Oct 18, 2010
Executives
Debbie Hancock – VP, IR Brian Goldner – President and CEO Deb Thomas – CFO David Hargreaves – COO
Analysts
Robert Carroll – UBS Margaret Whitfield – Sterne, Agee Felicia Hendrix – Barclays Capital Michael Kelter – Goldman Sachs Greg Badishkanian - Citigroup Gerrick Johnson – BMO Capital Markets Drew Crum - Stifel Nicolaus Sean McGowan – Needham & Co. Tim Conder – Wells Fargo Jeff Blaeser - Morgan Joseph Edward Woo - Wedbush John Taylor – Arcadia Investment
Operator
Good morning and welcome to the Hasbro's third quarter 2010 earnings conference call. [Operator instructions.]
At this time, I would like to turn the call over to Ms. Debbie Hancock, vice president of investor relations.
Please go ahead.
Debbie Hancock
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.
Our third quarter earnings release was issued earlier this morning and is available on our website. The press release includes information regarding non-GAAP financial measures included in today's call.
Additionally, whenever we discuss earnings per share, or EPS, we are referring to earnings per diluted share. 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 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 and entertainment plan, anticipated product performance, business opportunities and strategies, costs, financial goals, and expectations for our future financial performance in 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 Debbie. Good morning everyone and thank you for joining us today.
Our business grew in the third quarter, reflecting the continued execution of our long-term strategy and our steadfast focus on innovation and immersive consumer experiences, backed by a strong performance from the Hasbro team globally. Our growth was broad-based, both geographically and across numerous world-class brands.
While Transformers and G.I. Joe shipments presented a difficult challenge in 2010, we are overcoming this comparison through a number of global brand initiatives across categories.
This success is also translating to our bottom line. Operating profit reached record third quarter levels as we continued to unlock the profitability in our business and better leverage our investments globally.
Taking a closer look at our third quarter performance, we experienced growth in the pre-school, boys, and games and puzzles categories, while the girls category declined slightly in the quarter. Several of our mega-brands contributed to growth this quarter, including Nerf, which continues to post strong revenue gains globally.
The new Nerf Stampede launched globally on 9/9, and was the single most successful product launch in the history of the Nerf brand. The Stamped is on a number of the hot toy lists for this holiday season.
Magic The Gathering again this quarter was a standout performer. The team has done a great job reigniting this brand over the past few years.
Playskool also continues to post strong year-over-year performances, with successful new initiatives including Alphie, Weebles, and juvenile products, as well as growth in Mr. and Mrs.
Potato Head. As anticipated, Transformers and G.I.
Joe will continue to present difficult comparisons in 2010, although the revenue decline in the third quarter was not as great in absolute dollars as it was in the second quarter. I spoke earlier to the broad-based brand strength and innovation driving our results.
Beyond our mega-brands, we have a number of brands contributing to growth this quarter, including Baby Alive, Furreal Friends, Play Doh, Tonka, Iron Man, and Beyblade. Our board game business grew in the quarter, with increases in a number of brands, including Operation, Scrabble, U-Build, Bop It, and games based on Toy Story 3.
Must-have toy and award lists for this holiday reflect the broad portfolio of Hasbro brands we are showcasing this season, including the Nerf Stampede, Tonka Chuck and Friends Chuck's Stunt Park, Weebles Musical Treehouse, Play Doh Shape and Spin Elmo, Alphie, and others, as well as games like Scrabble Flash, Monopoly Revolution, U-Build, Sorry Spin, Twister Hoopla, and CUPONK, a new skill and action game in our line this year. Through our ongoing efforts to deliver innovation at a great value, brands like Furreal Friends have brought technology into affordable price points for the consumer, with products such as GoGo My Walkin' Pup.
For consumers looking for premium products and gifts this holiday, select higher price point items return to our line, including Furreal Friends Biscuit and Butterscotch Pony, Star Wars Millennium Falcon, Transformers Movie Ultimate Bumblebee, and the Scrabble Premier Wood Edition. Our marketing campaigns begin in earnest in the fourth quarter, and we are well-positioned to meet demand with a good supply of high-quality, safe toys this holiday season, although some of the hotter items may run in short supply due to high consumer demand.
We spoke with you last quarter about our efforts to ensure product availability this holiday season, given the potential disruptions in the supply chain related to container availability. We believe the steps we took to secure appropriate shipping capacity will maintain a smooth flow of goods and avoid any impact to our supply chain this holiday season.
We have worked closely with our retailers to ensure they have the products on the shelves consumers want for the holidays. We started the fourth quarter with the highly anticipated launch, on 10/10/10, of The Hub, our new children's and family television network with Discovery Communications.
We are very excited about the initial results, the look and feel of The Hub, and the strong programming lineup, which continues to roll out through the quarter. Hasbro Studios has created a number of fantastic programs airing currently on The Hub, including Family Game Night, Pictureka!, My Little Pony Friendship Is Magic, Pound Puppies, and The Adventures of Chuck and Friends.
In addition, Margaret Loesch and the Hub team have put together a tremendous lineup of programs, from the industry's best creative stewards, including R.L. Stine's The Haunting Hour The Series, Dan Vs., Twisted Whiskers, In the Night Garden, The WotWots, and classic shows such as Happy Days, Doogie Howser, The Wonder Years, and Family Ties.
