Gina Goetter
Executive Vice President Chief Financial Officer at Hasbro
Thanks, Chris, and good morning, everyone.
In February, I outlined our strategy to build on the foundation we put in place last year after resetting the business, and the necessary steps we're taking to reinvigorate innovation across the portfolio while continuing to drive operational rigor.
I am pleased with how we executed in the first quarter, with our strength in digital licensing and Magic contributing to a more profitable business mix while our turnaround efforts in toys started to take shape. We continued to deliver supply chain productivity ahead of inflation and we made meaningful progress on reducing operating expense.
We see more room to drive our cost footprint lower as we further refine our supply chain and optimize product design across each brand. We have already identified significant savings through this design-to-value strategy, with our teams leveraging customer insights and competitive analysis to inform our actions.
Looking at our toy turnaround in more detail, while Q1 represents the smallest contributor to full year sales, we maintained our controlled stance on inventories after the clean-up efforts last year. We ended Q1 with inventories at very healthy levels, down over 50% from a year ago and roughly flat to where we ended in 2023. Our number of days in inventory were at multi-year lows for Q1 at around 66 days. And while we expect to see our inventory days increase over the next couple of quarters in line with normal business seasonality, we are still planning for total owned inventory levels to finish the year relatively flat versus 2023. Our much-improved inventory position led to over 50% reduction in closeout sales in the quarter. And although this negatively impacted our Consumer Products segment revenue growth, we did realize a margin benefit from the improved sales rate, and we expect this trend to continue as we move through Q2.
While improving the profitability of toys and delivering our cost savings target are two of the company's top priorities, I want to emphasize that we are concurrently staying vigilant around what investment opportunities require incremental spend to drive the most profitable revenue across the portfolio. Through greater analytics we are already seeing an improvement in our marketing efficacy, and this is an area we will lean into as we ramp our innovation across toys and games and prepare for a stronger holiday season.
Moving now to our Q1 financial results. Total Hasbro revenue was $757 million dollars, down 24% versus Q1 of last year. If you exclude the impact of the eOne divestiture, total revenue was down 9% versus a year ago. Growth of 7% in our Wizards of the Coast segment, led by Magic and licensed digital games, and 65% growth in Entertainment driven by a renewal deal for Peppa Pig, was more than offset by the 21% decline in Consumer Products driven primarily by category declines and reduced volume moving through closeout.
Q1 Adjusted operating profit was $149 million, with an operating margin of 19.6%, up about 15 points year-over-year. This improvement was largely driven by a reduction in costs stemming from our Operational Excellence program, as well as supply chain productivity gains and favorable business mix, including the eOne divestiture. In aggregate, we were able to deliver significant margin improvement despite ongoing volume deleverage across our toys business.
Total Hasbro Q1 adjusted net earnings were $85 million, with diluted earnings per share of $0.61, driven by the improvement in operating profit, as well as favorability from a stock compensation adjustment and net interest expense reduction.
Operating cash flow was $178 million, an $89 million improvement over the same period last year, driven by the increase in net earnings, as well as reduced production expense in connection with our sale of eOne.
We gave back $97 million to shareholders through the dividend and ended the period with $570 million of cash on our balance sheet.
Now let's look at our two major segments in more detail. Starting with Wizards of the Coast and Digital Gaming,
Revenue grew 7% behind ongoing digital licensing contributions from Baldur's Gate 3 and Monopoly Go!, which as a reminder neither recorded revenue in Q1 of last year. We also saw growth in Magic tabletop revenue benefitting from shipments for our latest set release Outlaws of Thunder Junction, which arrived in stores last week, as well as a strong reception to our Fallout Commander set. Operating margin for the segment finished at 38.8%, up roughly 13 points year-on-year, driven by supply chain productivity, cost savings and improved business mix given the growth in digital licensing.
Turning to Consumer Products. The total revenue decline of 21% was mostly driven by broader market softness across our key brands, exacerbated by a reduction in closeout volume following our inventory clean-up efforts in Q4. We also saw some modest impacts from our exited brands, as well as a timing related headwind within our direct-to-consumer platform, Pulse, which is lapping a strong product offering in Q1 of last year. The volume decline was in line with our expectations and resulted in an improvement in our gross to net sales rate reflecting a more disciplined stance around discounting, which we expect will continue to benefit the CP segment profitability as volumes recover.
As Chris mentioned, we saw some bright spots with the recent launch of Furblets, as well as with Play-Doh and Hasbro Gaming. And conversely, we had continued softness in the blaster category which negatively impacted NERF, as well as action figures due to the light entertainment slate and lapping last year's successful launch of Transformers: Rise of the Beasts.
Operating margin for Consumer Products came in at negative 9.2%, which is down roughly 2 margin points compared to last year. As expected, we saw a material impact from deleverage associated with the volume decline, which was partially offset with supply chain productivity gains, managed expense savings and improved gross to net selling rate due to lower closeout volume. It's important to note that the CP gross margins grew by over 5 margin points, demonstrating the improvement in the underlying profitability of the business, despite the negative impact from deleverage.
Turning to guidance for 2024. While we are pleased with our Q1 progress, we recognize that the quarter represents a small portion of our full year sell through for toys and we want to monitor throughout Q2 our progress in Wizards, particularly in digital licensing and Magic, before potentially revising our outlook for the full year.
So, at this time, we are reaffirming our initial guidance. And as a reminder this calls for total Wizards revenue to be down 3% to 5%. The decline is primarily a result of the strong growth delivered in 2023. Within Wizards, we continue to plan for Licensed Digital Games to be relatively flat versus last year with contributions from Baldur's Gate 3 tapering down as we move through the year. For Monopoly Go!, we are still planning to record the contract minimum guarantee through the first half of the year and will continue to watch the data closely as we move through the second quarter. If the current trends continue, there could be the ability to book above the minimum guarantee sooner than the second half, but at this time we are holding our initial guidance. Wizards operating margin will be between 38% and 40%, up 2 points from last year, driven by the favorable mix shift within digital, lower royalty rates across Magic and strong cost management both in supply chain as well as within operating expenses.
For Consumer Products, revenue will be down 7% to 12%, and operating profit margin will be between 4% and 6%. As a reminder, about half of the revenue decline is due to actions we've taken to improve profitability, and the other half is due to prevailing category trends. We continue to expect a similar revenue decline in Q2 as we saw in Q1 with the pace of decline moderating in Q3 and flipping to growth in Q4 behind sharper innovation and marketing effectiveness, as well as healthy retail inventory levels heading into the holidays. However, we expect to see profitability improving as we move through the year as we build volume ahead of the holidays and we realize more of our net cost savings.
For entertainment, adjusting for the impact of the eOne divestiture, revenue will be down approximately $15 million versus last year and operating margin will be roughly 60%, up significantly driven by operating expense reductions, as well as lapping the impact of the D&D movie impairment in 2023.
We remain firmly on track towards our target of $750 million of gross cost savings by 2025. And given the results in Q1, we are on pace to deliver $200 million to $250 million of net cost savings in 2024.
We continue to expect total Hasbro EBITDA in the range of $925 million to $1 billion, driven by our cost savings and the lap of non-recurring inventory clean-up charges taken last year, which will more than offset the revenue decline and cost inflation.
Ending cash will be slightly down versus 2023, driven by relatively flat owned inventory levels, increased capital project spending, and additional costs associated with the restructuring actions announced in December.
And from a capital allocation standpoint, our priorities remain to: first, invest behind the core business; second, is to return cash to shareholders via the dividend; and third, to continue progressing towards our long-term leverage targets and pay down debt.
And with that, I'll turn it back to Chris to wrap up.
