people are asking us -- how is the current credit situation impacting Hasbro's liquidity? And the answer is that the current credit situation is not impacting Hasbro's liquidity.
We ended the quarter with $356.5 million in cash and we have available capacity if needed on both our securitization program and bank revolver. In addition, we are clearly through our working capital peak for this year and we will be substantially cash flow positive for the next two quarters.
Now let’s get back to our quarterly results, starting with our segments. U.S.
and Canada segment net revenues were $821 million compared to $773.5 million last year, an increase of $47.5 million, or 6%. U.S.
and Canada operating profit for the quarter was $131.9 million, compared to $122.8 million last year. As a percent of revenue, it was flat year over year at approximately 16%.
Net revenues in the international segment were $460.6 million, compared to $423.2 million a year ago. The segment was up 9% in U.S.
dollars and 4% excluding the impact of foreign exchange. The international segment reported operating profit of $65.8 million, compared to $68.8 million last year.
The decrease is primarily due to the investments we are making in the emerging markets. Now let’s take a look at earnings.
For the third quarter, we reported net earnings of $138.2 million, or $0.89 per share. This compares to $132 million, or $0.78 per share excluding a favorable tax adjustment of $29.6 million, or $0.17 per share, in 2007.
During the quarter, average diluted shares outstanding were $156.2 million, compared to $170.8 million last year. Earnings before interest, taxes, depreciation, and amortization were $261.8 million, compared to $259.3 million a year ago.
Gross margin for the quarter was 55.9%, compared to 57.4% a year ago. As we previously announced, we took pricing actions in September to offset the cost increases that we have experienced thus far this year.
While the cost increases impacted all three months of the quarter, the price increases were effective for only one month of the quarter. This resulted in a decline in gross margin for the quarter; however, for the full year through cost-saving initiatives and pricing actions we have taken, we expect to be able to mitigate most of these increases and they should not have a material impact on our full year results.
Now let’s take a look at expenses. Royalty expense for the quarter was $83.7 million, or 6.4% of revenue compared to $93 million, or 7.6% a year ago.
As we have discussed, entertainment based product lines continue to represent a significant part of our business, although less so than a year ago. Research and product development expense, while increasing $6.5 million to $50 million, was relatively flat on a percentage basis.
The increased spending reflects the significant investment we are making in product development to grow our business in 2009 and beyond. Advertising expense at 11.6% of revenue was consistent with last year as a percent of revenue.
However, it did increase by $12.6 million to $151.2 million. The increased spending reflects our commitment to building our brands and driving our business through the balance of the year.
SD&A expenses at $207.5 million was relatively flat on a percentage basis, although it did increase by $8.4 million compared to last year, primarily due to foreign exchange. As I shared with you at the beginning of my remarks, operating profit declined marginally from a year ago.
In part, this reflects the net impact of cost and price increases during the quarter but more significant are the investments we are making in the future growth of the business, including higher R&D spending, investments in emerging markets, and the promotion of our brands through higher advertising. Interest expense increased by $2.5 million to $11.7 million, primarily due to the $350 million of long-term debt we issued in the third quarter of last year, offset somewhat by the repayment of $135 million of notes that matured in July this year.
Other expense net totaled $2.7 million, compared to an income of $3.5 million a year ago, partially due to lower interest income on invested cash. Our underlying 2008 tax rate was 31.7%, compared to our 2007 full year underlying tax rate of 30.5%.
Now let’s turn to the balance sheet. At quarter end, cash totaled $356.5 million, compared to $410.9 million a year ago.
Although we have generated $579 million in operating cash flow in the last 12 months, we have spent a significant amount of cash on our share buy-back program and the acquisition of Cranium and the Trivial Pursuit brands. As I already mentioned, we are beyond our working capital peak and will be cash flow positive for the remainder of this year and into next.
Our receivables at $946.9 million were up $54.2 million compared to $892.7 million last year, primarily due to higher sales volume. DSOs were 65 days compared to 66 days last year.
We are very comfortable with the overall quality of our receivables. Inventories increased to $461.6 million, compared to $395.5 million a year ago.
