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Article by DailyStocks_admin    (02-23-09 05:10 AM)

The Daily Magic Formula Stock for 02/23/2009 is Hasbro Inc. According to the Magic Formula Investing Web Site, the ebit yield is 15% and the EBIT ROIC is 75-100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Overview

We are a worldwide leader in children’s and family leisure time and entertainment products and services, including the design, manufacture and marketing of games and toys. Internationally and in the United States, our widely recognized core brands such as PLAYSKOOL, TRANSFORMERS, MY LITTLE PONY, LITTLEST PET SHOP, TONKA, SUPER SOAKER, MILTON BRADLEY, PARKER BROTHERS, TIGER and WIZARDS OF THE COAST provide what we believe are the highest quality play experiences in the world. Our offerings encompass a broad variety of games, including traditional board, card, hand-held electronic, trading card, roleplaying, plug and play and DVD games, as well as electronic learning aids and puzzles. Toy offerings include boys’ action figures, vehicles and playsets, girls’ toys, electronic toys, plush products, preschool toys and infant products, children’s consumer electronics, electronic interactive products, creative play and toy related specialty products. In addition, we license certain of our trademarks, characters and other property rights to third parties for use in connection with digital games, consumer promotions, and for the sale of non-competing toys and games and non-toy products.

Organizationally, our principal segments are North America and International. Both of these segments engage in the development, marketing and selling of various toy and game products as listed above. Our North American segment covers the United States, Canada and Mexico while the International segment primarily includes Europe, the Asia Pacific region and Latin and South America (excluding Mexico). Financial information with respect to our segments and geographic areas is included in note 15 to our financial statements, which are included in Item 8 of this Form 10-K.

In addition, our Global Operations segment is responsible for arranging product manufacturing and sourcing for the North American and International segments and our other segment out-licenses our intellectual property to third parties on a worldwide basis.

North America

The North American segment’s strategy in 2007 continued to be based on growing core brands through innovation and reinvention, introducing new initiatives driven by consumer and marketplace insights and leveraging opportunistic toy and game lines and licenses. Major 2007 brands and products included TRANSFORMERS, LITTLEST PET SHOP, MARVEL products, PLAYSKOOL, STAR WARS, NERF, MONOPOLY, FURREAL FRIENDS, MAGIC: THE GATHERING, PLAY-DOH, BABY ALIVE and MY LITTLE PONY. In the North American segment, our products are organized into the following categories: (i) games and puzzles; (ii) boys’ toys; (iii) girls’ toys; (iv) preschool toys; (v) tween toys; and (vi) other.

Our games and puzzles category includes several well known brands, including MILTON BRADLEY, PARKER BROTHERS, TIGER GAMES, AVALON HILL and WIZARDS OF THE COAST. The MILTON BRADLEY, PARKER BROTHERS, TIGER GAMES and AVALON HILL brand portfolios consist of a broad assortment of games for children, tweens, families and adults. Core game brands include MONOPOLY, BATTLESHIP, GAME OF LIFE, SCRABBLE, CHUTES AND LADDERS, CANDY LAND, TROUBLE, MOUSETRAP, OPERATION, HUNGRY HUNGRY HIPPOS, CONNECT FOUR, TWISTER, YAHTZEE, JENGA, SIMON, CLUE, SORRY!, RISK, BOGGLE and TRIVIAL PURSUIT, as well as a line of jigsaw puzzles for children and adults, including BIG BEN and CROXLEY, as well as the PUZZ-3D line. WIZARDS OF THE COAST offers a variety of trading card and roleplaying games, including MAGIC: THE GATHERING and DUNGEONS & DRAGONS. We seek to keep our core brands relevant through sustained marketing programs as well as by offering consumers new ways to experience them. In 2008, we will seek to continue to expand our core brand portfolio by introducing a PLAYSKOOL line of games that will leverage our existing preschool consumer insights. In addition, we will seek to continue to incorporate technology into our existing game brands to align with current consumer interests. In 2007, the Company introduced the MONOPOLY ELECTRONIC BANKING edition, which allowed for faster, more intense game play. In 2008, the Company plans to introduce a customizable version of TRIVIAL PURSUIT. In January of 2008, the Company acquired Cranium, Inc., which develops and markets a wide range of CRANIUM branded games and related products.

Our boys’ toys include a wide range of core brands such as G.I. JOE and TRANSFORMERS action figures and accessories as well as entertainment-based licensed products based on popular movie and television characters, such as STAR WARS and MARVEL toys and accessories. In the action figure area, a key part of our strategy focuses on the importance of reinforcing the storyline associated with these products through the use of media-based entertainment. In 2007, sales in our boys’ toys category benefited from major motion picture releases of SPIDER-MAN 3 in May of 2007 and TRANSFORMERS in July of 2007. In 2008, SPIDER-MAN and TRANSFORMERS products are expected to be supported by animated television series. The STAR WARS product line is expected to be supported in 2008 by the release of animated television programming as well as the release of an animated motion picture. In addition, we will be introducing products based on the expected major motion picture releases of IRONMAN and HULK, two properties available under our MARVEL license, and INDIANA JONES. In addition to marketing and developing action figures for traditional play, the Company also develops and markets products designed for collectors, which has been a key component of the success of the STAR WARS brand.

In our girls’ toys category, we seek to provide a traditional and wholesome play experience. Girls’ toys include LITTLEST PET SHOP, MY LITTLE PONY, FURREAL FRIENDS and BABY ALIVE brands. In 2008, we will seek to continue to grow and update the LITTLEST PET SHOP brand by introducing the VIRTUAL INTERACTIVE PET segment which includes a plush doll that will allow the consumer access to a website to digitally customize their pets as well as access to games and other features. We also plan to reintroduce a redesigned EASY-BAKE oven.

Our preschool toys category encompasses a range of products for infants and preschoolers in the various stages of development. Our preschool products include a portfolio of core brands marketed primarily under the PLAYSKOOL trademark. The PLAYSKOOL line includes such well-known products as MR. POTATO HEAD, WEEBLES, SIT ’N SPIN and GLOWORM, along with a successful line of infant toys including STEP START WALK N’ RIDE, 2-IN-1 TUMMY TIME GYM and BUSY BALL POPPER. Through our AGES & STAGES system, we seek to provide consumer friendly information that assists parents in understanding the developmental milestones their children will encounter as well as the role each PLAYSKOOL product can play in helping children to achieve these developmental milestones. In addition, our preschool category also includes the TONKA line of trucks and interactive toys and the PLAY-DOH brand.

Our tweens toys category generally markets products under the TIGER ELECTRONICS and NERF brands and seeks to target those children who have outgrown traditional toys. The age group targeted by this category is generally 8 to 12 years old. In recent years, we have used our consumer insights and electronic innovation to develop a strong line of products focusing on this target audience. Our major tweens toys product lines in 2007 included NERF, I-DOG and the POWER TOUR GUITAR. As demonstrated through our I-DOG product, an interactive pet that acts as an accessory to an MP3 player, we seek to draw on the popularity of electronic trends in our tween product offerings.

International

In addition to our business in the United States, Mexico and Canada, in 2007 we operated in more than 20 other countries, selling a representative range of the toy and game products marketed in the North American segment as discussed above, together with some items that are sold only internationally. The major geographic regions included in the International segment are Europe, Asia Pacific and Latin and South America. In addition to growing core brands and leveraging opportunistic toy lines and licenses, we seek to grow our international business by continuing to expand into Eastern Europe and emerging markets in Asia and Latin and South America. Key international brands for 2007 included TRANSFORMERS, LITTLEST PET SHOP, MONOPOLY, MARVEL, MY LITTLE PONY, and PLAYSKOOL.

Other Segments

In our Global Operations segment, we manufacture and source production of substantially all of our toy and game products. The Company owns and operates manufacturing facilities in East Longmeadow, Massachusetts and Waterford, Ireland. Sourcing of our other production is done through unrelated manufacturers in various Far East countries, principally China, using a Hong Kong based wholly-owned subsidiary operation for quality control and order coordination purposes. See “Manufacturing and Importing” below for more details concerning overseas manufacturing and sourcing.

