Hasbro, Inc.

Good morning and welcome to the Hasbro second quarter 2025 earnings conference call. At this time, all parties will be in listen-only mode. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Today's conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I'd like to turn the call over to Fred Whiteman, Vice President, Hasbro Investor Relations. Please go ahead.

Thank you and good morning, everyone. Joining me today are Chris Cox, Hasbro's Chief Executive Officer, and Gina Getter, Hasbro's Chief Financial Officer and Chief Operating Officer. Today, we'll begin with Chris and Gina providing commentary on the company's performance, and then we'll take your questions. The earnings release and presentation slides for today's call are posted on our investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures. Our call today will discuss certain adjusted measures which exclude these non-GAAP adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we're referring to earnings per diluted share. Before we begin, I would like to remind you 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. There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. These factors include those set forth in our annual report on Form 10-K, our most recent 10-Q, 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. I'd now like to introduce Chris Cox. Chris?

Good morning, and thank you for joining us today. Before we begin today's call, I want to take a moment to honor the life and legacy of Alan Hassenfeld, our former chairman and CEO, and a dear friend and mentor. Alan was a driving force behind Hasbro for decades. He led with heart, conviction, and an unwavering belief in the transformative power of play. But more than that, Alan believed in people. He made it his mission to lead with empathy, to give generously, and to use Hasbro as a platform for doing good in the world. Alan reminded us that the true measure of our success isn't just financial performance. It's the positive impact we make on people's lives, especially the joy we bring every day to children around the world. Alan, You will be missed, but your vision and mission will never be forgotten. Now let's turn to QQ results. We're now halfway through 2025 and already seeing momentum on our Plane to Win strategic plan announced in February. I'm pleased to report that Hasbro is performing ahead of expectations, driven by exceptional results from our Wizards of the Coast business, continued performance in our licensing and digital segments, and a steady long-term approach to navigating a complicated and evolving macro environment. While the broader consumer landscape remains dynamic, our play-focused, partner-scaled strategy is paying off, leaning into premium, high-margin segments like wizards, licensing, and digital. And we're seeing it translate to bottom-line outperformance. Let's break it down. Wizards of the Coast had a standout quarter, Magic the Gathering continues to deliver, growing 23% year over year in the second quarter, and up 32% year to date. This isn't just a one-off moment. It's a clear indication of the power of Magic's community, our release cadence, and the resonance of our Universe is Beyond strategy. Magic's engine of growth is durable, it's diversified, and it's accelerating. We're seeing strength across every KPI of the brand. Tarkir Dragon Storm is on pace to become the top-selling magic premiere set of all time. Final Fantasy, the latest release in our Universes Beyond portfolio, is already the highest-grossing magic set ever. And Secret Lair, our direct-to-consumer collectible business, just delivered the strongest sales quarter in its history. It's not just about our new releases either. Our backlist Magic sets have already set an all-time annual sales record, and we're only six months into the year. That's a testament to the depth and durability of Magic's value to players, collectors, and fans alike. A play system of over 22,000 cards that retain full compatibility. Community engagement is also hitting new highs. Last month's MagicCon Las Vegas drew record attendance, with over 19,000 badges sold. eclipsing our previous high from Chicago just earlier this year. And the Wizards Play Network continues to expand, now totaling nearly 9,000 locations globally. Organized play is on fire. We saw a nearly 40% year-over-year increase in unique players during the first half of 2025, a clear signal that our play programs are bringing new energy and deeper connection to local communities. Final Fantasy set a record for new player growth. delivering more new players in its first two weeks than any prior set posted over an entire season. For the balance of this year, fans are eagerly anticipating our upcoming slate of releases, including Edge of Eternities, Marvel's Spider-Man, and Avatar The Last Airbender, both new additions to our