In summary, we are very pleased with the results we reported today. We grew revenues and earnings in a difficult economic environment whilst also continuing to make investments in our future.
As we look to the remainder of the year, clearly it will continue to be a very challenging environment. We have said in the past that based on history, we believe we are relatively recession resistant.
However, given the severity of what is now happening in the global economies, we do not believe we will be unaffected and we are adjusting our expectations and spending plans accordingly. That said, we do believe that the underlying strength of our brands and balance sheet will enable us to do well even during these stormy times.
With that, Brian, Deb, and I would be happy to take your questions.
Operator
(Operator Instructions) Our first question is from Robert [Carol] of UBS.
Robert Carol - UBS
I was actually just wondering if you could comment on some of the retail sell-through that you’ve seen during the quarter and even just any progression through -- I mean, if things had trailed off a little bit in September or October as the overall economy has gotten a little worse.
Brian Goldner
Good morning, Robert. First of all, we still believe that Christmas will come for consumers and retailers this year and our retailers have agreed that toys and games are more recession resistant than other discretionary spending categories, and we agree with this conclusion.
David, do you want to talk about some of the specifics?
David D. R. Hargreaves
In terms of the POS, we are clearly -- in our toy business we are clearly up year-to-date and our game business is fairly flat. In terms of most recent month, clearly retail was down in September and the first two months of October have shown retail to be down overall.
We haven’t escaped that slight downturn in POS. Whether that continues throughout the end of the year or whether that was a particular blip that appeared in time due to what was going on in the economy, we’ll find out but as Brian said, we are relatively confident.
We know that Christmas will come and we have a very strong product line and a lot of good demand of our products.
Brian Goldner
Robert, as I look across our business and as I talk to retailers, you know, retailers have still seen good sales over the past few weeks on some of the popular brands. Our brands and others that have had momentum with their new innovative holiday items and their highly promoted products and brands, so that’s kind of where we are.
Robert Carol - UBS
That’s helpful. Thank you, guys.
Operator
Our next question is from John Taylor of Arcadia. Please go ahead.
John G. Taylor - Arcadia
I’ve got a couple of questions, if I can -- everybody gets nervous this time of year, even without the stuff that’s going on in a macro sense and I’m wondering what you guys are or how you would characterize this sort of game of chicken regarding inventory and who is going to hold what, whether you guys are doing to build it and wait for orders or whether retailers are going to bring it in. Because it seems like people still believe there’s going to be a Christmas and it might just come later than it usually does.
It may not ultimately reach the level that it typically does given whatever multiplier you might use from here but I wonder if you can talk about the timing of shopping patterns and whether people are going to be in-stock with inventory and whether you are going to have enough to sort of supply in case there is in fact a decent Christmas and people try to shield their kids from the stuff that’s going on. Long question but can you get into some of that?
Brian Goldner
Sure, John, good morning. So where we are and what we have seen overall, we have forecasting and tracking teams that have partnered with retailers throughout the year to create the plans and this continues day by day in the fourth quarter.
Our brands have had a lot of momentum. You just heard about the third quarter, through the third quarter.
We still have significant plans in the fourth quarter for these brands, Furreal, Littlest Pet Shop, Nerf, just to name a few. So again, we feel again with our retailers and partnering that we are on the right track.
We recognize that it’s going to come down to the consumer. The consumer is projected to spend less by many people than prior years this holiday but we want to be in a position where consumers spend more as a percentage on Hasbro brands and our great innovative products.
We think we can do that and that’s why we continue to invest in marketing and marketing programs, in our family game night promotions, and ensuring that our products are out there available. In terms of specific inventory, even our higher ticket items, you know we’ve forecasted an appropriate level of sales for these items.
We’ve thought about how many Codas and how many Biscuits we think we can sell and we feel very comfortable. We are seeing some really good early results.
John G. Taylor - Arcadia
So if I can get at what David, how David was discussing it though, saying it clearly is going to have an impact on Hasbro to some degree. Is that most likely going to show up in an ad-to-sales ratio?