Through our other segment we generate revenue through the out-licensing worldwide of certain of our intellectual properties to third parties for promotional and merchandising uses in businesses which do not compete directly with our own product offerings. During 2007, our Hasbro Products Group out-licensed our brands primarily in apparel, publishing, home goods and electronics, and certain brands in the digital area. One of the primary goals of our licensing segment is to further expand our brands into the digital world through strategic licenses. As an example, in 2007 the Company entered into a long-term strategic licensing alliance with Electronic Arts Inc. (“EA”), which provides EA with the exclusive worldwide rights to create digital games for all platforms, including mobile phones, personal computers, and game consoles such as XBOX, PLAYSTATION and WII, based on most of our toy and game intellectual properties. The first games generated under this strategic alliance are expected to be introduced in 2008.

Other Information

To further extend our range of products in the various segments of our business, we sell our toy and game products directly to retailers, primarily on a direct import basis from the Far East. These sales are reflected in the revenue of the related segment where the customer resides.

Certain of our products are licensed to other companies for sale in selected countries where we do not otherwise have a direct business presence.

During the 2007 fiscal year, revenues generated from the sale of TRANSFORMERS products were approximately $482,000, which was 12.6% of our consolidated net revenues in 2007. During the 2005 fiscal year, revenues generated from the sale of STAR WARS products produced under our license with Lucas Licensing and Lucasfilm were approximately $494,000, which was 16% of our consolidated net revenues in 2005. No other line of products constituted 10% or more of our consolidated net revenues in 2007 or 2005. No individual line of products accounted for 10% or more of our consolidated net revenues during our 2006 fiscal year.

Working Capital Requirements

Our working capital needs are primarily financed through cash generated from operations and, when necessary, proceeds from our accounts receivable securitization program and short-term borrowings. Our borrowings and the use of our accounts receivable program generally reach peak levels during the fourth quarter of each year. This corresponds to the time of year when our receivables also generally reach peak levels as part of the production and shipment of product in preparation for the holiday shipping season. The strategy of retailers has been to make a higher percentage of their purchases of toy and game products within or close to the fourth quarter holiday consumer buying season, which includes Christmas. We expect that retailers will continue to follow this strategy. Our historical revenue pattern is one in which the second half of the year is more significant to our overall business than the first half and, within the second half of the year, the fourth quarter is more predominant. In 2007, the second half of the year accounted for approximately 66% of full year revenues with the third and fourth quarters accounting for 32% and 34% of full year revenues, respectively. In years where the Company has products tied to a major motion picture release, such as in 2007 with the mid-year releases of SPIDER-MAN 3 and TRANSFORMERS and in 2005 with the mid-year release of STAR WARS III: REVENGE OF THE SITH, this concentration is not as pronounced due to the higher level of sales that occur around and just prior to the time of the motion picture theatrical release.

The toy and game business is also characterized by customer order patterns which vary from year to year largely because of differences each year in the degree of consumer acceptance of product lines, product availability, marketing strategies and inventory policies of retailers, the dates of theatrical releases of major motion pictures for which we have product licenses, and changes in overall economic conditions. As a result, comparisons of our unshipped orders on any date with those at the same date in a prior year are not necessarily indicative of our sales for that year. Moreover, quick response inventory management practices result in fewer orders being placed significantly in advance of shipment and more orders being placed for immediate delivery. Retailers are timing their orders so that they are being filled by suppliers, such as us, closer to the time of purchase by consumers. Unshipped orders at January 27, 2008 and January 28, 2007 were approximately $149,000 and $192,000, respectively. It is a general industry practice that orders are subject to amendment or cancellation by customers prior to shipment. The backlog of unshipped orders at any date in a given year can also be affected by programs that we may employ to incent customers to place orders and accept shipments early in the year. These programs follow general industry practices. The programs that we plan to employ to promote sales in 2008 are substantially the same as those we employed in 2007.

Historically, we commit to the majority of our inventory production and advertising and marketing expenditures for a given year prior to the peak third and fourth quarter retail selling season. Our accounts receivable increase during the third and fourth quarter as customers increase their purchases to meet expected consumer demand in the holiday season. Due to the concentrated timeframe of this selling period, payments for these accounts receivable are generally not due until later in the fourth quarter or early in the first quarter of the subsequent year. The timing difference between expenses paid and revenues collected sometimes makes it necessary for us to borrow varying amounts during the year. During 2007, we utilized cash from our operations, proceeds from our accounts receivable securitization program, and borrowings under our secured amended and restated revolving credit agreement as well as our uncommitted lines of credit to meet our cash flow requirements. In addition to the above sources of cash, in September 2007, we issued $350,000 of notes that are due in 2017 (the “Notes”). The proceeds from the Notes were primarily used to repay our short-term borrowings while the remainder of the proceeds were used for general corporate purposes.

Royalties, Research and Development

Our success is dependent on innovation through the continuing development of new products and the redesign of existing products for continued market acceptance. In 2007, 2006, and 2005, we spent $167,194, $171,358, and $150,586, respectively, on activities relating to the development, design and engineering of new products and their packaging (including products brought to us by independent designers) and on the improvement or modification of ongoing products. Much of this work is performed by our internal staff of designers, artists, model makers and engineers.

In addition to the design and development work performed by our own staff, we deal with a number of independent toy and game designers for whose designs and ideas we compete with other toy and game manufacturers. Rights to such designs and ideas, when acquired by us, are usually exclusive and the agreements require us to pay the designer a royalty on our net sales of the item. These designer royalty agreements, in some cases, also provide for advance royalties and minimum guarantees.

We also produce a number of toys and games under trademarks and copyrights utilizing the names or likenesses of characters from movies, television shows and other entertainment media, for whose rights we compete with other toy and game manufacturers. Licensing fees for these rights are generally paid as a royalty on our net sales of the item. Licenses for the use of characters are generally exclusive for specific products or product lines in specified territories. In many instances, advance royalties and minimum guarantees are required by these license agreements. In 2007, 2006, and 2005, we incurred $316,807, $169,731, and $247,283, respectively, of royalty expense. A portion of this expense relates to amounts paid in prior years as royalty advances. Our royalty expenses in any given year vary depending upon the timing of movie releases and other entertainment. Royalty expense in 2007 and 2005 was more significant in those years due to the release of SPIDER-MAN 3 and TRANSFORMERS in 2007 and STAR WARS EPISODE III: REVENGE OF THE SITH in 2005 and the corresponding increases in sales of the related products in those years.

Marketing and Sales

Our products are sold nationally and internationally to a broad spectrum of customers, including wholesalers, distributors, chain stores, discount stores, mail order houses, catalog stores, department stores and other traditional retailers, large and small, as well as internet-based “e-tailers.” Our own sales forces account for the majority of sales of our products. Remaining sales are generated by independent distributors who sell our products, for the most part, in areas of the world where we do not otherwise maintain a direct presence. While we have thousands of customers, including over 2,000 in the United States during 2007, there has been significant consolidation at the retail level over the last several years in our industry, which we expect to continue. As a result, the majority of our sales are to large chain stores, distributors and wholesalers. While the consolidation of customers provides us with certain benefits, such as potentially more efficient product distribution and other decreased costs of sales and distribution, this consolidation also creates additional risks to our business associated with a major customer having financial difficulties or reducing its business with us. In addition, customer concentration may decrease the prices we are able to obtain for some of our products and reduce the number of products we would otherwise be able to bring to market. During 2007, sales to our three largest customers, Wal-Mart Stores, Inc., Target Corporation and Toys “R” Us, Inc., represented 24%, 12% and 11%, respectively, of consolidated net revenues, and sales to our top five customers, including Wal-Mart, Target and Toys “R” Us, Inc., accounted for approximately 52% of our consolidated net revenues. In the North American segment, approximately 70% of the net revenues of the segment were derived from our top three customers.