The network will also be the exclusive home for a limited series of original musical specials featuring singing sensation Taylor Swift produced for the network by Hasbro Studios. The Hub's launch marketing campaign is themed "Where Great Things Come Together," reinforcing The Hub as a destination for kids and their families, as well as showcasing an array of great brands.
The launch campaign will continue throughout the fourth quarter, with substantial support for exciting programming and marketing events. Hasbro continues to support The Hub's launch with marketing initiatives including product stickers on at least 34 million retail packages promoting the network and the placement of TV schedules in shipments of all orders placed on hasbrotoyshop.com during the holidays.
If you haven't already tuned in, we encourage you to do so. You can find the schedule and channel locator at hubworld.com.
The site also hosts program descriptions, videos, and games to play. We know building a successful kids' network is a long-term endeavor, but we are proud of what the Hasbro Studios team and The Hub team have accomplished in such a short period of time.
Additionally, from a film perspective, Transformers 3, which is scheduled for July 1, 2011, and Battleship, scheduled for May 18, 2012, are currently filming and we continue to develop a number of additional brands with Universal, Paramount, and Sony. We also remain excited about the movie slate from key partners.
In 2011, Marvel will deliver Thor and Captain America: The First Avenger to theaters globally. In addition, Lucasfilm and Fox recently announced the Star Wars saga will be converted to 3D, with Star Wars Episode 1: The Phantom Menace expected to be released theatrically in 2012.
For the full year 2010 we continue to believe we should be able to grow revenues and earnings per share, including the dilution from our television investments and barring a further decline in consumer spending, global economic conditions, or foreign exchange. As we look ahead to 2011 and beyond, our global teams are actively executing our long-term strategy by reimagining, reinventing, and reigniting our brands to develop innovative toys, games, and immersive experiences consumers can enjoy anytime and anywhere.
We look forward to updating you further at our investor day here in Rhode Island on November 9. I'll now turn the call over to Deb.
Deb?
Deb Thomas
Thank you Brian, and good morning. Our third quarter performance highlights the strength of our brands and quality of execution from our global teams.
To date we've been able to offset the difficult revenue comparisons from Transformers and G.I. Joe in 2009 while improving profitability, investing in our business, and returning cash to our shareholders.
For the third quarter, worldwide net revenues grew 3% to $1.31 billion, compared to $1.28 billion last year. Excluding the negative $16.2 million impact of foreign exchange, net revenues grew 4% in the quarter.
Operating profit in the quarter grew 3% to $237.8 million, or 18.1% of revenue, versus $230.7 million, or 18% of revenue in 2009. Looking at our third quarter segment results, the U.S.
and Canada segment net revenues increased 4% to $825.5 million compared to $791.9 million last year. The results reflect growth in the pre-school, boys, and games and puzzles categories while revenue in the girls category declined.
U.S. and Canada operating profit for the quarter increased 23%, to $158.8 million, or 19.2% of revenue, compared to $129.1 million, or 16.3% of revenues last year.
Operating margin increased primarily due to lower royalty and amortization expense. Net revenues in the international segment increased 3% to $458.9 million, compared to $444.1 million a year ago.
Revenues in the international segment grew 7%, excluding the negative $17.8 million impact from foreign exchange. The results reflect growth in the pre-school and games and puzzles categories, as well as in the girls category, which more than offset a decline in the boys category.
Growth in the emerging markets also contributed to the segment's revenue gains. Operating profit in the international segment increased 10% to $70.8 million, or 15.4% of revenues, compared $64.1 million last year, or 14.4% of revenues.
The year-over-year increase was primarily the result of lower royalties due to the mix of products sold. The entertainment and licensing segment net revenues decreased to $27.5 million, compared to $41.6 million a year ago.
This is primarily due to a decrease in movie-related revenues for Transformers and G.I. Joe.
The entertainment and licensing segment operating profit decreased to $5.9 million, compared to $19.8 million last year, reflecting lower revenues and additional expenses associated with our television initiatives, including $5 million of programming amortization costs. Now let's look at earnings.
For the quarter, we reported net earnings of $155.2 million, or $1.09 per diluted share, compared to $150.4 million, or $0.99 per diluted share a year ago. The third quarter of 2010 includes a negative $0.07 per share impact from our television-related activities versus a negative $0.03 per share impact in the third quarter 2009.
Cost of sales in the quarter was $596.6 million, or 45.4% of revenues, versus $550 million, or 43% of revenues, in 2009. This includes the $5 million in programming amortization I mentioned previously.
In addition, the increase in cost of sales as a percentage of revenue in the quarter was the result of a change in revenue mix, which includes the decline in entertainment and licensing revenue as well as changes in foreign currency, as opposed to an increase in commodity prices. Operating profit increased 3% and represented 18.1% of net revenues versus 18% last year.
Consistent with the second quarter 2010, royalties declined due to lower entertainment-based revenue, including the decline in Transformers and G.I. Joe.
Amortization is down as the intangible assets associated with Wizards of the Coast and Laramie acquisitions have been fully amortized. Hasbro's profitability enables us to continue investing in our business, including investments in product development to drive innovation in future years, television programming and the overall support of our television initiatives, and continued expansion and marketing of our business in emerging markets.