Is that mostly going to show up in a mid-sales number? I mean, are there any line items in particular you feel are most exposed or categories or any way to sort of narrow this down a little bit for us?
Brian Goldner
I think as we look across the fourth quarter, you know, clearly as we’ve said, we expect to be up both in revenue and earnings per share this year. You know, the consumer may not spend as much.
They may spend more on Hasbro toys. It may have some impact on what we have as an internal estimate for fourth quarter but again, we still believe we can deliver overall.
John G. Taylor - Arcadia
Okay, great. Thank you.
Operator
Our next question is from Margaret Whitfield of Sterne, Agee.
Margaret Whitfield - Sterne, Agee & Leach
Good morning. I was wondering if you could further elaborate on your comments at the end that you will be adjusting your expectations and your spending levels.
It sounds like some of the high-ticket items are going well, or are you shifting more of your shipments to more value-based products? Thank you.
David D. R. Hargreaves
Margaret, as we’ve said, we’ve had a lot of momentum this year thus far. We were up 13% in the first two quarters and we were up again this quarter.
We have a lot of momentum and clearly we see a lot of that continuing into the fourth quarter. However, when you look what’s going on in the global economy, it’s tough to think that with potentially higher unemployment, with potentially a slow-down on consumer spending, as they tend to take down their credit card debt, some retailers around the globe are going to find some difficulties -- it is tough to think that our momentum won’t be somewhat impacted by what’s going on in the macroeconomic environment.
So I don’t think we are saying that we think we are going to have a bad year in any sense -- I think it’s just maybe perhaps not as good as we thought it would be two months ago.
Margaret Whitfield - Sterne, Agee & Leach
Okay. Will there be a shift in more value toys, do you believe this holiday versus the $2.99 item?
David D. R. Hargreaves
You know, one of the things you will see is with advertising in the third quarter was up significantly year-on-year and we are going to keep the advertising going to drive sales during the fourth quarter.
Margaret Whitfield - Sterne, Agee & Leach
And how about currency? To the bottom line, what was the effect in this quarter and year-to-date?
David D. R. Hargreaves
Well, I think revenues were favorable year over year during the third quarter by about $19 million. I think as we get into the fourth quarter, again that’s another area where we won’t be un-impacted because for a number of years, we have had favorable sort of tailwinds in terms of currency.
In terms of the fourth quarter of this year, it will probably be the first year for a substantial period of time where year over year, currency and the translation of foreign revenues and earnings back to U.S. dollars is actually going against us.
Margaret Whitfield - Sterne, Agee & Leach
Okay. Would you say the situation in your overseas markets is worse than the U.S.
in terms of retailers’ concern about the holiday season?
David D. R. Hargreaves
I think certainly we’re in an extraordinary blip of time at the moment. Whether things settle down as we get in through the rest of the fourth quarter, we’ll find out but certainly over the last couple of weeks, with everything that’s been going on, retailers are expressing more caution and consumers, as you can see from consumer sales numbers, have been shopping less than a year ago.
Again, that said, we keep coming back to the fact that we’ve got very strong brands, we’ve got a lot of momentum, and we think we are positioned to do well even in these sort of stormy times.
Brian Goldner
Margaret, the consumer can spend somewhat less money in Q4 and Hasbro can still grow if we get our fair share or better. So again, our goal is to have the plans in place to continue to drive our business with our teams with great brands and an array of brands, a diversity of brands that have great momentum.
Margaret Whitfield - Sterne, Agee & Leach
Okay. Thank you and best of luck.
Operator
Our next question is from Drew Crum of Stifel Nicolaus.
Drew Crum - Stifel Nicolaus
Good morning, everyone. I wonder if you guys could comment on when the business benefits from the significant pull-back we’ve seen in oil prices, and specifically raw material costs.
And then also if you could elaborate on your comment about sustaining operating profit margin, or gross margins, rather, and pricing and what you see for 2009 as far as pricing product? Thanks.