We advertise many of our toy and game products extensively on television. Generally our advertising highlights selected items in our various product groups in a manner designed to promote the sale of not only the selected item, but also other items we offer in those product groups as well. We introduce many of our new products to major customers during the year prior to the year of introduction of such products for retail sale. In addition, we showcase many of our new products in New York City at the time of the American International Toy Fair in February, as well as at other international toy shows.

In 2007 we spent $434,742 on advertising, promotion and marketing programs compared to $368,996 in 2006 and $366,371 in 2005.

Manufacturing and Importing

During 2007 substantially all of our products were manufactured in third party facilities in the Far East, primarily China, as well as in our two owned facilities located in East Longmeadow, Massachusetts and Waterford, Ireland.

Most of our products are manufactured from basic raw materials such as plastic, paper and cardboard, although certain products also make use of electronic components. All of these materials are readily available but may be subject to significant fluctuations in price. We generally enter into agreements with suppliers at the beginning of a fiscal year that establish prices for that year. For this reason, we are generally insulated, in the short-term, from increases in the prices of raw materials. However, severe increases in the prices of any of these materials may require renegotiation with our suppliers during the year. Our manufacturing processes and those of our vendors include injection molding, blow molding, spray painting, printing, box making and assembly. We purchase most of the components and accessories used in our toys and certain of the components used in our games, as well as some finished items, from manufacturers in the United States and in other countries. However, the countries of the Far East, and particularly the People’s Republic of China, constitute the largest manufacturing center of toys in the world and the substantial majority of our toy products are manufactured in China. The 1996 implementation of the General Agreement on Tariffs and Trade reduced or eliminated customs duties on many of the products imported by us.

CEO BACKGROUND

Basil L. Anderson 63 Vice Chairman, Staples, Inc. (office supply company) from 2001 until March 2006. Prior thereto, Executive Vice President — Finance and Chief Financial Officer of Campbell Soup Company (consumer products company) since 1996. Director of Becton, Dickinson and Company, CRA International, Inc., Moody’s Investors Service, Inc. and Staples, Inc. 2002

Alan R. Batkin 63 Vice Chairman, Eton Park Capital Management, L.P. (global, multi-disciplinary investment firm) since 2007. Prior thereto, Vice Chairman, Kissinger Associates, Inc. (strategic consulting firm) from 1990 until 2007. Director of Diamond Offshore Drilling, Inc., Overseas Shipholding Group, Inc. and Cantel Medical Corp. 1992

Frank J. Biondi, Jr. 63 Senior Managing Director, WaterView Advisors LLC (private equity fund specializing in media) since 1999. Director of Amgen, Inc., Cablevision Systems Corporation, The Bank of New York Mellon and Seagate Technology. 2002

Kenneth A. Bronfin 48 President of Hearst Interactive Media (the interactive media division of diversified media company Hearst Corporation) since 2002. Prior thereto, Deputy Group Head of Hearst Interactive Media since 1996. 2008

MANAGEMENT DISCUSSION FROM LATEST 10K

The following discussion should be read in conjunction with the audited consolidated financial statements of the Company included in Part II Item 8 of this document.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements concerning the Company’s expectations and beliefs. See Item 1A “Forward-Looking Information and Risk Factors That May Affect Future Results” for a discussion of other uncertainties, risks and assumptions associated with these statements.

(Thousands of Dollars and Shares Except Per Share Data)

Executive Summary

The Company earns revenue and generates cash through the sale of a variety of toy and game products, as well as through the out-licensing of its properties for use in connection with non-competing products offered by third parties. The Company sells its products both within the United States and in a number of international markets. The Company’s business is highly seasonal with a significant amount of revenues occurring in the second half of the year and within that half, the fourth quarter. In 2007, 66% of the Company’s net revenues were generated in the second half of the year with 34% of annual net revenues generated in the fourth quarter. In 2006 and 2005, percentages were 68% and 67% for the second half, respectively, and comparable at 35% for the fourth quarter. While many of the Company’s products are based on brands the Company owns or controls, the Company also offers products which are licensed from outside inventors. In addition, the Company licenses rights to produce products based on movie, television, music and other entertainment properties, such as MARVEL and STAR WARS properties.

The Company’s business is primarily separated into two business segments, North America and International. The North American segment develops, markets and sells both toy and game products in the U.S., Mexico and Canada. The International segment consists of the Company’s European, Asia Pacific and Latin America marketing operations. In addition to these two primary segments, the Company’s world-wide manufacturing and product sourcing operations are managed through its Global Operations segment. The Hasbro Products Group is responsible for the worldwide out-licensing of the Company’s intellectual properties and works closely with the North American and International segments on the development and out-licensing of the Company’s brands.

The Company’s focus remains on growing core owned and controlled brands, developing new and innovative products which respond to market insights and optimizing efficiencies within the Company to reduce costs, increase operating profits and strengthen its balance sheet. While the Company believes it has achieved a more sustainable revenue base by developing and maintaining its core brands and avoiding reliance on licensed entertainment properties, it continues to opportunistically enter into or leverage existing strategic licenses which complement its brands and key strengths. In 2007, the Company had significant sales of products related to the Company’s license with Marvel Entertainment, Inc. and Marvel Characters, Inc. (collectively “Marvel”), primarily due to the theatrical release of SPIDERMAN-3 in May of 2007. Given the strength of its core brands, the Company may also seek to drive product-related revenues by increasing the visibility of its core brands through entertainment-based theatrical venues. As an example of this, in July of 2007, the TRANSFORMERS motion picture was released and the Company developed and marketed products based on the motion picture. As a result of pairing this core brand with this type of entertainment, both the movie and the product line benefited. Net revenues during 2007 related to the TRANSFORMERS line of products totaled approximately $482,000, or 12.6% of consolidated net revenues.

The Company’s core brands represent Company-owned or Company–controlled brands, such as TRANSFORMERS, MY LITTLE PONY, MONOPOLY, MAGIC: THE GATHERING, PLAYSKOOL, G.I. JOE and TONKA, which have been successful over the long term. The Company has a large portfolio of owned and controlled brands, which can be introduced in new formats and platforms over time. These brands may also be further extended by pairing a licensed concept with a core brand. By focusing on core brands, the Company is working to build a more consistent revenue stream and basis for future growth. In 2007 the Company had strong sales of core brand products, namely TRANSFORMERS, LITTLEST PET SHOP, MY LITTLE PONY, PLAYSKOOL, MONOPOLY, NERF, and PLAY-DOH.

In addition to its focus on core brands, the Company’s strategy also involves trying to meet ever-changing consumer preferences by identifying and offering innovative products based on market opportunities and insights. The Company believes its strategy of focusing on the development of its core brands and continuing to identify innovative new products will help to prevent the Company from being dependent on the success of any one product line.

While the Company’s strategy has continued to focus on growing its core brands and developing innovative new products, it will continue to evaluate and enter into arrangements to license properties when the Company believes it is economically attractive. In 2006, the Company entered into a license with Marvel to produce toys and games based on Marvel’s portfolio of characters. The Company had significant sales of products related to this license during 2007, primarily due to the theatrical release of SPIDER-MAN 3 in May of 2007. The Company has also incurred royalties on products based on the theatrical release of TRANSFORMERS in July 2007. While gross profits of theatrical entertainment-based products are generally higher than many of the Company’s other products, sales from these products also incur royalty expenses payable to the licensor. Such royalties reduce the impact of these higher gross margins. In certain instances, such as with Lucasfilm’s STAR WARS, the Company may also incur amortization expense on property right-based assets acquired from the licensor of such properties, further impacting profit made on these products.