Below the operating profit line, interest expense increased by $4 million to $21.7 million, primarily due to the debt offering we completed in March 2010, and other income net totaled $3 million, compared to $4.8 million a year ago. Our 50% share of the joint venture results is included in this line in the P&L.
This quarter, our share of the earnings in the joint venture was a loss of $874,000, as The Hub began spending to support its launch earlier this month. The bulk of the spending is slated for the fourth quarter of 2010.
In the third quarter of 2009, our share of the earnings in The Hub was a positive $1.5 million. In the third quarter of 2010, our underlying tax rate was 28.8%, compared to 29.7% last year.
Now let's turn to the balance sheet. At quarter end, cash totaled $497.9 million compared to $297.4 million a year ago.
Over the past 12 months, we have generated over $480 million in cash from operations. Our cash generation is healthy, and we continue investing in our business.
This includes approximately $31 million in television programming costs to date. Our next $25 million royalty payment to The Hub is due later this quarter.
In March 2010 we raised $500 million through a debt offering, and on March 29 we called our outstanding 2.75% convertible debt. Prior to the end of the call period, substantially all the debenchers were converted into 11.6 million shares.
In the third quarter, we repurchased 6.1 million shares of common stock at a total cost of $260.1 million, and at an average price of $42.39 per share. In the first three quarters of 2010, we repurchased 15.6 million of common stock, at a total cost of $629.2 million, and at an average price of $40.32 per share.
At the end of the third quarter, $157.5 million remains in our current share repurchase authorization. The quality of our receivables portfolio remains good, and receivables at quarter-end were $1.2 billion, compared to $1.1 billion last year.
We did not utilize our securitization facility in the third quarter 2010, or 2009. DSOs increased 4 days to 83 days due to the timing of sales and collections, as well as lower royalty revenue in the quarter, compared with a year ago.
Inventory is at $468 million in the quarter, compared to $399.9 million a year ago. We managed through potential shipping disruptions in the quarter, and we brought product into our warehouses early.
As a result, we're well-positioned, with good, quality inventory, to meet demand this holiday season. We're pleased with the growth in our business to date and our ability to not only increase revenues, but earnings as well.
In a year with difficult comparisons, and challenging economic conditions, we're in a strong position fiscally and have entered the important holiday season with a good supply of innovative toys, games, and immersive experiences for our consumers. For the full year 2010, we continue to believe we should be able to grow revenues and earnings per share, including the dilution from our television investments and barring a further decline in consumer spending, global economic conditions, or foreign exchange.
As Brian said, we look forward to sharing more of our future plans with you during our investor day on November 9. Brian, David, and I are now happy to take your questions.
Operator
Thank you. We will now be conducting a question and answer session.
[Operator instructions.] Our first question is from the line of Robert Carroll with UBS.
Please proceed with your question.
Robert Carroll – UBS
A quick question on the year-over-year changes in terms of G.I. Joe and Transformers.
Is there any input in terms of why that may have been different this quarter versus last quarter, why the declines were not as severe? Is it just changes in trends in the marketplace or is there something you guys can point to?
Brian Goldner
Well, you first have your year on year around the movie timing, and obviously a big shipment quarter in the second quarter as opposed to more of the third quarter. And as in the third and fourth quarter we're beginning to sell the new initiatives toward the holidays, especially for Transformers.
Robert Carroll
Just one other quick one on the expense side. Advertising revenue is about flat year-over-year.
Looking at that holistically with royalties, we were expecting it to be up a little bit higher. Is that still the right way to look at it in terms of advertising royalties on a combined basis?
Brian Goldner
Yeah. The royalties are down obviously, and our advertising we're still using to drive our products.
Over time you might imagine as the TV initiative gets up and running that you might have a bit of a change between the two, but we're certainly continuing to advertise and we're now getting into the fourth quarter as our advertising will go up, as will our investment in our television initiative.
Robert Carroll
And then one just other last one. In terms of some of the commentary we heard from competitors recently, have you guys seen anything similar in terms of North American shipments, I mean retailers positioning themselves more for a tighter selling season around the holidays?
Brian Goldner
Overall we feel very good about our position with retail. Each retailer has some very strong plans for the holidays.
We've talked about, certainly people have acknowledged, more linear feet in the toys department. We're seeing a lot of momentum around a lot of our innovative products across a number of brands.
I would say the only place where we were back a couple of weeks would be like a Family Game Night promotion initiative that starts two weeks later this year versus a year ago. But other than that, no, not really.
Operator
Our next question is from the line of Margaret Whitfield with Sterne, Agee. Please proceed with your question.
Margaret Whitfield – Sterne, Agee
Following up on that, we heard from another competitor about lean inventories at retail. I wonder if you could give us the status of your inventories here in the U.S.
as well as abroad.
David Hargreaves
I think basically we're very happy with the level of inventories at the retail at the moment. We're looking for strong sell-through in the fourth quarter and we think the levels of inventory support that.
With regard to old inventories, we are up a little bit versus a year ago. That primarily reflects the plans that we've put in place to deal with potential supply chain issues, be that labor shortages or containers.
So I think we're very happy with our level of inventory, even though it's up a bit. I think overseas, very similar to the U.S.
We're happy with the level of inventories that the retailers have and we think they'll support a strong sell-through in the fourth quarter.
Margaret Whitfield
And Brian, I wonder if you could elaborate more on your comments, which were positive, on the initial read on The Hub. Any comments on what programs, segments are particularly faring well?