David D. R. Hargreaves
So whilst oil has swung dramatically from around $70 a barrel in the fourth quarter of last year up to $147 and then back down to $70, you know, there’s not a direct correlation with plastics. Resins such as ABS polypro did not increase as significantly and although they’ve started to fall back a little bit during the last quarter, they are still above where they were a year ago.
In addition to resins, we are still contending with higher China labor costs, up about 30% since a year ago. We’ve got some incremental quality and safety testing costs and we’ve got the appreciation of the Chinese currency.
So there’s still a reasonable amount of cost pressure out there. In terms of pricing, what we said when commodity costs were going up is that we would take the appropriate pricing actions in order to protect our margin.
I think as prices, commodity costs start to come down, you know, we reevaluate the need or the magnitude of any price increases go forward. But clearly this is not a time to be taking price increases that aren’t warranted by cost increases, so I think we’ll be looking to protect our margins and we will take the appropriate pricing actions to do that.
Certainly in Europe we probably will see more pricing because if you look at sterling, for example, it’s already fallen 15% against the U.S. dollar, so I think whereas in Europe we’ve taken less pricing over the last couple of years because the exchange has been going forward and offsetting cost increases, over the next period of time we will have to take more pricing in Europe as the exchange rates go against us, or against them.
Drew Crum - Stifel Nicolaus
One last one -- Dave, is there a CapEx figure you can provide for the quarter?
David D. R. Hargreaves
We do have that. I think it’s $29 million but I’ll just check that and -- hold on one minute -- 29.7.
Drew Crum - Stifel Nicolaus
Okay, very good. Thank you, guys.
Operator
Our next question is from Tony Gikas of Piper Jaffray.
Tony Gikas - Piper Jaffray
Good morning, guys and congratulations on some good execution in the quarter. A couple of questions -- you guys have been growing operating income really well in a tough environment and you’ve been spending significantly on investment in international markets.
How significantly is that investment? Specifically I think you’ve been talking about Brazil, Russia, China.
I just want to get a feel for the dollar amount, if possible, and where are those sales at today in some of those markets? What do you think the opportunity is?
How quickly do these new markets ramp? Second question, you didn’t really talk about the movie Wolverine in 2009.
Maybe just what are you hearing on the movie, how important is that to your entertainment business next year?
Brian Goldner
Good morning. We’ll let David take the first part; I’ll talk about the second.
David D. R. Hargreaves
I think we said in the first and second quarters that our operating profit growth wasn’t fully consistent with our revenue growth because of expenditures, investment spending we were doing in digital, in entertainment, and in emerging markets. I think in the aggregate, if you sort of did some math you’d probably get a sense that it was about $20 million a quarter during those early quarters.
Some of our investment spending against our Wizards of the Coast initiative is starting to tail off, so it’s not as significant during the latter part of the year. And also our revenues are higher, so it becomes less as a percentage wise.
However for the full year, it will be a fairly significant amount of investment spending. When you talk about the emerging markets, we certainly in places like Latin America, Mexico, under-perform against our major competitor and I think if you go back to the turn of the century, 2000, 2001, you know, we were losing money and we had a lot of debt and at that time, we scaled back some of our emerging market investments and we probably lost a little bit of ground by doing that.
Given that we are now making large share, 13.5% operating margin and [inaudible] large share of $602 million in operating cash flow, we are in a position now where clearly we can investment spend and probably catch up in some of these markets, which is clearly what we are doing and we believe that given the fact that we probably under-performed thus far that our opportunity in the emerging markets, particularly behind big global events such as the Transformers movie, the G.I. Joe movie or with Spider-man, that we’ve got an opportunity to play catch-up very quickly and we have a substantial growth opportunity in these markets.
Brian Goldner
And on the second point on Wolverine, it’s for next May and it will be part of our boys portfolio. The teams are working on it now and it certainly will help lead into a tremendous summer because after that, of course, is Transformers and G.I.
Joe, Star Wars will continue. So again, 2009 should be a very good year for our boys business.
Tony Gikas - Piper Jaffray
Could the revenues from the Wolverine brand be similar to G.I. Joe in size, perhaps?