The Company’s long-term strategy also focuses on extending its brands further into the digital world. As part of this strategy, in August 2007, the Company announced a multi-year strategic agreement with Electronic Arts Inc. (“EA”). The agreement gives EA the exclusive worldwide rights, subject to existing limitations on the Company’s rights and certain other exclusions, to create digital games for all platforms, such as mobile phones, gaming consoles and personal computers, based on a broad spectrum of the Company’s intellectual properties, including MONOPOLY, SCRABBLE, YAHTZEE, NERF, TONKA and LITTLEST PET SHOP. As part of this agreement, the Company has also obtained the rights to create toys and non-digital games based on EA’s intellectual properties. The first games under this agreement are expected to launch in 2008.

While the Company remains committed to investing in the growth of its business, it continues to be focused on reducing fixed costs through efficiencies and on profit improvement. Over the last 5 years the Company has improved its operating margin from 7.8% in 2002 to 13.5% in 2007. The Company reviews it operations on an ongoing basis and seeks to reduce its cost structure in an efficient manner. In 2006 the Company announced a reduction of its manufacturing activity in Ireland and transition of the manufacture of certain products to the Company’s suppliers in China, and recently the Company announced a restructuring of its games manufacturing facility in the U.S. that is also expected to result in work practice efficiencies and cost reductions. The Company is also investing to grow its business in emerging international markets and will continue to evaluate strategic alliances and acquisitions which may complement its current product offerings or allow it entry into an area which is adjacent to and complementary to the toy and game business. For example, in January of 2008, the Company acquired Cranium, Inc., which develops and markets a wide range of CRANIUM branded games and related products. In 2008, the Company expects to leverage revenue to offset the impact of these investments on its operating margins.

In recent years, the Company has been seeking to return excess cash to its shareholders through share repurchases and dividends. As part of this initiative, over the last three years, the Company’s Board of Directors (the “Board”) has adopted three repurchase authorizations with a cumulative authorized repurchase amount of $1,200,000. After fully exhausting the prior two authorizations, the third authorization was passed on August 2, 2007 for $500,000. During the third and fourth quarters of 2007, $390,399 of common stock was repurchased under this authorization. For the years ended 2007, 2006 and 2005, the Company invested $587,004, $456,744 and $48,030, respectively, in the repurchase of 20,795, 22,767 and 2,386 shares, respectively, in the open market. Also, in May of 2007, the Company paid $200,000 in cash to repurchase exercisable warrants to purchase 15,750 shares of the Company’s common stock. Subsequent to December 30, 2007, the Board approved an additional $500,000 share repurchase authorization. The Company intends to opportunistically repurchase shares in the future subject to market conditions. In addition, in February 2008, the Company announced an increase in its quarterly dividend to $0.20 per share. This was the fifth consecutive year that the Board has increased the dividend.

Results of Operations

The fiscal years ended December 30, 2007 and December 25, 2005 were fifty-two week periods while the fiscal year ended December 31, 2006 was a fifty-three week period.

Net earnings for the fiscal year ended December 30, 2007 were $333,003, or $1.97 per diluted share. This compares to net earnings for fiscal 2006 and 2005 of $230,055 and $212,075, or $1.29 and $1.09 per diluted share, respectively.

Net earnings includes non-operating (income) expense related to the change in fair value of certain warrants required to be classified as a liability of $44,370 in 2007, $31,770 in 2006, and $(2,080) in 2005. These warrants were repurchased during May 2007. Net earnings for 2007 also includes a favorable tax adjustment of $29,619, or $0.17 per diluted share, related to the recognition of certain previously unrecognized tax benefits.

Net earnings for 2005 include income tax expense of approximately $25,800 related to the Company’s repatriation of approximately $547,000 of foreign earnings in the fourth quarter of 2005 pursuant to the special incentive provided by the American Jobs Creation Act of 2004.

On December 26, 2005, the first day of fiscal 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which required that the Company measure all stock-based compensation awards using a fair value method and record such expense in its financial statements. The Company adopted this statement using the modified prospective method. Under this adoption method, the Company is recording expense related to stock option awards that were unvested as of the date of adoption as well as all awards made after the date of adoption. Accordingly, 2005 net earnings do not include expense related to stock options.

Consolidated net revenues for the year ended December 30, 2007 were $3,837,557 compared to $3,151,481 in 2006 and $3,087,627 in 2005. Most of the Company’s net revenues and operating profits were derived from its two principal segments: North America and International, which are discussed in detail below. Consolidated net revenues were positively impacted by foreign currency translation in the amount of $94,500 in 2007 and $27,800 in 2006 as the result of the overall weaker U.S. dollar in each of those years.

North America

North American segment net revenues for the year ended December 30, 2007 increased 15% to $2,460,016 from $2,130,290 in 2006. The impact of foreign currency translation on North American segment net revenues in 2007 was favorable, primarily due to the strength of the Mexican peso and Canadian dollar, and increased net revenues by approximately $4,800. The increase was due primarily to increased revenues in the boys’ toys category driven by sales of MARVEL and TRANSFORMERS products due to the theatrical releases of SPIDER-MAN 3 in May 2007 and TRANSFORMERS in July 2007. Although STAR WARS product sales declined in 2007 from 2006, sales of these products have continued to be a significant contributor to boys’ toys revenues in 2007. Revenues in the girls’ toys category increased as a result of higher sales of LITTLEST PET SHOP and FURREAL FRIENDS products as well as higher revenues from the BABY ALIVE line which was reintroduced in the second quarter of 2006. To a lesser extent, revenues in the girls’ toys category were positively impacted by increased shipments of MY LITTLE PONY products. Girls’ toys revenues were negatively impacted by decreased sales of EASY-BAKE oven products due to the recall of the product in July of 2007. Revenues from the preschool category were flat for 2007. Revenue from games and puzzles decreased slightly due to lower revenues from trading card and plug and play games partially offset by increased sales of traditional board games. Revenues from the tweens category decreased as a result of lower sales of electronic products such as VIDEONOW, ZOOMBOX and I-DOG partially offset by increased sales of NERF products. Revenues in 2007 were also positively impacted by increased sales of TOOTH TUNES.

North American operating profit increased to $318,737 in 2007 from $275,959 in 2006. Operating profit in 2007 was positively impacted by approximately $1,500 due to the translation of foreign currencies to the U.S. dollar. The increase in operating profit is primarily the result of higher gross profits resulting from the higher revenues discussed above. Although North American gross profit increased as a result of higher revenues, this increase in gross profit was negatively impacted by approximately $10,400 of charges recorded in the second quarter of 2007 related to the July 2007 EASY-BAKE oven recall. The increase in gross profit was also partially offset by higher royalty expense as the result of the increased sales of MARVEL and TRANSFORMERS movie-related products. Operating profit was also impacted by higher advertising expense as well as higher selling and distribution costs related to the increased sales volume. In addition, North American operating profit included increased investment spending in an online initiative of the Company’s Wizards of the Coast operation.

North American segment net revenues for the year ended December 31, 2006 increased 4% to $2,130,290 from $2,038,556 in 2005. The impact of foreign currency translation on North American segment net revenues in 2006 was favorable and increased net revenues by approximately $3,200. Anticipated decreased revenues of STAR WARS products were more than offset primarily by increased sales of LITTLEST PET SHOP, PLAYSKOOL, NERF, I-DOG and MONOPOLY products, as well as revenues from the successful reintroduction of BABY ALIVE. Revenues in 2006 were also positively impacted, to a lesser extent, by increased sales of PLAY-DOH and TRANSFORMERS products. STAR WARS revenues were significant in 2005 due to the theatrical and DVD releases of STAR WARS EPISODE III: REVENGE OF THE SITH and remained strong in 2006.

North American segment operating profit increased to $275,959 in 2006 from $165,676 in 2005. The increase in operating profit was primarily due to increased gross profit as a result of the increased sales in 2006 as well as decreases in royalty and amortization expense principally due to the decrease in sales of STAR WARS products. Operating profit for the North American segment was negatively impacted by higher research and product development costs due to higher investments in the PLAYSKOOL line and costs related to MARVEL products introduced in 2007. North American operating profit was negatively impacted in 2005 by a loss of approximately $23,000 in the electronic games category, which included charges associated with inventory obsolescence and customer allowances related to plug and play games.