Brian Goldner
Overall, I would say a couple of conclusions. Clearly, parents and kids are visiting The Hub and are spending time with the channel and also hubworld.com.
Secondly, we're really seeing brands perform, whether it be Hasbro's brands like Family Game Night, or My Little Pony, Pound Puppies, or Pictureka!, but also other great brand stewards, brands like Strawberry Shortcake and Batman Beyond. So a great environment, where great brands and great things come together.
Thus far we are very pleased with the results and we're looking forward to some of the major initiatives we have coming up, namely this weekend an amazing Taylor Swift special that starts on October 22 and runs for three nights, new episodes of Family Game Night, as well as Transformers launching later in the fourth quarter.
Margaret Whitfield
And any update on Hasbro Studios and its efforts to sell the programming overseas?
Brian Goldner
The efforts are continuing and we'll probably announce something relatively shortly, but again, the efforts are going on, a lot of excitement around the world for branded content, especially Hasbro branded content. And they're making good progress.
Operator
Our next question is from the line of Felicia Hendrix of Barclays Capital. Please proceed with your question.
Felicia Hendrix – Barclays Capital
Brian, you said in your prepared remarks something about bringing back higher-priced items like Butterscotch. I was just wondering how that related to what we're hearing about the price-sensitive consumer right now.
Brian Goldner
What we've done is we've brought back a handful of higher-priced items as an ultimate gift promotion with a retailer or two, and there is a demand among certain consumers for that ultimate under-the-tree gift. We felt that was missing from our line a year ago, and that we would bring that back out and re-promote it in partnership with our retailers.
Felicia Hendrix
And then when we think about your movies going forward, movies like Battleship, are you participating in ticket and DVD sales?
Brian Goldner
We do. We do participate in gross sales of the entertainment.
Felicia Hendrix
And then just getting back to the inventories, David you just said that you're comfortable with where the inventories are and you've built some to just deal with shortages and containers and stuff. So when we think about, and we look at inventories in the next quarter and going forward, can you just help us think about how you're building in that cushion, just so we can have an idea of when an inventory level is too high versus a cushion?
David Hargreaves
I think we're probably through most of the container issues at the moment. They've abated and some of the surcharges that were on at peak have now been taken off, so I think we're through that.
I think one of the things you're going to find going forward is that the old days with most of our suppliers' labor in Southern China being migrants who just came down during a peak period from June to November, that's kind of gone away. The workforce is people who live in the area and come to work from home on their bicycle, not migrants who come down and stay in dormitories.
So I think in order to attract and retain this labor force throughout the year we are going to have to build a little bit more earlier than historically so I wouldn't be surprised to see inventories in the second and third quarter end a little bit higher than we've experienced in recent years. But not materially higher.
I think there's been bit of a shift in the dynamic of China, China manufacturing.
Felicia Hendrix
So it seems like there's a real balance you guys are going to have to overcome in terms of appeasing the factories versus the demand from retail, because it seems the spread could be getting wider.
Brian Goldner
Well you know very early on Felicia, we can identify the key drivers in our line and certainly have done a lot with our teams to ensure we understand the sales templates early on, what the rates of sales could look like. And so again, we're placing our bets in good quality inventory, in our major initiatives, and those initiatives that have already demonstrated a good propensity for high sales.
Felicia Hendrix
And then Deb, on the gross margin, you said that some of the things that were driving the gross margin, which was lower than we had expected in the quarter, was mix and FX. I was wondering if you could just give us the FX impact to gross margin?
Deb Thomas
The FX impact we won't specify what the exact number was. It was more significant when you look at the margin mix year on year, because in the prior year, if you recall, with the changing foreign exchange rates, we had some very very favorable hedging that had flowed through our inventory.
So that was really driving the rate down a bit more in 2009. So that's really the FX impact we're talking about, between '09 and '10.
And with respect to the cost, it wasn't so much a cost increase for us, it was more this FX impact as well as the mix in revenues. So with the decline in entertainment and licensing revenue, which has very low cost of sales associated with it, along with the impact of the programming cost amortization that hit in the quarter, and this FX impact, it just made for a wider spread quarter-on-quarter than we normally see.
Felicia Hendrix
Then should we assume that happens again in the fourth quarter?
Deb Thomas
We did have some favorable hedges flowing through our P&L going into the fourth quarter as well - the fourth quarter of last year.
Felicia Hendrix
And then just one final question on The Hub. Just wondering if you can comment on your ratings so far versus expectations, particularly on Family Game Night?
Brian Goldner
We feel very good about the ratings. David Zaslav and I spent a good amount of time talking about this over the last couple of days.
The teams have done a tremendous job, if you've seen The Hub, which I hope you have. The marketing campaign has been very impactful, lots of favorable comments back from folks, and the ratings are indicative of people coming out and sampling, both parents and kids.
Operator
Our next question is from the line of Michael Kelter of Goldman Sachs. Please proceed with your question.
Michael Kelter – Goldman Sachs
On the entertainment-driven properties looking forward, obviously you have Transformers 3 next year. You mentioned Battleship, I assume mainly because it was filming, but you didn't mention Stretch Armstrong.
Any reason to believe Stretch Armstrong is being pushed back? And then how would you compare the two in terms of what you think could be most material for you in 2012 - Battleship or Stretch Armstrong?