Brian Goldner
It’s too early to say exactly where it will be. It was more of a late-breaking addition to the year as things started to form.
We are just now starting to see some of the materials for the film and you know, we are putting together our product lines. We are very excited about G.I.
Joe and we were out over the past several months in Europe. In Prague, we had a summer tour visiting G.I.
Joe and bringing our European retailers in. They are very excited about G.I.
Joe. We just had a program in Shanghai.
We’ll be down in Brazil in the next couple of weeks with our retailers. Our retailers have been here, so not just U.S.
retailers but global retailers are very excited about G.I. Joe because of the direction we’ve taken the brand, which is again more along the lines of the 80s comic book heroes and the raft of characters in G.I.
Joe versus Cobra. And so it would be hard to compare our own to Wolverine at this point.
Tony Gikas - Piper Jaffray
Okay. Thank you, guys and good luck.
Operator
Our next question is from Gerrick Johnson of BMO Capital Markets.
Gerrick L. Johnson - BMO Capital Markets
Good morning. I may have missed it but did you give a retail take-away number for the third quarter?
David D. R. Hargreaves
I think I did say that our POS for toys was a little bit up for the third quarter and games, if you take out something like [inaudible] specifically last year, certainly on our board games we’re about flat to a little bit up.
Brian Goldner
Right. Year-to-date our board games, our classic games are up for the year.
Gerrick L. Johnson - BMO Capital Markets
Okay, and can you comment on inventory? It looked like it was up about almost 17% year over year.
How is that inventory? Is there any concern there or is that a build for something that you are launching later on in the fourth quarter?
And how is the inventory in the channel looking?
David D. R. Hargreaves
In terms of our inventories, there’s a couple of reasons why it was up versus a year ago. Firstly, a year ago Transformers was in really hot and we were struggling to keep anything in inventory on Transformers, so we virtually had no Transformers inventory at this time last year.
The second thing which is impacting it a bit is the fact that there’s a major customer in Mexico who takes a lot of inventory into the Christmas for the annexes they do down there. Last year they took that inventory in the last couple of weeks of September.
This year they have taken it in the first couple of weeks of October. But that said, our inventory, given the challenging retail environment in the fourth quarter if anything it’s probably a little bit higher than we’d like it to be but we are happy with the overall quality and to the extent that we’ve got any slower moving items in there, we’ve already established programs to move them out and we are pretty confident that we’ll have the right level of inventory by year-end.
Gerrick L. Johnson - BMO Capital Markets
Okay, and then in the channel?
David D. R. Hargreaves
I think in the channels, I think basically their inventories are in good shape. You know, balanced as John Taylor asked the question -- we certainly hope we have enough there to satisfy the demand on what is some very strong brands.
Gerrick L. Johnson - BMO Capital Markets
Okay, great. Thank you very much.
Operator
Our next question is from Sean McGowan Needham.
Sean P. McGowan - Needham & Company
Good morning. A couple of questions here as well -- one I just wanted to ask for a clarification.
I think it was David or maybe Brian was saying that you are only now getting some images from the movie -- did you mean for Wolverine or for G.I. Joe?
Brian Goldner
For Wolverine.
Sean P. McGowan - Needham & Company
Okay. Does that mean that the product that you would be developing is not quite as tailored to the movie as it would be if you had images, a longer lead time?
Brian Goldner
I’m sorry, let me clarify. Thanks, Sean, thanks for pointing it out.
So what I was talking about was we haven’t seen a lot of the movie yet so I can’t really comment on the strength of the film. What we’ve gotten, our designers for many months have had the images to work on for the product line.
Sean P. McGowan - Needham & Company
Okay, so no issue there?
Brian Goldner
Yeah, so they’ve had the images to work on the product line, the product will be tailored to the film. The point is of course we are very involved with, intimately familiar with G.I.
Joe and just less familiar with the film in total of Wolverine.