International

International segment net revenues for the year ended December 30, 2007 increased by 33% to $1,278,589 from $959,319 in 2006. In 2007, net revenues were positively impacted by currency translation of approximately $88,500 as a result of a weaker U.S. dollar. Although international revenues increased in all categories, the largest increase in net revenues was in the boys’ toys category. As in the North American segment, this increase was driven by higher sales of TRANSFORMERS products resulting from the theatrical release of the TRANSFORMERS movie in most countries in July of 2007 and MARVEL products resulting from the theatrical release of SPIDER-MAN 3 in May of 2007. Increased revenues in the girls’ toys category were principally the result of increased sales of LITTLEST PET SHOP products, and to a lesser extent, MY LITTLE PONY products. Revenues in the preschool category were higher in 2007 based on increased sales of PLAYSKOOL products, partially due to strong revenues of IN THE NIGHT GARDEN in the United Kingdom. Revenues in the games and puzzles category increased primarily due to increased sales of MONOPOLY. Revenues from the tweens category increased primarily as a result of sales of the POWER TOUR GUITAR which was introduced in 2007.

International segment operating profit increased 75% to $158,846 in 2007 from $90,893 in 2006. Operating profit for the segment in 2007 was positively impacted by approximately $10,400 due to the translation of foreign currencies to the U.S. dollar. The remaining increase in operating profit is due to the higher revenues discussed above. The increased gross profit as a result of the higher revenues was partially offset by higher royalty expense due to higher sales of MARVEL and TRANSFORMERS products as well as higher advertising and selling, distribution and administration expenses.

International segment net revenues for the year ended December 31, 2006 decreased by 3% to $959,319 from $988,591 in 2005. In 2006 net revenues were positively impacted by currency translation by approximately $24,300 as a result of a weaker U.S. dollar. The decrease in net revenues was primarily the result of decreased sales of STAR WARS products in 2006 as well as decreased sales of FURBY and DUEL MASTERS products. These decreases were partially offset by increased revenues from LITTLEST PET SHOP, PLAYSKOOL and MONOPOLY products. To a lesser extent, 2006 net revenues were also positively impacted by increased sales of MY LITTLE PONY, TRANSFORMERS and PLAY-DOH products as well as the reintroduction of the BABY ALIVE doll.

International segment operating profit decreased 15% to $90,893 in 2006 from $106,435 in 2005. Operating profit for the segment in 2006 was positively impacted by approximately $4,900 due to the translation of foreign currencies to the U.S. dollar. The decrease in operating profit was the result of decreased gross profit primarily as a result of the decrease in net revenues, partially offset by decreases in royalties and amortization expense as a result of the decrease in sales of STAR WARS products.

Gross Profit

The Company’s gross profit margin increased to 58.9% for the year ended December 30, 2007 from 58.6% in 2006. This increase is due to changes in product mix, primarily the positive impact of higher sales of licensed products. Although licensed products generally carry a higher gross margin, the increased gross margin is largely offset by higher royalty expense associated with these products. Gross profit in 2007 was also negatively impacted by approximately $10,400 in charges related to the recall of the Company’s EASY-BAKE oven product and by a charge of approximately $10,000 related to a restructuring and related reduction in work force at the Company’s manufacturing facility in East Longmeadow, Massachusetts. This charge consisted primarily of severance costs.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

This Quarterly Report on Form 10-Q, including the following section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements expressing management's current expectations, goals, objectives and similar matters. These forward-looking statements may include statements concerning the Company’s product plans, anticipated product performance, business opportunities and strategies, financial goals and expectations for achieving the Company’s objectives. See Item 1A, in Part II of this report, for a discussion of factors which may cause the Company's actual results or experience to differ materially from these forward-looking statements. The Company undertakes no obligation to revise the forward-looking statements in this report after the date of the filing.


EXECUTIVE SUMMARY

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The Company earns revenue and generates cash primarily through the sale of a variety of toy and game products, as well as through the out-licensing of rights for use of its properties in connection with non-competing products offered by third-parties. The Company sells its products both within the United States and in a number of international markets. The Company's business is highly seasonal with a significant amount of revenues occurring in the second half of the year and within that half, the fourth quarter. In 2007, 66% of the Company's net revenues were generated in the second half of the year with 34% of annual net revenues generated in the fourth quarter. In 2006 and 2005, the percentages were 68% and 67% for the second half, respectively, and comparable at 35% for the fourth quarter. While many of the Company's products are based on brands the Company owns or controls, the Company also offers products which are licensed from outside inventors. In addition, the Company licenses rights to produce products based on movie, television, music and other family entertainment properties, such as MARVEL and STAR WARS properties.


The Company's business is primarily separated into two business segments, U.S. and Canada and International. The U.S. and Canada segment develops, markets and sells both toy and game products in the U.S. and Canada. The International segment consists of the Company's European, Asia Pacific and Latin and South American marketing operations. In addition to these two primary segments, the Company's world-wide manufacturing and product sourcing operations are managed through its Global Operations segment. The Company’s other segment is responsible for the worldwide out-licensing of the Company's intellectual properties and works closely with the U.S. and Canada and International segments on the development and out-licensing of the Company's brands. Prior to 2008, the Company’s Mexican operations were included with the U.S. and Canada in the North American segment. At the beginning of 2008 the Company reorganized the management and reporting structure of its operating segments and moved the Mexican operations, previously reported in the North American segment, into the International segment and the North American segment was renamed the U.S. and Canada segment. The management reorganization was the result of a realignment of the Company’s commercial markets and reflects its objective to leverage its Mexican operations in connection with its growth strategy in Latin and South America.

The Company’s focus remains on growing core owned and controlled brands, developing new and innovative products which respond to market insights and optimizing efficiencies within the Company to reduce costs, increase operating profits and strengthen its balance sheet. While the Company believes it has achieved a more sustainable revenue base by developing and maintaining its core brands and avoiding reliance on licensed entertainment properties, it continues to opportunistically enter into or leverage existing strategic licenses which complement its brands and key strengths. In 2007 and the first nine months of 2008, the Company had significant sales of products related to the Company's license with Marvel Entertainment, Inc. and Marvel Characters, Inc. (collectively "Marvel"), primarily due to the theatrical releases of SPIDER-MAN 3 in May 2007, IRON MAN in May 2008 and THE INCREDIBLE HULK in June 2008. In addition, the Company had significant sales in the first nine months of 2008 of products related to the movie releases of INDIANA JONES AND THE KINGDOM OF THE CRYSTAL SKULL in May 2008 and STAR WARS: CLONE WARS in August 2008. During the last quarter of 2008 the Company expects to continue to have a high level of revenues from entertainment-based licensed properties as well as products related to television programming based on TRANSFORMERS, SPIDER-MAN and STAR WARS.


The Company's core brands represent Company-owned or Company-controlled brands, such as TRANSFORMERS, MY LITTLE PONY, MONOPOLY, MAGIC: THE GATHERING, PLAYSKOOL, G.I. JOE and TONKA, which have been successful over the long term. The Company has a large portfolio of owned and controlled brands, which can be introduced in new formats and platforms over time. These brands may also be further extended by pairing a licensed concept with a core brand. By focusing on core brands, the Company is working to build a more consistent revenue stream and basis for future growth. During the first nine months of 2008 the Company had strong sales of core brand products, namely TRANSFORMERS, LITTLEST PET SHOP, MY LITTLE PONY, PLAYSKOOL, MONOPOLY and NERF.



In addition to its focus on core brands, the Company’s strategy also involves trying to meet ever-changing consumer preferences by identifying and offering innovative products based on market opportunities and insights. The Company believes its strategy of focusing on the development of its core brands and continuing to identify innovative new products will help to prevent the Company from being dependent on the success of any one product line.