ever-expanding Universes Beyond portfolio. We're committed to scaling Magic through thoughtful innovation, smart operational execution, and a continued focus on player-first experiences. We see a bright future for the brand, both in the second half of 2025 and beyond. Simply put, Magic's stronger than ever, and we're just getting started. Sticking with Wizards, we're now in a place where we can start talking more confidently about our digital pipeline, a major investment area for both Wizards and Hasbro as we scale our ability to deliver play in new ways across more platforms with more partners. Exodus, our flagship AAA sci-fi RPG from Archetype Entertainment, is progressing well and is currently targeting launch in the second half of calendar 2026. This game represents a bold step forward into premium digital storytelling and will be sharing a major update with players later this year. This quarter, we announced an exclusive publishing agreement with Giant Skull, led by industry veteran Stig Asmussen. Stig has an exceptional track record, and not coincidentally, is the force behind some of my favorite games, God of War III and Star Wars Jedi Fallen Order, to name two. And he's now leading the development of a brand new single-player Dungeons & Dragons action-adventure game. This is a premium title built from the ground up in Unreal Engine 5, and we believe it will set a new bar for narrative and immersion in the D&D universe. This agreement reflects our playing-to-win strategy in action, investing in top-tier talent, deepening digital engagement, and expanding our presence in premium genres. Whether it's Exodus, D&D, or tapping into the amazing portfolio of collector and age-up-oriented brands across Hasbro, we're building a diverse, high-quality slate that strengthens our connections with fans and unlocks new growth for Hasbro's digital game portfolio. Starting at this year's Game Awards in December, you will be hearing a lot more from us. Turning to consumer products, as anticipated, sales were down in the quarter, particularly in North America, where our retail partners made a shift in ordering from direct imports to domestic, given the uncertainty around tariffs over the last few months. We expect to make up much of this delayed ordering in Q3 and into Q4 as sales ramp into the holidays. EMEA and APAC are performing well, and we anticipate each of these regions will end the year in growth mode. While tariffs represent a headwind for the business, the current duties are better than the range we discussed in our last earnings call. We are compensating for these costs through a combination of cost reductions, rebalancing our marketing spend, diversifying our supplier mix, and implementing some targeted pricing actions. Coupled with a strong slate of new toys, including Play-Doh Barbie, our new line of Peppa Pig toys, celebrating the birth of Peppa's little sister, Evie, retooled and reimagined board game favorites like Candyland and Operation, and Marvel Legends series products tied to the upcoming Fantastic Four release, we expect top-line performance for consumer products to improve sequentially as we move through the balance of the year. Lastly, our licensing business, which is embedded into our CP and Wizard segments, continues to outperform. Monopoly Go continues an impressive run of user and revenue milestones, proving to be an enduring hit from our partners at Scopely. We've just inked a new multi-party deal in casino gaming with Aristocrat Technologies, Bally's, Evolution, and Galaxy Gaming. They joined SciPlay to form a five-company partnership to expand our brands in a lucrative and high-growth market for digital on-premise gaming. And the balance of our LBE consumer products and digital gaming licensing business is both growing and providing an important source of high profit diversification. All of this adds up to a business that is showing strong signs of underlying momentum and meaningful progress against our playing to win objectives. While I won't steal much of Gina's thunder, based on the strength we are seeing across our diversified portfolio, especially from Magic, We are raising both top and bottom line guidance for 2025 and reaffirming our midterm outlook. 2025 will be the year Hasbro returns to growth, and we will do so backed by record operating margins. I want to thank our teams across the world for making this possible. Our supply chain organization has done yeoman's work, diversifying our supply chain while keeping costs low. Our sales teams are partnering with our retailers to navigate an unpredictable environment with agility and a long-term mindset. And our product, marketing, and design teams are delivering some of the best new products and campaigns Hasbro has dreamed up in years. Alan would be proud. Now I'll turn over the call to Gina Getter, our CFO and COO. Gina?