Brian Goldner
If you look at our total lineup in 2012 it's now shaping up to be another stellar entertainment year, motion picture-led year because of the recent announcement from Lucas on the re-release in 3D of the first episode one of Star Wars, which is new news over the last few weeks. And then you have two motion pictures from our partners at Marvel in the Avengers and then of course you have Spiderman from Sony and from Marvel coming, and then of course our Battleship.
So there is an opportunity we see potentially to move Stretch out of '12 and into '13. Obviously between all of our motion picture initiatives and the TV initiatives there may be an opportunity to begin to populate the 2013 timeframe.
And if you look at the difference, really for us Battleship is a wonderful opportunity. It's a brand that's obviously it's up in the quarter, and what we're seeing is a great array of online games and other digital games around Battleship.
If you go to hubworld.com for example there's a great Battleship interactive game that's there that you can play that was developed by our partners at Electronic Arts. And so Battleship will be a completely immersive game [unintelligible] experience across a number of different platforms in time for the movie.
Stretch Armstrong may be a little more traditional action figure business, and boys action business, albeit kind of comedic and fun, and slightly younger-skewing
Michael Kelter
And then anything else on the horizon in terms of wholly-owned content in the way that Battleship and Stretch Armstrong are yours? Anything else you think is more in the near- to medium-term that we should have our eye on?
Brian Goldner
Well, we're obviously working on a sequel to G.I. Joe, which was very successful as a motion picture and certainly drove toy sales in the year.
We are working on Ouija, Monopoly, Clue, a number of different brands in the motion picture arena, which are all wholly-owned, Risk, all wholly-owned by Hasbro, and working with some great partners in Universal and Paramount and Sony. The other one I'd mention is we're beginning to redevelop and will launch Micronauts as a motion picture in the next couple of years as well.
I don't want to give you specific dates on all that, but suffice it to say that's all in the offing over the next three to five years.
Michael Kelter
And then international? Seven percent organic growth, you mentioned that emerging markets contributed.
Can you possibly talk about what percentage of international is from emerging markets and what the growth rate is there versus, let's say, the established Western European markets?
David Hargreaves
So, emerging markets - by that I mean emerging Asia, emerging Latin America, and emerging Europe - today still remains a relatively small part of our overall international business, but it is growing very rapidly. So in some of those markets we're seeing 33%, 50% growth rates, but from a fairly small base.
But what it does mean, that over the next few years we could be adding hundreds of millions of dollars to our revenues in markets like Brazil, China, Russia, etc.
Michael Kelter
And then on share repurchases, and leveraging the balance sheet, it looks like you'll have offset the impact of the convertible dilution, which was your goal, fairly shortly if not already, depending on how you look at it. And you'll have a lot of cash to deploy going into next year.
Any reason to believe that that won't continue to go toward share repurchases? Are you looking at any other use of cash beyond the normal running of the business?
Deb Thomas
We've consistently said, Michael, that we do believe in investing in ourselves first. As David talked about some of the markets that we're entering in and expecting a lot of this revenue growth, we'll continue to put people there as needed in our efforts there as needed first, and then we do still remain skeptical of acquisitions, although if something's compelling we will certainly consider it if it fits in well with our brand portfolio.
But beyond that, our expectation is we would continue to return our cash to our shareholders through dividend or share repurchase. And at the end of the third quarter, we had $157.5 million remaining under our current share repurchase authorization.
Michael Kelter
And then one last thing on gross margins. Obviously a little lower than probably most people were expecting on the quarter.
You explained some of it, and since a lot of it is mix, should we assume that that gross margin reverses itself next year with Transformers as a movie coming back? Do gross margins come back to where they were before?
Is that a fair way to look at it?
Brian Goldner
I think there's a couple things to think about. The gross margin shift could just be a higher gross margin product that's also is royalty-bearing versus a slightly lower gross margin product that is not royalty bearing and obviously driving a higher operating return.
So you are seeing some of that in the quarter and you may see some of that as we drive other of our own operated brands that are less royalty-bearing over the next couple of years. Obviously, as David mentioned, you also have programming that hits the cost of goods lines of our P&L.
Deb, you want to comment further?
Deb Thomas
I think that's good, and we are looking at, as that programming production amortization cost becomes greater next year, we are looking at breaking that out on the P&L to make that cost of goods measure easier to look at.
Operator
Our next question is from Greg Badishkanian of Citigroup. Please proceed with your question.
Greg Badishkanian - Citigroup
Just two quick ones. First, with POS, you said it was up nicely.
Just kind of triangulating that with the inventory levels at retail. So would you say that your shipment growth was pretty similar to POS this quarter?
Brian Goldner
Yes, it was. In fact in the quarter we had growth in POS in pre-school and girls.
Certainly as you look at boys, the underlying boys business, very strong POS growth, albeit we are comping up against Transformers, so if you look at Transformers that would be down year-on-year. But the underlying brands, Nerf or Marvel, are certainly contributing.
Our games business year to date, POS is up. As I mentioned in a prior answer, we have moved back family game night promotions by two weeks, so we're seeing POS pick up a bit later.
But again, I feel very strongly overall that our POS is right in line with our expectations and certainly reflecting some good innovative products out on the market already.
Greg Badishkanian
And then just with respect to next year, you have a pretty good lineup of movies. Maybe just a little bit more color in terms of what you expect from those versus movie lineup this year, which was pretty light?