The Company also seeks to drive product-related revenues by increasing the visibility of its core brands through entertainment-based theatrical venues. As an example of this, in July of 2007, the TRANSFORMERS motion picture was released and the Company developed and marketed products based on the motion picture. As a result of pairing this core brand with this type of entertainment, both the movie and the product line benefited. The Company expects to continue this strategy and anticipates the theatrical releases of both TRANSFORMERS 2 and G.I. JOE: RISE OF COBRA motion pictures during 2009. In addition, the Company has entered into a six-year strategic relationship with Universal Pictures to produce at least four motion pictures based on Hasbro’s core brands. The first movie is expected to be released in 2010 or 2011, followed by anticipated releases of at least one movie per year thereafter. While gross profits of theatrical entertainment-based products are generally higher than many of the Company's other products, sales from these products also incur royalty expenses payable to the licensor. Such royalties reduce the impact of these higher gross margins. In certain instances, such as with Lucasfilm's STAR WARS, the Company may also incur amortization expense on property right-based assets acquired from the licensor of such properties, further impacting profits earned on these products.


The Company's long-term strategy also focuses on extending its brands further into the digital world. As part of this strategy, the Company entered into a multi-year strategic agreement with Electronic Arts Inc. ("EA"). The agreement gives EA the exclusive worldwide rights, subject to existing limitations on the Company's rights and certain other exclusions, to create digital games for all platforms, such as mobile phones, gaming consoles and personal computers, based on a broad spectrum of the Company's intellectual properties, including MONOPOLY, SCRABBLE, YAHTZEE, NERF, TONKA and LITTLEST PET SHOP. As part of this agreement, the Company has also obtained the rights to create toys and non-digital games based on EA's intellectual properties. The first major game releases under this agreement are expected to be launched by EA during the fourth quarter 2008.


While the Company remains committed to investing in the growth of its business, it also continues to be focused on reducing fixed costs through efficiencies and on profit improvement. Over the last five years the Company has improved its full year operating margin from 7.8% in 2002 to 13.5% in 2007. The Company reviews its operations on an ongoing basis and seeks to reduce its cost structure and promote efficiency. The Company is also investing to grow its business in emerging markets and digital gaming and will continue to evaluate strategic alliances and acquisitions which may complement its current product offerings or allow it entry into an area which is adjacent to and complementary to the toy and game business. For example, in January of 2008, the Company acquired Cranium, Inc., a developer and marketer of CRANIUM branded games and related products. In the second quarter of 2008, the Company acquired the rights to Trivial Pursuit, a brand which the Company had licensed on a long-term basis. Ownership of the rights will allow the Company to further leverage the brand in different media. In 2008 the Company expects to leverage revenue to mitigate the impact of investments in emerging markets, digital gaming and strategic alliances and acquisitions on its operating margins.

In recent years, the Company has been seeking to return excess cash to its shareholders through share repurchases and dividends. As part of this initiative, over the last four years, the Company's Board of Directors (the "Board”) has adopted four repurchase authorizations with a cumulative authorized repurchase amount of $1,700,000. After fully exhausting the prior three authorizations, the fourth authorization was approved on February 7, 2008 for $500,000. For the quarter and nine months ended September 28, 2008, the Company invested $149,999 and $357,589, respectively, in the repurchase of 4,004 and 11,736 shares of common stock, respectively, in the open market. At September 28, 2008, the Company had $252,364 remaining under the February 2008 authorization. For the fiscal years ended 2007, 2006 and 2005, the Company invested $587,004, $456,744 and $48,030, respectively, in the repurchase of 20,795, 22,767 and 2,386 shares, respectively, in the open market. Also, in 2007, the Company paid $200,000 in cash to repurchase exercisable warrants to purchase 15,750 shares of the Company's common stock. The Company intends to, at its discretion, opportunistically repurchase shares in the future subject to market conditions. In addition, in February 2008, the Company announced an increase in its quarterly dividend to $0.20 per share. This was the fifth consecutive year that the Board has increased the dividend.


Recent issues in the credit markets have not impacted the Company’s liquidity. As of September 28, 2008 the Company had $356,512 in cash and had available capacity, if needed, under its accounts receivable securitization program and revolving credit agreement. The Company is past its working capital peak for the year and expects to generate cash flow from operations during the remainder of 2008 and the first quarter of 2009. The Company believes that the funds available to it, including cash expected to be generated from operations and funds available through its available lines of credit and accounts receivable securitization program are adequate to meet its working capital needs for the remainder of 2008 and 2009.

RESULTS OF OPERATIONS
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The quarterly and year to date periods ended September 28, 2008 and September 30, 2007 were 13-week and 39-week periods, respectively. Net earnings for the quarter and nine months ended September 28, 2008 were $138,229 and $213,185, respectively, compared with net earnings of $161,580 and $199,271 for the respective periods of 2007. Basic earnings per share for the quarter and nine months ended September 28, 2008 were $0.98 and $1.51 compared with basic earnings per share of $1.04 and $1.25 for the respective periods of 2007. Diluted earnings per share were $0.89 and $1.39 for the quarter and nine months ended September 28, 2008, compared with diluted earnings per share of $0.95 and $1.16 for the respective periods in 2007. The 2007 results for the quarter and nine months ended September 30, 2007 include a favorable tax adjustment of $29,619, or $0.17 per diluted share, related to the realization of certain previously unrecognized tax benefits. The 2007 results for the nine months ended September 30, 2007 also includes a charge of $44,370 related to the final mark to market adjustment related to certain warrants that were required to be classified as a liability. These warrants were repurchased during the second quarter of 2007.

Consolidated net revenues for the quarter ended September 28, 2008 increased 6% to $1,301,961 compared to $1,223,038 for the quarter ended September 30, 2007. For the nine months ended September 28, 2008, consolidated net revenues were $2,790,467 compared to $2,539,713 for the nine months ended September 30, 2007, an increase of 10%. Consolidated net revenues were positively impacted by foreign currency translation in the amount of $19,400 and $69,800 for the quarter and nine months ended September 28, 2008, respectively, as the result of the weaker U.S. dollar in 2008. Operating profit for the quarter ended September 28, 2008 was $215,925 compared to $209,737 for the quarter ended September 30, 2007. Operating profit for the 2008 nine-month period was $342,687 compared to an operating profit of $319,241 for the nine-month period of 2007.


In January 2008 the Company acquired Cranium, Inc. (“Cranium”). The results of operations for the first nine months of 2008 include the operations of Cranium from the acquisition closing date of January 25, 2008.

U.S. AND CANADA SEGMENT
The U.S. and Canada segment’s net revenues for the quarter ended September 28, 2008 increased 6% to $821,028 from $773,545 for the quarter ended September 30, 2007. Net revenues for the nine months ended September 28, 2008 increased 7% to $1,717,213 from $1,601,494 for the nine months ended September 30, 2007. The increase in both the quarter and nine month period was primarily due to higher revenues in the boys’ toys category, driven by increased sales of STAR WARS and sales of INDIANA JONES products. Sales of TRANSFORMERS products increased slightly for the nine-month period ended September 28, 2008, but decreased in the third quarter of 2008 compared to 2007 as a result of the significant sales recognized in the prior year as a result of the movie release. Revenues from MARVEL products decreased for the quarter and nine month periods as the result of the significant sales of products in the prior year related to the theatrical release of SPIDER-MAN 3. However, revenues from both TRANSFORMERS and MARVEL remain significant contributors to U.S. and Canada segment net revenues in both the quarter and nine-month periods of 2008. The increase in U.S. and Canada segment net revenues for the quarter and nine months was also due to increased sales in the games and puzzles category as a result of increased sales of DUEL MASTERS, TRIVIAL PURSUIT and the impact of Cranium, partially offset by decreased revenues from plug and play games. Revenues from the preschool category increased for the quarter and nine month period as a result of increased sales of PLAYSKOOL products. Revenues from the girls’ toys category decreased for the quarter and nine months primarily as a result of decreased revenues from LITTLEST PET SHOP and MY LITTLE PONY, partially offset by increased sales of EASY-BAKE OVEN. However, revenues from LITTLEST PET SHOP remain a significant contributor to U.S. and Canada segment net revenues in both the quarter and nine month periods of 2008. Revenues from the tweens categories decreased for the quarter and nine months primarily due to decreased sales of POWER TOUR GUITAR, which is no longer in the Company’s product line, in those periods, as well as decreased sales of I-DOG in the nine month period, partially offset by increased sales of NERF products. Net revenues for the quarter and nine months were also negatively impacted by decreased sales of TOOTH TUNES.