Thanks, Chris, and good morning, everyone. We delivered a strong Q2, outperforming expectations on revenue, profit, and margin, all while navigating a dynamic external environment. Our performance this quarter reflects the strength of our portfolio strategy, the outsized momentum in our magic business, and the disciplined execution behind our transformation and operational excellence initiatives. Net revenue came in at $981 million, essentially flat year over year on the strength of magic. Adjusted operating profit delivered $247 million. with an adjusted operating margin of 25.2%, which was up 20 basis points versus last year, despite a material step up in royalties expense. Adjusted earnings per diluted share rose to $1.30, up 7% year over year, driven by favorable mix and margin discipline. Our Wizards of the Coast in digital gaming segment continues to be the growth engine. Revenue grew 16% to $522 million, led by Magic the Gathering, which delivered 23% growth. Final Fantasy became the biggest Magic set in our history, exceeding expectations and attracting both longtime players and new fans. Segment operating profit was $242 million, with an exceptional 46.3% margin, reflecting both scale and discipline cost execution. As expected, consumer products revenue declined 16% to $442 million, primarily due to retailer order timing and market softness in select geographies. As we foreshadowed last quarter, most of our U.S. retailers managed their discretionary inventory tightly through the quarter. While revenue declined, we improved margins, delivering near break-even profitability through cost actions, mix, and promotional spending disciplines. Entertainment delivered $16 million in revenue in line with plan and $10 million in adjusted operating profit. The team continues to execute well against a leaner, more focused content portfolio. As we look at our year-to-date results, we are back to growth with revenue growing 7% versus last year behind the strength of Magic. Operating profit of $470 million is up 18% behind volume, favorable business mix, and cost productivity. We remain intensely focused on transformation and cost leadership. With $98 million of gross savings delivered through the first half, we are firmly on track to meet our annual target, reflecting strong execution across supply chain, SG&A, and product development. Year-to-date adjusted EBITDA reached $576 million, up 19% behind the drivers previously noted. Through the first half of the year, we generated $209 million in operating cash flow and returned $196 million to shareholders via dividends. We've also bought back $62 million of debt as we work towards our target leverage ratio. Our teams are executing decisively against the evolving tariff backdrop. While the current China tariff rate is more favorable than what was proposed in April, rates remain fluid. Last quarter, we were modeling a broad range of potential outcomes with a net impact of $60 to $180 million. Based on the updated trade policies with China at 30% and Vietnam at 20%, we are now estimating that we'll be at the lower end of the range and expect $60 million of expense in our 2025 P&L. We've incurred minimal tariff-related expense in our year-to-date results, as most of the impacted inventory is still sitting on the balance sheet and is yet to flow through the P&L. Company-owned inventories are up versus last year, but reflect several factors including tariffs, foreign exchange, and a planned shift in revenue mix towards domestic fulfillment. We feel well-positioned ahead of the retail seasonal inventory build and expect to exit the year slightly up versus last year. As a result of the impact of tariffs and our long-term outlook, We recorded a $1 billion non-cash goodwill impairment charge in the consumer product segment this quarter. We're also seeing downstream impacts from trade uncertainty across the retail landscape. Many retailers are delaying holiday inventory builds and pushed shelf resets into Q3, both of which weighed on Q2 consumer products revenue and are requiring us to remain agile in the second half. To that end, we've activated a comprehensive mitigation playbook including skew rationalization, sourcing diversification, pricing strategy, and retailer collaboration to manage risk and preserve profitability. Today, approximately 50% of our U.S. toy and game volume originates from China, and we have plans in place to bring that exposure down to less than 40% by 2027 through accelerated geographic diversification. At the same time, we're identifying opportunities to onshore more production, including continuing to source from East Longmeadow, which manufactures most of our U.S. Hasbro gaming portfolio. These steps are strengthening our long-term supply chain resilience while protecting margin performance. Based on our strong first half and improved visibility into the back half, we are raising full-year guidance for revenue, margin, and adjusted EBITDA. The upgrade reflects the continued strength of our Wizards business, confidence in our cost transformation efforts, and a tariff impact that is now expected to be less significant than we had anticipated back in April. As Chris said, we are back to growth, and we now expect total Hasbro to grow revenue mid-single digits and an adjusted operating margin of 22% to 23%. We are now forecasting Wizards of the Coast revenue to grow in the high 20% range, with an operating margin between 42% and 43%. The stronger outlook is driven by the record-breaking success of Final Fantasy, strong engagement across upcoming universe beyond sets like Spider-Man and Avatar The Last Airbender, and continued momentum in backlist titles and secret lair, all of which are reinforcing the durability and depth of the Magic franchise. In consumer products, we now expect revenue to decline 5% to 8% for the year, with an adjusted operating margin between 4 and 6 percent. This revised guidance reflects the cost of the tariffs themselves, the revenue shortfall and operating deleverage in Q2 tied to changing order patterns, and the anticipated impact from retailers shifting their holiday resets back as they adjust to a more fluid consumer demand environment. We are also on track to achieve $175 to $225 million in gross cost savings this year, and continue to prioritize investments behind our core growth engines while maintaining balance sheet strength and financial flexibility. As a result, we are increasing our full-year adjusted EBITDA guidance to $1.17 to $1.2 billion, which reflects the strong first half execution, cost discipline, and improved tariff backdrop. Our capital allocation priorities remain unchanged. Our first priority is to invest in the business, particularly behind high return growth drivers like Wizards and Digital. Second, we remain focused on debt reduction and long-term leverage goals, including opportunistic debt repurchases and pre-funding next year's bond maturity through match-dated treasuries. And third, return cash to shareholders via our dividend. As announced in today's release, we have kept the Q3 dividend unchanged. In short, we delivered another strong quarter, beating expectations, expanding margins, and strengthening our foundation for the second half. The magic business continues to lead, our portfolio is resilient, and our teams are executing with clarity and discipline. We remain confident in our ability to deliver our updated full-year financial commitments and create long-term value for shareholders. And with that, I'll turn it back to the operator for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. To allow as many as possible to ask questions, we ask you please limit yourself to one question and one follow-up. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the star keys. Thank you. And our first question is from the line of Steven Nysik with Goldman Sachs. Please proceed with your questions.