Sean P. McGowan - Needham & Company
Okay, thanks for clarifying that. So then the other two questions I have is number one, given the fact that when you launched Transformers, you hadn’t yet really ramped up a lot of these investments in Brazil, Russia, China, and Czech Republic.
How much more do you feel like you could have done with Transformers 1, had you had in place the investments that you will now have for Transformers 2? And second, and I don’t want to hang you on Al Verrecchia’s comment but about this time last year, he said something about it really being a great time to be in New England, something about the Patriots and --
Brian Goldner
Well, we plan to execute the fourth quarter better than they executed last night, I guess, how about that?
Sean P. McGowan - Needham & Company
Okay, fair enough.
Brian Goldner
In terms of Transformers, I think what we are very excited about, you know, clearly we don’t know exactly how much we left on the table because it was our first time with a major motion picture in Transformers. Certainly we left retail light.
We had many opportunities to build more of an immersive experience around Transformers than we might have liked. You know, obviously the first time out, retailers were very excited but are much more excited as we go into the second film because now of course we have a template, we understand what we have.
We are also seeing in many emerging markets, especially in China, Transformers really resonates. You know, you have generations of people who grew up with the animation and an opportunity to build Transformers into a much bigger brand, both in terms of the products we manufacture as well as our license business, as well as our videogame business and other immersive experiences for consumers.
So it is really a poster child for the kinds of reinvention and reimagination we intend to do across our core brands over time.
Sean P. McGowan - Needham & Company
Any idea if that’s an eight-figure opportunity or a nine-figure opportunity?
Brian Goldner
I wouldn’t try to speculate. I would just say that clearly as we talk to retail, as we build our plans, as we look at promotional partners, some who will return and some who are new, and we look at the markets where Transformers resonates, we are very excited about the opportunity and the one thing we have said or will reiterate is certainly we’d expect to grow that brand again in 2009.
Sean P. McGowan - Needham & Company
Okay. Thank you.
Operator
Our next question is from Tim Conder of Wachovia.
Timothy A. Conder - Wachovia Securities
Thank you. Let me also offer a congratulations on good execution.
A couple of things, gentlemen, to circle back to the investment dollars that you spent -- would it be fair to say that maybe the pace of spending really has not come off that much year over year? David, if I heard you right, is that a fair interpretation?
And then how would you characterize that going forward in ’09?
David D. R. Hargreaves
Okay. I mean, I think this year we’ve been investing in a number of different areas.
We’ve been investing in emerging markets. As Brian said, we opened companies in Brazil and a number of places around the globe.
Next year we probably won’t open as many offices but having opened one in Brazil this year, maybe we will do Argentina next year or Chile expansion next year. So we’ll continue to invest in emerging markets.
We certainly, although we opened the office in China this year, we certainly are going to be starting up and putting more people on the ground. We are expecting Transformers to do very well in China, so we will continue to invest in the emerging markets.
In terms of the Wizards digital initiative, a lot of that in terms of Dungeons and Dragons [Insider] is behind us at this stage. In terms of investments we’ve been making in entertainment area, this year we brought on Lisa [Lecht] and [Bennett Schnaya].
We have a small office out on the Universal lot. We started a company registered with the Screen Actors Guild to write scripts to present to Universal and they also come up with ideas for movies under the Universal deal, so we are still hoping we will get the first movie under that deal in 2010 and we are working towards that.
So I think investment in entertainment and the Universal deal will continue. So overall, year over year ’09 versus ’08, investment spending might be down a bit but we are certainly not going to stop investing for our future in entertainment and emerging markets.
Brian Goldner
And we do expect that we will grow revenues in 2009, so we are going to invest behind our business to continue to grow our core business, with our commitment to continue to execute around the world.
David D. R. Hargreaves
Another area we invested this year is we are only just starting to get revenues coming in from Electronic Arts, where major product launches were all targeted for the consolers during the fourth quarter. However, since we signed the deal with them, we’ve ramped up quite a bit of an internal team that work with them and who have been sort of preparing for these product launches.
So the good news is that next year we will get revenues to offset the expense that we’ve had in terms of our digital entertainment team.