Brian Goldner
Next year we have a number of movies that we're very excited about: Transformers 3, expected to hit theaters around July 1, 2011, and then of course there's Thor, which comes. We have Captain America: The First Avenger, and then we'll have some games product around Cars 2.
So overall feel very good about our 2011 motion picture lineup, both from Hasbro owned and operated brands as well as partner brands.
Operator
Our next question is from the line of Gerrick Johnson with BMO Capital Markets. Please proceed with your question.
Gerrick Johnson – BMO Capital Markets
Talking about Hasbro Studios adding $5 million in programming amortization to cost of goods sold, can you tell us how much the studios added to sales?
Deb Thomas
What you're seeing now is really minimal levels as we began to make deliveries to The Hub itself, so -
Brian Goldner
The revenues come in arrears, so you have to produce the content, you then provide it to The Hub, your partners. You then distribute the content, and then you would have all the waterfalls, be it digital distribution or DVD distribution over time.
Gerrick Johnson
And then David commented that you guys were happy with the level of inventory at retail and you can support sell-through in the fourth quarter. Should we interpret this as meaning the channel inventories are up?
Can you just give us a little more granularity on exactly where retail inventories are?
David Hargreaves
I think overall in the U.S. we're maybe a little bit up versus last year.
I don't think that's true for every retailer. Some are up, some are down a bit.
But overall, we're certainly not less than last year. And we're kind of fine with that, because we're expecting some pretty good sell-through.
We've got a lot of promotions, a lot of advertising, a lot of good new products launching, so that's okay.
Gerrick Johnson
And Deb commented that - I think she said there was no impact on margins from higher input costs. Is that because they're offset by higher selling prices, or are we not seeing cost increases?
And if so when might we see those coming through?
Deb Thomas
I think you're seeing a very minimal impact. And that's really what I was trying to get across, is that the bigger impact on our cost of sales line for the quarter was not from cost increases.
As we've talked about previously, we lock in our prices for new product for about a 12- to 18-month period. So we do expect to see some cost increases next year and we'll price our products appropriately.
Gerrick Johnson
And then on to the product side. Can you sort of give us a breakdown between, say, outdoor sports versus action figures, how those two categories are?
Brian Goldner
Some of the biggest drivers in the boys category this quarter were certainly Nerf, not only in the U.S. but as we're now rolling out that brand around the world.
Our Marvel businesses are certainly up significantly, and that's what's driving that. So it's a good balance in our portfolio, be it boys or girls, good balanced portfolio, breadth of brands, Hasbro's own brands and long-term license partner brands that are contributing to growth in the quarter.
Gerrick Johnson
And lastly, comment on Beyblades, the re-launch there. Is that tracking according to your plans, or how is that doing?
Brian Goldner
It's doing very very well. We're feeling very good about Beyblades, starting to get placement around the world, domestically and in markets where the programming has been placed, has been very successful.
And it's certainly been meeting our expectations and we're very familiar with the sales template for this brand, having done it before. And our partnership with Nelvana is quite good, and we feel very good about the prospects.
Operator
The next question is coming from Drew Crum of Stifel Nicolaus. Please proceed with your question.
Drew Crum - Stifel Nicolaus
With respect to your games and puzzles business, can you comment on the inventory levels entering the fourth quarter and planned shelf space in light of the timing for Family Game Night?
Brian Goldner
Overall, we are seeing already good growth from a number of different games across the breadth of the portfolio, be it Trouble, or Scrabble and Scrabble Flash, or Battleship, Monopoly. There's a lot of great brands being supported.
My only point was as we look at the promotion year-on-year we had pushed it back by a couple of weeks and that does change the template. But of course as you know, games sell late in the fourth quarter very significantly, and so we felt that was warranted and would allow us to have a bigger impact.
We have a number of new brands within games, or new lines within games. The Scrabble Flash is off to a tremendous start.
CUPONK is a new line within the games business, which is a lot of fun to play and is having great success. So overall, again, games garnering great linear footage, great displays, great promotions.
Our Monopoly promotion with McDonald's is going on presently, maybe you've seen some of the advertising. So again, feel very good about where we are with our games.
In fact, Drew, we're not only seeing Scrabble do well as our analog product, but on the Kindle the Scrabble is the number-one app overall, even including books or other downloads. You can play Scrabble on your iPad, you can play Scrabble on other brands in a number of different forms and formats.
So again, it's complementary and not cannibalistic to our analog business.
Drew Crum
And then I want to return to the question around emerging markets. I know it's not a big piece of your business today, but how much of a drag is this on profits.
Is it break-even yet? What are the prospects for growing profitability for that piece of business over the near to intermediate term?
David Hargreaves
It's mixed. I think the markets in Eastern Europe, Poland, Czech Republic, are certainly a little bit mature.
They actually make returns similar to a lot of the rest of our business. But in the newer markets, in some of the bigger markets, where we clearly do believe we're in investment spending mode and they're not at break-even yet.
I would say probably Brazil and China and Russia we consider that we are investment spending to get growth. We're in a very fortunate position, of course, that we have both the cash and the margin that allows us to do this at the moment.
I think clearly we don't expect this investment spending to continue too long. I would say over the next two to three years those markets should turn positive.