Hey, good morning. Thanks for taking the questions. Christina, maybe first on Final Fantasy, biggest set release in history. I'm just curious if you could talk a little bit more about how demand for Final Fantasy materialized versus your expectations in the quarter. Maybe how quickly you were able to scale up production to meet that demand and How much of that elevated demand do you think is still out there in the marketplace for you to execute against into the back half of the year? And what's factored into the updated guide you gave today on Wizards? And then maybe looking ahead on the Magic segment, Chris, I'm curious, what was it about this particular set that you think made it so successful? And are there any key elements of that success that you think you can carry forward into future universes beyond sets? And you mentioned just getting started in terms of the momentum and the magic. How do you feel about growing off this record year that you're about to have in 2025, in particular, looking into 26, growing off this new revenue base? Thank you.

Hey, Stephen. Good morning. I'll start, and then I'll turn it over to John. In terms of Final Fantasy and how it met expectations, I'll give you a comparison between two of our biggest university onsets. Lord of the Rings took six months to deliver $200 million of revenue. Final Fantasy took one day. And we left demand on the table. So we couldn't produce enough. I think we increased production runs on it four times pre-release. It was substantially by many, many very high double-digit percentages ahead of any other production run we've ever done. And we left the market wanting more. And, you know, our expectation is there's going to be a nice long tail of backlist for the product. Likewise, we're still selling Lord of the Rings product today. So, you know, even though we hit $200 million in December of 22 for Lord of the Rings, you know, we sold a substantial percentage of that in the several years following. We expect Final Fantasy to be no different. It's partially what's powering our backlist, which already in like five and a half months in the year did more than we've ever done in any year prior. So I think that's a little bit on kind of what our bullishness is on Final Fantasy. What drove success for it? I think it's a couple of things. I think first and foremost, it's finding the right IPs that are great adjacencies to what Magic fans might appeal to or what Magic might appeal to another fan base. Lord of the Rings was fantastic because it's kind of the granddaddy of fantasy. It invented the genre, major books, major movies, major animation and games. Final Fantasy, I think, is almost as strong as Lord of the Rings in terms of IP strength, if not stronger in some regions. I think it has stronger cross-regional appeal, and it has probably more of a sweet spot in gaming than Lord of the Rings has because it was kind of born from gaming. So I think potentially the overlap of fan bases was stronger than you might have even seen for something like Lord of the Rings. And I think when you couple that with some savviness that the Wizards team has learned over the last couple years in terms of managing the SKU mix, managing what the AST expectations should be, and shifting people up in terms of what they want to collect and what they want to buy, it just breeds very, very strong success. And then in terms of your third kind of sneaky question.

Very sneaky.

Yeah, yeah, yeah.

Getting them all out at the beginning.

One C. In terms of our outlook for Magic, we feel pretty darn good about the Universes Beyond lineup we have set up for 2026 and 2027. We're very player-focused in terms of how we announce these things, so we're not going to take away any of the Magic team's thunder. But over the next couple months, usually in August and September, the Magic team reveals what the new sets are going to be for the following year. And we feel pretty good about the brand collaborations and the first-party sets we have next year in terms of being Final Fantasy-like in terms of the types of players, the size of community, and the adjacencies we have.

Yes, Stephen, the only color I would add to Chris's answer there is I'll give props and kudos to our magic team who really navigated this unprecedented demand. They were very agile. And every week we were getting an updated view of what the sales could be. And almost instantly we were back working options on how we would be able to produce and kind of lean into sales. Leading to as much demand as we could. So as Chris said, we upped production four different times. We're continuing to produce the set. We think the set itself is going to have a huge long tail. But the team really has honed in their agile operating skills to be able to respond. It was impressive this quarter.