U.S. and Canada segment operating profit increased to $131,929 for the quarter ended September 28, 2008 compared to $122,847 for the quarter ended September 30, 2007. For the nine months ended September 28, 2008, U.S. and Canada segment operating profit increased to $212,933 compared to $204,141 for the nine months ended September 30, 2007. Gross profits for both the quarter and nine months increased as a result of the higher revenues discussed above. Gross profit for the nine month period ended September 30, 2007 was negatively impacted by approximately $10,400 of charges related to the July 2007 EASY-BAKE OVEN recall. The increases in gross profit were partially offset in the quarter and nine months by increased operating expenses reflecting increased product development spending as a result of increased investment in the Company’s digital initiative related to its Wizards of the Coast subsidiary; increased amortization as a result of the acquisition of Cranium and the purchase of intellectual property rights related to Trivial Pursuit; increased advertising and promotional expenses to support the growth of the business; and increased selling, distribution and administrative expense, including both increased shipping and distribution costs, reflecting increased sales volume and higher transportation costs, and increased sales and marketing to support the growth of the business.
INTERNATIONAL
International segment net revenues increased by 9% to $460,559 for the quarter ended September 28, 2008 from $423,185 for the quarter ended September 30, 2007. Net revenues for the nine months ended September 28, 2008 increased 14% to $1,002,502 from $881,043 for the nine months ended September 30, 2007. For the quarter and nine months ended September 28, 2008, International segment net revenues were positively impacted by currency translation of approximately $18,900 and $64,300, respectively, as the result of the weaker U.S. dollar. Excluding the favorable impact of foreign exchange, International segment net revenues increased 4% in local currency for the third quarter of 2008 and 6% in local currency for the first nine months of 2008. The increase in net revenues was primarily the result of increased product sales in the girls’ toys and preschool categories primarily relating to LITTLEST PET SHOP in the girls’ toys category and PLAYSKOOL and IN THE NIGHT GARDEN products in the preschool category. Net revenues were also positively impacted by increased sales in the games and puzzles category, primarily as a result of increased sales of traditional board games including MONOPOLY. Net revenues in the boys’ toys category decreased for the quarter and nine months primarily as a result of decreased sales of MARVEL and TRANSFORMERS products. However, TRANSFORMERS continued to be a significant contributor to International segment net revenues in both the quarter and nine-month periods of 2008. Decreased net revenues in the boys’ toys category were partially offset by increased sales of STAR WARS and sales of INDIANA JONES products. Net revenues in the tweens category increased for the nine month period but decreased for the quarter. Increased sales of NERF products were partially offset in the nine month period by decreased revenues from POWER TOUR GUITAR, which is no longer in the Company’s product line, and I-DOG and more than offset in the quarter primarily by lower revenues from POWER TOUR GUITAR.


International segment operating profit decreased to $65,815 for the quarter ended September 28, 2008 compared to $68,828 for the quarter ended September 30, 2007. For the nine months ended September 28, 2008 operating profit increased to $92,820 from $82,376 in 2007. For the quarter and nine months ended September 28, 2008, International segment operating profits were positively impacted by currency translation of approximately $1,400 and $2,500, respectively, as the result of the weaker U.S. dollar. Absent the impact of foreign exchange, the decrease in International segment operating profit for the quarter is primarily due to increased investments in emerging markets as well as decreased gross margins as a result of both mix of products sold in 2008 compared to 2007 and input cost inflation. To a lesser extent, international operating profit was also impacted by higher advertising expense. The decrease in operating profit for the quarter is partially offset by decreased royalty expense as a result of decreased sales of entertainment-based products. The increase in operating profit for the nine months was due to the higher revenues discussed above as well as decreased royalty expense, partially offset by higher advertising and promotional expenses as well as increased investments in emerging markets. International operating profit in the nine months ended September 28, 2008 was also positively impacted by the recognition of a pension surplus in the United Kingdom.

CONF CALL

Karen Warren

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, Senior Vice President and Head of Corporate Finance.

To better understand our fourth quarter and full year 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 and good morning everyone. Let me begin by saying that in 2008 we achieved our stated goal of growing revenue and earnings per share in what can be described as one of the worst holiday seasons in decades.

Revenue grew 5% to $4 billion compared to $3.8 billion a year ago. The strength in our portfolio was broad based with key drivers in each major product category contributing to our growth. We delivered earnings per share of $2.00 compared to $1.97 in 2007. Our results in 2008 reaffirmed that we should be able to grow both revenue and earnings per share in 2009 assuming we do not see further deterioration in the global economy or foreign exchange.

After a very strong performance in the first nine months of the year the fourth quarter clearly had significant headwinds between the impact of foreign exchange and the broad based economic downturn. Fourth quarter net revenues declined 5% to $1.2 billion. However, net revenues increased 1% absent the $80 million negative impact of foreign exchange.

We reported an operating margin of 12.3% or $151.6 million compared to 15.4% or $200.1 million a year ago and earnings per share of $0.62 compared to $0.84 in 2007. If you go back to four months ago on our third quarter conference call we spoke to you about the changes in consumer demand we had seen since September and we described weakness in October retail POS.

At that time we indicated we had reduced our previous expectations for the fourth quarter 2008 and for 2009. We further stated at our analyst event in November if the weakness we experienced in October continued into November and December there was the potential that retailers could pull back from previous indicated levels of purchase and there would be more uncertainty about how we would finish the year.

Following the November meeting we did not see the improvement in retail sales we had hoped for. As consumers pulled back on their purchasing this resulted in higher levels of inventory at retail. To address this issue we began to look at new ways to drive incremental business at retail and to finish the year in as strong a position as possible. Prior to Thanksgiving our discussion with our key retail partners around the globe shifted to developing additional programs to ensure the best possible sell through for the remaining weeks of the holiday season.

Together with our retail partners we put promotional programs in place. The programs provided incremental mark downs as well as discounts to drive store traffic and to get product moving through retail in these very critical selling weeks. The goal was to keep our core brands strong and to finish 2008 in a much better inventory position than we would have otherwise. In this regard the programs were successful.

That said these actions resulted in a decline in operating margins in the fourth quarter. Given the environment we viewed these decisions as necessary and the impact on our financials as short-term.

Looking at the full year while we took proactive steps in the fourth quarter to address the short fall in consumer spending it was our commitment to our longer term strategy that enabled us to grow our business in 2008. We continued to focus on four key areas as part of our ongoing strategy.

First, to reinvent Hasbro’s core brands. Second to expand and drive Hasbro brand into digital gaming. Third to continue to make our brands meaningful by bringing them to life by lifestyle licensing and publishing. Finally to expand and contemporize our brands by delivering the right entertainment and immersive experience for every consumer audience. In addition to these key strategies we continued to execute our plans to grow globally including our emerging market business.

Our focus on core brands including continued investments in marketing and product development grew solid growth for the year in our Boy’s, Preschool, Girl’s and Tween’s categories. Board games were also up for the year.

The Boy’s category was up 6%. In the beginning of 2008 we said we believe that our top six Boy’s entertainment properties could quite possibly equal the top three Boy’s properties in 2007. In fact we exceeded our goal. Star Wars was up significantly for the year. The Marvel brands performed very well with Iron Man exceeding expectations. The Transformers brand was remarkably strong. It did not show the type of decline we typically see after a movie year. In fact it was the lowest percent decline in the year-after movie of any of our Boy’s entertainment properties we had launched in the last ten years.