Drew Crum
And then two last housekeeping questions from me. The amortization was a little higher than we modeled.
Is there any updated guidance you can give us for 2010 there, and the cap ex number in the quarter?
Deb Thomas
The amortization is tracking along, and we had some little blips of things that went higher and maybe had a little bit more amortization in the quarter because of the way they were tracking against particular revenues. So I don't think there's anything significantly different than the guidance we had given back in November at the last analyst day that you should be thinking of for amortization.
It's more of just a timing issue. And the cap ex in the quarter was $26 million.
Operator
Our next question is from the line of Sean McGowan of Needham & Co. Please proceed with your question sir.
Sean McGowan – Needham & Co.
I have a couple of questions as well. On the other income line, can you give us some sense of what's in there and what's driving that outside of the network's activities?
Deb Thomas
Outside of the network as we talked about we have an $874,000 loss from the network versus $1.5 million of income last year quarter-on-quarter, but outside of what's in that is really just a mix of interest income goes into that line and really just some small FX gains that became small losses this year. So there's just things mixing back and forth, but there's really nothing significantly different in that line year-on-year.
Sean McGowan
But it was a source of income, right, this quarter? Should we expect that to be a loss, then, in the fourth quarter, given the margin expenses for the launch?
Deb Thomas
Certainly with respect to The Hub. We still have reiterated we believe that we'll have $0.25 to $0.30 dilution on the full year from The Hub, and our expectation is the greatest piece of that, the dilution will be in the fourth quarter, as the bulk of the marketing expenditures are being expended.
Sean McGowan
But is there anything that you would think could offset that other income line?
Deb Thomas
If currency moves differently we may have some gains, but our expectation is there won't be anything significant offsetting that in the quarter.
Sean McGowan
Can you comment on retail momentum in Europe? You know, what you're seeing as we approach the holidays versus how things were earlier in the year?
Some of those markets were kind of troubled from a consumer standpoint. Are they showing some improvement?
David Hargreaves
We're feeling pretty good about our business in Europe. As Brian said, a lot of our new products, whether it's Beyblade, or whether its CUPONK, or whether it's Scrabble Flash, all of these products are doing pretty well over there.
Certainly Nerf is doing really well, the Stampede had a great launch over there. So we have quite a bit of product momentum at the moment.
By market, last year Mexico was a difficult market and so was Eastern Europe. Both of those have bounced back pretty well.
I think Spain has been a difficult market last year, and I think that continues to be difficult. And I think our business in Germany is doing pretty good.
So overall a lot of new product momentum and we're feeling good as we're going into the holiday season.
Brian Goldner
The one thing I'd add is that actually internationally our girls' business is up pretty significantly and it's really being driven by all the new initiatives around Furreal Friends and Baby Alive, Strawberry Shortcake and now the initial elements of our new segments within Littlest Pet Shop, with Blythe Loves Littlest Pet Shop. So again, seeing some good results there as well.
Sean McGowan
And then the final question would be, given what seems to be the early success of CUPONK, would you expect to be monetizing in other ways the general drinking game category?
Brian Goldner
I'm not sure how to comment on that. I thought you were going to pitch me CUPONK the movie or something.
[Laughter.]
Operator
Our next question is from the line of Tim Conder with Wells Fargo. Please proceed with your question.
Tim Conder – Wells Fargo
Just to return back to the inventory question, and David maybe - I think you had an earlier question related to your channel inventories year-over-year domestically. Did you comment there on how those are internationally?
Were they up, down, or sideways?
David Hargreaves
I don't get as good data internationally as we do in the U.S. So it's very difficult to make an overall informed comment.
I think basically, as I talk to each of the general managers of each of our businesses in each of the countries around the world, they're pretty comfortable with the level of inventory out there. As I said, supporting what we hope is going to be a fairly strong POS season around the holidays.
Brian Goldner
David and the team just came back from Italy last week and spent some time with the Europeans and I think overall we're feeling very good about our business across the international markets.
Tim Conder
And just to wrap up the inventory question, on the timing issue that was mentioned by a competitor earlier, you're not really seeing any major timing issues, and in particular the commentary that's been out there regarding Walmart's planned flex in the month of December. Just kind of flesh that out if you could, a little more color.
Brian Goldner
Every one of our retailers, domestic and international, have pretty exciting plans for the toy category this holiday season. And certainly we are going to see more overall linear footage given the value of the toy department to retailers, to parents, and to kids, that is being really reflected now in the decisions about where to put the emphasis, the promotions, the marketing.
So we feel good about the momentum thus far. We're already seeing really good over-the-counter sales of our new initiatives.
We mentioned one segment, one promotion, that we pressed back by a couple of weeks in Family Game Night, but certainly we expect a very robust holiday season.
Tim Conder
So again, some are, or are not taking inventory a little later, or more similar to what you saw last year?
Brian Goldner
I would say that we work with our retailers really since early in the year to take inventory throughout, especially on the new initiatives. We're not seeing major delays of inventory, nor are we seeing major shipments of inventory.
It's just been a good, smooth flow of goods to ensure that they have our innovative top items at retail for the holiday season. But no major delays.
David, do you want to comment further?
David Hargreaves
No, I think we've had a lot of - we said at the beginning of the year that our business would be lots of singles and doubles and it might come a bit later, so we've had a lot of new initiatives during the third and into the fourth quarter, and people are always going to support good new initiatives.