That's great. I appreciate that all. Thank you. Thank you both. No worries.

Are you done with your five-point questions, Steven? Thank you.

The next question comes from the line of Megan Clapp with Morgan Stanley. Please receive your questions.

Hey, good morning, Christina. Thanks for taking our question. A couple of follow-ups, I guess. Starting with the midterm outlook, you reaffirm the midterm outlook. You call for, in that outlook, 500 to 100 basis points of average annual operating margin expansion through 2027. we just take the high end of your updated outlook for this year. You could achieve most of that this year alone. So just as we think about calibrating our models beyond this year, should we think about those targets as potentially conservative? And I recognize there are going to be incremental costs coming in from exodus, but you're also absorbing a lot of royalty expense and tariffs this year. Tariffs could ease over time. You still have cost savings to be realized. And it seems like you think you can continue the momentum for MAGIC. So just any help in kind of thinking about squaring those targets versus where you're going to end this year.

Yeah, morning, Megan. Good question. I guess at this point, we're not going to make any changes to our midterm targets. We still feel like we have a path. As you pointed out, this year is clearly over-delivering the expectations that we set in February. So there could be some some lumpiness as we think 25, 26, 27, but we do still believe that we've got a path to that growth profile. To your point, the headwinds that we have now that we didn't know then when we set them in February, here's a big one. So even though the net impact this year is 60, we expect that to be bigger as we move into 26, 27. But to your point, it remains fluid. So I think we'll get a little bit deeper into this year before we give any sort of updated guidance on 26-27. But big picture, we feel pretty good with where we are.

Okay, that's helpful. And just a follow-up, I guess, on Monopoly Go, which accelerated pretty nicely this quarter. I think $44 million is the highest contribution you've ever recognized in a quarter game to date. So can you just talk a little bit about what you're seeing there? Are you finding that maybe there's some seasonality in the business? Was there any change in marketing cadence from Scopely? Just maybe a little bit more on what drove that acceleration. And then just any updates in terms of the assumptions for that decay rate you factored into the updated guidance?

Their user metrics continue to be excellent. And I think it exceeds just about any other benchmark in the industry. Scopely is being very savvy in terms of their partnerships. They had a fantastic collaboration with Star Wars in May and June. And then I'd also say that the user acquisition costs and the percentage of revenue that we're spending against user acquisition has probably come in on the lower side of our expectations. All of those things combined have raised the amount of revenue contribution that we're able to take from that game. And, you know, I think we previously said about $10 million a month. That's likely on the conservative side based on what we're seeing for the first six months.

Yeah, I would guide you to it. It's more, you know, we've been running roughly 14. I would guide you to that $12 to $14 million a month in the back half, just given what we're seeing.

Okay, great. Thank you. I'll pass it on.

Thanks, Megan. The next questions come from the line of Arpina Kocharian with UBS. please just use your questions.

Hi. Thanks for taking my question and congrats on a great quarter. So you had upside in your full year guide given Q1 outperformance already. And by my calculation, that operating profit margin was a little bit higher a bit than the original guidance for 2025. So original was 21 to 22. I was sort of expecting a little bit maybe upside to the guidance that you gave today, given the Q1 outperformance already. I understand why you would want to keep that sort of checked a bit, given sort of significant uncertainty ahead of you, and you still have holiday season ahead of you. But would you say that leaves room for a nice upside for the full year? How would you sort of calibrate that guidance, given that it was already upside to the original guide, given Q1 outperformance? Then I have a quick follow-up.

Yeah, morning. So I would classify our guidance outlook on margin to be the right call where we're sitting for what we can see today. I mean, through the first half of the year, the one piece to keep in mind is that we haven't seen any of that tariff impact in the P&L quite yet. So that starts to manifest in the back half of the year. And that's almost a two-point drag on our margins as we move through that back half. And to your point, it's still early in the sales-selling cycle for holidays, so there is a question mark on how all of that is going to impact kind of our margin in the back half. But, you know, right now I would say we feel good about the guidance that we put out there for the year.

Okay, thank you. And then maybe a bigger picture question for you, Chris. As you look at the wizard business today, wizard in its entirety, including D&D, your success in digital, and, of course, Magic the Gathering, Is there anything that has changed in your thinking in terms of growth profile and opportunity today versus a year ago or even six months ago in terms of what third-party IP could mean for this business, let's say, three years from now?