This summer we will continue to deliver entertainment and immersive experiences with the live action theatrical releases of GI Joe: The Rise of Cobra, Transformers: The Revenge of the Fallen and Wolverine, one of our Marvel properties.

Our Preschool and Girl’s businesses were up double digits. Preschool was up 11% with continued strength from our Playskool brand and In the Night Garden. The Girl’s category grew 13% led by Littlest Pet Shop which was up a strong 26%. The Tween category grew 7%. Nerf continues to be strong and was up 51% with the Nerf End Strike Vulcan and the Nerf End Strike Recon performing very well. iDog also continued to contribute significantly to the category.

Board games were up 2% while the total games and puzzle category was flat compared to a year ago. We did have tough comparisons due to shipments of Are You Smarter Than a Fifth Grader in 2007. There were a number of successes in the games category primarily from brands we targeted for reinvention with products like Twister Hop Scotch, Guess Who Extra, Sorry Sliders, Monopoly Here and Now the World Edition and the 60th Anniversary Edition of Scrabble. In addition, Pictureka was launched globally and performed very well.

With all the strength in our core brands it is clear that our strategy to grow and reinvent Hasbro brand is working. In our digital business our brands were re-imagined through our partnership with EA where we saw great success with Hasbro branded games including strong selling titles for Nerf for the Wii and Littlest Pet Shop for the Wii and Nintendo DS. Monopoly also had a great year and launched on a number of platforms including mobile, iPod, the Wii and Xbox 360.

In 2009 EA is launching several new video games and over two dozen games for mobile and online including Scrabble, Cranium and Trivial Pursuit. Additionally, Activision will launch a full slate of games in conjunction with the Transformers theatrical release this summer. In 2009 we expect to continue growing our digital gaming revenue.

The investments we made in the emerging markets also contributed to our growth. In the key markets we targeted for expansion; Russia, the Czech Republic, Brazil, Korea and China, growth exceeded our expectations and many of our core brands performed well including Transformers, Nerf, Playskool, Monopoly and Littlest Pet Shop. Our continued investment in these markets will contribute to our growth over the next several years.

In 2008 many retailers experienced difficulty due to reduced consumer spending and the global financial crisis. At the end of last year two customers went out of business; Woolworth’s in the U.K. and KB Toys in the U.S. These events have not had a material impact on our business.

As we look to 2009 given the severity of the downturn in global economies we are focused on keeping costs down, managing our operating cash flow and continuing to invest in our business for the long-term. Without question we expect it to be another challenging year with the first quarter probably being the most difficult. As the year progresses we would expect to see more momentum around our major movie initiatives and as we roll out our many new brand initiatives this fall.

In closing, we remain committed to our long-term strategy, a strategy that has been successful and one that we believe will drive growth, differentiate and create sustainable competitive advantages for Hasbro and deliver value to our shareholders for the long-term.

With that let me turn the call over to David Hargreaves. David?

David Hargreaves

Thank you. Good morning everyone. Before we begin reporting our numbers in detail I’d like to spend a few minutes talking about the fourth quarter. As Brian indicated, the fourth quarter was extremely challenging with consumer spending on toys down from a year earlier in most of our major markets.

In almost all cases Hasbro out performed the industry and we are reporting fourth quarter revenues which absent the adverse impact of exchange rates grew 1%. This growth didn’t just happen; it took some major tactical initiatives. You may recall that at our November Investor Event we indicated October POS had been down significantly and we potentially had some business at risk. We decided to proactively work with our retail partners undertaking additional promotions and giving them incremental mark down money to enable them to reduce the retail price of higher priced and slow moving product lines.

This proved to be successful. It enabled us to meet our revenue goal and to finish the year with a reasonable level of inventory. However, these actions clearly hurt our operating margins during the fourth quarter and were the major factor in the reduction to 12.3% from 15.4% last year.

Now let’s take a more detailed look at our full year results. In a very difficult environment we delivered our fourth consecutive year of revenue growth and our eighth consecutive year of growth in earnings per share. Worldwide net revenues were $4 billion compared to $3.8 billion last year, an increase of 5% to $184 million. For the full year there was a negative impact of foreign exchange of $10 million.

U.S. and Canada segment net revenues were $2.4 billion compared with $2.3 billion last year, an increase of $113 million or 5%. U.S. and Canada operating profit for the year was $283.2 million or 11.8% of revenues compared to $287.8 million or 12.5% of revenues in 2007. Net revenues in the international segment were $1.5 billion compared to $1.4 billion a year ago. This segment was up 3.8% in U.S. dollars and 4.3% in local currencies.

The international segment reported operating profit of $165.2 million or 11% compared to $189.8 million or 13.1% of revenue last year. Operating profit in both the U.S. and Canada segment and International declined as a percent of revenue. This reflects the costs associated with the incremental programs we implemented at retail in the fourth quarter.

In the U.S. and Canada segment we also had increases in product development and marketing expenses related to the investments we are making in our core brands as well as our Wizards of the Coast digital initiative. In the international segment we had expenses related to the investments we are making in our emerging market strategy.

Now let’s take a look at earnings. For the full year we reported net earnings of $306.8 million or $2.00 per share. This compares to $333 million or $1.97 per share in 2007. For 2008 average diluted shares outstanding were 155.2 million compared to 171.2 million last year. Earnings before interest, taxes, depreciation and amortization were $654.3 million compared to $653.5 million a year ago. Gross margin for the year was 57.9% compared to 58.9% a year ago. The decline in gross margin is primarily due to the actions we took in the fourth quarter.

As previously discussed in our quarterly conference calls throughout the year we have been making significant investments in the emerging markets, in digital gaming and our entertainment strategy. This investment spending not only impacted our gross margin it also impacted development, advertising and SG&A expenses as well.

Now let’s take a look at expenses. Royalty expense for the year was $313 million or 7.8% of revenue compared to $316.8 million or 8.2% of revenue a year ago due primarily to a lower mix of movie based product lines. Research and product development expense for the year was $191.4 million or 4.8% of revenue compared to $167.2 million or 4.4% of revenue a year ago. Advertising expense while increasing $19.9 million to $454.6 million was consistent with last year at 11.3% of revenue.

SG&A expense at $797.2 million was relatively flat on a percentage basis although it did increase $42.1 million compared to last year. Interest expense increased by $12.5 million to $47.1 million primarily due to the $350 million of long-term debt we issued in the third quarter of 2007 offset somewhat by the repayment of $135 million of notes that matured in July 2008.

Other expense net totaled $6.1 million compared to $22.4 million a year ago. 2007 included a $44.4 million mark to market expense on [inaudible] warrants. Our 2008 tax rate was 30.4%. Excluding certain discrete items our underlying tax rate for 2008 was 32.8%. This compares to our 2007 full year underlying tax rate of 30.5%.

Now let’s turn to the balance sheet. At year end cash totaled $630.4 million compared to $774.5 million a year ago. We generated $593.2 million in operating cash flow in the last 12 months. However, we spent $146 million to acquire Cranium and the Trivial Pursuit brand, $135 million to pay down maturing debt and we returned $467.3 million to shareholders via our increased dividend and stock buyback program.

Our receivables at $611.8 million declined by $43 million compared to $654.8 million last year. This is in line with the lower fourth quarter sales. Our DSO’s of 45 days were consistent with last year. Inventories increased to $300.5 million compared to $259.1 million a year ago. Although inventories are up year-over-year we are satisfied with the overall quality of our inventories.

In summary we are very pleased with the full year results we reported today. We grew revenues and earnings per share in a difficult economic environment and at the same time we were able to continue to make investments in our future. As we look to the year ahead we believe it will continue to be very challenging. Given this we are focused on keeping costs down and maximizing operating cash flow while continuing to invest in our business for the long-term.

That said, we do believe the underlying strength of our brands and our balance sheet will enable us to continue to do well even during these difficult times. We look forward to talking to you again on Friday from our Investor Meeting in New York where we will be providing more detail on our 2008 results and our outlook for 2009.

With that Brian, Deb and I will be happy to take your questions.

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