Tim Conder
And I guess that's a good transition to my other question. You commented on how the early acceptance of Beyblade is good.
Should we see Beyblade more impactful here in the fourth quarter as far as your initial ship-in, or you pretty well feel comfortable with what you've got in there as we've got it up and rolling here?
David Hargreaves
I think we will continue to Beyblade launch. You always have ramp-up capacity, so I think we're still catching up with demand at the moment.
I think we'll be shipping in in the fourth quarter and clearly we see Beyblade as going strongly into next year as well.
Tim Conder
And then one last housekeeping question, just an update on your thoughts for cap ex and overall depreciation for this year and looking into next year?
Deb Thomas
I think for the full year we still expect our cap ex to be around $120 million for the full year. And depreciation, that one I don't have at the top of my head, so let me -
Tim Conder
We'll circle back, Deb. No problem.
Deb Thomas
Okay, great. Thanks.
Operator
Our next question is from Jeff Blaeser of Morgan Joseph. Please proceed with your question sir.
Jeff Blaeser - Morgan Joseph
Could you comment on the Transformer trends this year versus last year's post-movie results?
Brian Goldner
We had mentioned in the second quarter that Transformers was performing more like a year-after boys action brand than it had from 2008 from 2007 and that was really owing to the fact that we had chosen to move back our animation which we had had in 2008. We moved it back to time out with the launch of The Hub.
So Transformers is performing more along the lines of a traditional decline year-on-year from the motion picture year to the year after.
Jeff Blaeser
And was Q4 or Q3 bigger for Transformers last year?
Brian Goldner
I don't have that at my fingertips. I'll have to come back to you.
I'm not sure.
Jeff Blaeser
Okay, and then on the boys side, I think you mentioned Nerf and Beyblades certainly additive. Any other areas of strength there?
Brian Goldner
Well sure. Across the board - okay so I have - Q3 in 2009 was a bit higher than Q4 last year on Transformers.
Jeff Blaeser
Okay, great.
Brian Goldner
And then across boys, we've got a number of things that are really working. Obviously Nerf.
We said a number of years ago that you could go out and garner consumer insights and believe that the Nerf idea is a global idea, not just a domestic idea, and we have now demonstrated that by growing Nerf several-fold and also growing it internationally. The opportunity to grow Nerf far beyond where it is today is still there and apparent, new segments being introduced, the Stampede is just one among many.
Marvel is continuing to perform very well this year and is up. Star Wars we're really seeing now with the new season really coming into its own, and we're very excited about the Star Wars plans, not only for television but as it comes back into movies.
Beyblade is getting started. So overall, again, we talk about a broad portfolio of great brands and boys is no different.
Operator
Our next question is coming from Edward Woo of Wedbush. Please proceed with your question.
Edward Woo - Wedbush
You mentioned that Playskool and the preschool was pretty strong this quarter. Was there any specific categories of that, or was it just pretty broad-based?
Brian Goldner
It was very broad-based. Playskool core is up, our Play Doh business, Tonka business, other businesses are all contributing.
So yes, it's a broad-based strength, an array of great Hasbro brands.
Edward Woo
That's good to hear. And the other question I have is it seems that FX, at least the dollar, has weakened significantly.
Do you see FX potentially being less of a headwind in the current quarter?
Deb Thomas
I think if rates continue the way they are today it is less of a headwind than we thought it would be a quarter or so ago.
Operator
Our next question is from the line of John Taylor of Arcadia Investment. Please proceed with your question.
John Taylor – Arcadia Investment
Pet Shop has been a real driver in the girls side for a long time, and Brian I think you called out that Pet Shop internationally was pretty good, but girls overall was down. And there's a lot of competition in that kind of small doll category this year with new stuff and whatnot.
I wonder if you could talk a bit about that headwind and the way you might be responding to it.
Brian Goldner
Right now, if you go out in retail you'll start to see it. It's a major new segment for us within Pet Shop called Blythe Loves Littlest Pet Shop and Blythe is a doll that was back in the day and then was very popular in Asia and we've brought that into the line in a very inventive way.
The team's done a really terrific job of introducing our first pet sitter as Blythe. And that will go forward as well.
A number of new segments and initiatives for 2011, so like we've always said we need to constantly reinvent and reimagine reigniting our brands and there are times and quarters where you'll hit an inflection point, but I do believe it's about timing more than anything. It's similar with My Little Pony.
We're just launching the animation now domestically. We'll launch that in 2011 internationally, and the My Little Pony line is reflective of this new "Friendship is Magic" TV animation, which will roll out around the world.
And meanwhile, we have an array of great Hasbro brands that are driving our business, from Furreal Friends, Baby Alive, and also partnered brands with American Greetings, like Strawberry Shortcake. So a great, broad array of brands.
John Taylor
Is the Blythe segment being internationally shipped this year too, or just U.S.?
Brian Goldner
You'll see a bit of it happening late this year around the world and then it will hit more significantly in spring and into next year. And then obviously for fall of 2011 already contemplating a number of new initiatives - really exciting initiatives within Littlest Pet Shop and My Little Pony, which we'll share with you on November 9.
Operator
There are no further questions at this time. I would now like to turn the floor back over to Debbie Hancock for closing comments.
Debbie Hancock
Thank you operator. We'd like to thank everyone for joining the call today.
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