Timothy A. Conder - Wachovia Securities
And collectively, gentlemen, would you anticipate the total absolute revenue, or excuse me, the expenses you said, David, would probably be down a little bit year over year. Would you anticipate the revenues related to all that spending being somewhat self-funding those expenditures?
David D. R. Hargreaves
I think in terms of the Wizards of the Coast digital initiative, we should have revenue coming on tap. I think we are going out with a subscription based site there and with regard to Electronic Arts, we’ll certainly have revenues against that spending.
With regard to new entertainment, particularly the Universal deal, no, we are not going to see revenues from that during ’09, hopefully 2010, certainly by ’11. In terms of the emerging markets, clearly we will be getting a good return in Brazil and some of the markets we’ve invested in this year will have revenues but if we are doing a start-up in Argentina or in other markets, then obviously the revenues will lag a little bit.
Timothy A. Conder - Wachovia Securities
Okay. And another clarification regarding your ad spending -- on a full year basis as a percent of revenues, would you anticipate that being flattish to up somewhat, given the comments you made earlier?
David D. R. Hargreaves
Yeah, it’s not going to be down because we are going to keep driving during the fourth quarter here.
Timothy A. Conder - Wachovia Securities
Okay, and then lastly, any comment at this point, Brian, as to the timing maybe of a Spidey 4 release?
Brian Goldner
No, I won’t comment before the studio but suffice it to say -- hang on. I’ll get back to you on that one but I’ll let the studio sort of talk about that and as they solidify their plans but you know, clearly Spidey 4 is something that we would plan for.
Timothy A. Conder - Wachovia Securities
Okay, great. Thank you.
Operator
Our last question today is from John Taylor of Arcadia.
John G. Taylor - Arcadia
I wonder -- I want to go up to 30,000 feet, if we can, and talk about the global economic situation and implications for next year. So if you go back six months as you were starting to think about ’09 and ’10 plans in terms of product planning and price points and all that stuff, you know, you walked in with one set of assumptions so now we’ve got this amazing uncertainty, et cetera.
So what things are on the table now maybe that weren’t there before in terms of planning, what things have been taken off maybe in terms of new brand building or the impetus to expand your office base internationally? I just wonder kind of in a general sense how you are thinking -- you know, price -- okay, so last year or this year retailers didn’t push back on price increases -- I mean, they pushed back nominally but they all had them so they couldn’t deal with them.
Next year maybe the environment is different so I wonder if you can just kind of talk us through how the conversation has changed as you are approaching ’09 and maybe ‘010.
Brian Goldner
Well you know, there’s a number of points to that, J.T. The first thing we’ve done obviously at this kind of time, you know, you spend a lot of time in conversations internally and with your board.
You know, we have reiterated our position on liquidity and that we have a strong balance sheet and have generated great cash and that’s something that we want to continue to have as part of our capital structure. You know, we continue to expect that revenues for 2009 and EPS will grow but we’ve also tempered those expectations with the current consumer environment.
We have great plans in place across our boys business -- as you know, two motion pictures; in our girls business, a number of brands and reinventions and our games business similarly. So again, as we work around the world, I think what we’ve tried to do is say we are going to stay focused on our core strategy, we are going to continue to execute that core strategy and reinventing and reimagining those brands but we are going to have to temper our overall expectations as far as the consumer goes.
We still want to put ourselves in a position where consumers spend more as a percentage on our brands and believe we can do that through great innovation. So it’s not to say we’ve abandoned some aspect of our plan.
We want to build in our emerging market business. We have built some offices and we are starting to see those get some traction.
We may open a few others but again we are going to look at the environment to ensure that they can be successful and we are going to build on our entertainment business with the goal of getting a motion picture as part of our deal with Universal. We are going to build the digital gaming business with EA and EA is going to have more launches in 2009 than they had in 2008 and of course our revenues will go up as a result.
