Hasbro 2006 Annual Report Download - page 33

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.
With the theatrical release of Lucasfilm’s STAR WARS EPISODE III: REVENGE OF THE SITH in
May 2005, and the subsequent holiday season DVD release, sales of product related to the Company’s
strategic STAR WARS license were a significant contributor to 2005 revenues and have continued to be strong
in 2006. Pairing this key licensed property with the Company’s ability to design and produce action figures,
role playing toys, and games, as well as its ability to launch an integrated marketing campaign to promote the
product globally, was the key to this line’s success. While sales of product related to this license performed
well in 2006, they were lower than 2005.
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
Entertainment, Inc. and Marvel Characters, Inc. (collectively “Marvel”) to produce toys and games based on
Marvel’s portfolio of characters. The Company will also incur 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 remains committed to reducing fixed costs and increasing operating margins. Over the last
5 years the Company has improved its operating margin from 7.8% in 2002 to 11.9% in 2006. In the fourth
quarter of 2006, as part of its ongoing cost reduction efforts, the Company determined that it will reduce its
manufacturing activity in Ireland and transition the manufacture of certain products to the Company’s suppliers
in China. The Company is also investing to grow its business in emerging international markets. With a strong
balance sheet, and having achieved a debt to capitalization ratio of between 25-30%, the Company will also
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. The
Company expects to leverage revenue to offset the impact of these investments and maintain 2007 operating
margin levels near 2006.
In recent years, the Company has been seeking to return excess cash to its shareholders through share
repurchase and dividends. As part of this initiative, in July 2006, the Company’s Board of Directors (the
“Board’’) authorized the repurchase of an additional $350,000 in common stock after a previous authorization
of $350,000 was exhausted in July 2006. For the fiscal year ended December 31, 2006, the Company has
invested $456,744 in the repurchase of 22,767 shares of common stock in the open market. The Company
intends to opportunistically repurchase shares in the future subject to market conditions. In addition, in
February 2007, the Company announced an increase in its quarterly dividend to $.16 per share. This is the
fourth consecutive year that the Board of Directors has increased the dividend rate.
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