And we are building and rebuilding our licensing business because as we offer more immersive brand experiences to consumers for our brands and we’ve reorganized the company around some core brand activities, we think we can then grow our licensing and publishing business in a way we hadn’t in the past. So again, it’s that core strategy, a lot more focus being brought to bear on that, ensuring that we have the tools in our toolbox to activate those brands around the world, and that we do have the offices open but overall tempering our expectations against a consumer who is clearly struggling at this moment.
John G. Taylor - Arcadia
So it sounds like it’s kind of full steam ahead from an investment standpoint, continuing on these initiatives you’ve put in place for a while but maybe tempering top line, tempering margin -- is that fair?
Brian Goldner
No, I think that -- yeah, well there’s some element of that but we will also a little temper some of our spending. I think David had indicated we will probably have a little bit less investment in 2009 than 2008.
We will also probably have more revenues, given the EA ramp-up against some of those places we’ve invested in 2009 versus 2008. So you will see more non-toy, non-game revenues increasing in other categories.
Our license revenue should increase in 2009 based on Transformers and G.I. Joe, more significantly, more like where it was in ’07.
So again, we are going to just look very carefully. We are just -- again, we don’t want to say -- in fact, we will say that we expect to grow revenues and EPS in 2009 but we need to be very carefully focused on the market and look at consumers and understand the consumer insights both in terms of what we do in our products and marketing but also the consumer insights around shopping and shopping patterns and the size of baskets and working with our retailers and planning and forecasting that.
John G. Taylor - Arcadia
But if you anticipate what some of those results are going to be, it’s going to be a focus more on value, lower price points, that sort of thing. Are you anticipating maybe a shift in that direction that maybe you wouldn’t have six months ago?
Brian Goldner
Well, I think one of the things we should also note is Coda and Biscuit -- are you familiar, you know, the triceratops and our Furreal dog, are really great examples today of innovation and value for the money at any price point and we are seeing even today strong early results. You know, having said this, it’s important to note we are not trying to sell as many Codas or Biscuits or higher priced items as we sell in action figures in the holiday, so I think that finding that right balance in our portfolio and continuing to do great innovative items but recognizing we’ve already said the bulk of our line, the majority of our product line does sell for $20 or under at retail.
John G. Taylor - Arcadia
Thank you.
Operator
Thomas Russo of Gardner Russo Gardner, please go ahead.
Thomas Russo - Gardner Russo Gardner
My questions were on the investment spend in emerging markets; I’m impressed that you continue to do even as the world seems to slow down, but the other question was -- that’s just an observation. The other question was as you continue to grow your advertising spending in total, how has the mix changed within that total?
Has there been any particularly effective new areas where you are directing portions of the ad spend that may not have been as effective previously?
Brian Goldner
We are focused in our advertising in really looking at how consumers experience our brands. So the long answer to your question is for each audience, for Littlest Pet Shop is very different than Transformers is very different than Playskool.
Each one of those audiences and the folks that enjoy those brands experience those brands and competitive brands in very different ways. You know, Littlest Pet Shop, the height of entertainment for a little girl is a Nintendo DS game and we are launching those presently with EA and that would represent the kind of products we are putting out and therefore the marketing would be more focused around where those young girls would find messaging for those kinds of products and for our VIP, the virtual interactive pets that are online.
So again, we have to be sensitive to where the consumer is, where Playskool, about moms and about grandparents and focused on where they take in and understand information about buying great products, innovative products to help children achieve the developmental milestones that they are out to help them achieve. So I think the mix continues to get -- let’s call it more sophisticated and more varied as we go forward.
The opportunity to talk to consumers anywhere they are and everywhere they are is out there for us and it’s very consistent with the kinds of experiences we are trying to provide for our brands.
Thomas Russo - Gardner Russo Gardner
Thank you.
Operator
There are no other questions at this time. I will turn the conference back over to our speakers for any closing comments.
Karen A. Warren
Thank you, Lacey. I would like to thank everyone for joining the call today.
A replay of our call will be available on our website after 2:00 p.m. at Hasbro.com.
Thank you very much.
Operator
Ladies and gentlemen, that concludes today’s Hasbro Inc. conference call.
Thank you for joining us and have a wonderful day.