Yeah. Hey, good morning, Arpine. We built the Universes Beyond strategy for Magic with the idea of new player and total player expansion. I would say that every KPI that we're able to measure indicates that not only has that strategy been successful, it's been really successful. You know, I think we're seeing meaningful player growth on Magic. I think we're seeing meaningful distribution growth. And that to me translates into enduring business success. And, you know, it's kind of a It's a tale as old as time inside of toys and games. It's why licensing is as big of a business as it is. And Magic is really a single source provider inside of trading cards for this kind of business. And, you know, it's great for Magic because it grows our overall player base. It tends to be very lucrative for us. It's also fantastic for the licensors because the scale of releases that we're able to achieve It's basically like a licensor gets a new blockbuster movie or a new AAA video game's worth of revenue for a year that tends to have a nice long tail associated with it. So to me, I think Universe is Beyond is exceeding expectations. And I think despite maybe some headwinds that we see in the consumer product segment due to tariffs, that's partially why we're able to very strongly reaffirm our midterm guidance because we see upside in games.

Thank you very much.

Our next questions are from the line of James Hardiman with Citi. Please receive your questions.

Hey, good morning. So, obviously, a fantastic quarter from a wizard's perspective. But even CP... think was in line with to maybe a little bit better than we were modeling. I guess the biggest question I'm getting as we think about a beat versus the street of about 75 million, the raise seems a bit more muted, right? So call it $60 million at the midpoint. Help us bridge some of that. You talked about tariffs going from I think what was assumed in your previous guidance, 180 to now 60. So that's about $120 million of a good guy right there. And obviously the Wizards, a little fuzzier, but I get to maybe 75 million of upside from Wizards. So what's the offset to that? I mean, in your bridge slide, it looks like, as is often the case, CP is the answer. But maybe walk us through where we stand today on CP and versus where we were three months ago.

Yeah, yeah. Good question. Morning, James. Morning. Let's start with where CP came in on Q2. To your point, the overall segment was a bit better than what we were saying. We were calling kind of 19%, 20% down last April, and now we came in at down 16%. Really, it was on the back of some timing within LCP. Yeah. The toy and game part of the CP finished almost spot on what we had anticipated within the quarter. So just as we think about digesting Q2. In terms of how the guide is working and what's going on with CP business, so there's the net tariff impact itself, which to your point is materially improved from where we had it pegged last quarter. The things, though, that are different, we did see with that revenue coming out in Q2, while we'll see some improvement in our performance in the back half, we're kind of looking at that Q2 revenue loss as a revenue loss and then the impact that that has on the business as we move through from a deleverage both kind of within the supply chain as well as within our managed expense route. It really is just how we're thinking about the stickiness of that Q2 loss as it plays through the back half of the year. We've also watching with all of our retailers, they have you know, taken very, they're carefully watching their inventory levels and they've taken decisions to push the sets back, the holiday sets back further. So that's impacting how we're thinking about the flow through of our inventory, you know, in the back half of the year and what that is ultimately going to lead to a demand outlook. So it really comes down to how we are forecasting Q3, Q4 for CP.

Yeah, James, I would say it's a bit of a tale of two categories. You know, on the game side, In Q1, we were bullish. I think Q2 reaffirmed our bullishness, and we see that flowing through in the back half of the year. The collectible segment, the hobby segment is continuing to be very buoyant, and that's obviously based on that chart where we see a lot of the upside. On the consumer products and more general merchandise and toy side, I would say we share a similar sentiment with our retailers, which is cautious optimism. Optimism in that consumer sentiment, it seems to be bouncing back from April lows. The consumer tends to be continuing to buy, and we don't see much evidence of pull-forward buying, anticipating inflation or tariffs. That said, though, You know, the tariffs are going to have an impact. We do expect pricing to happen across the industry. And so it's a little bit of a black box what the back half of the year is going to look like. I think you're going to see companies like us be cautious on our inventory. I think you're going to see retailers be cautious on inventory. And I think consumers are going to have a bit of a choice because they're still very promotionally sensitive right now. But a lot of hot products are going to likely be out of stock this holiday because we're just not going to be able to refund them because we didn't have the upfront inventory for them. So like a Play-Doh Barbie, an Animals, a Baby Eevee, you know, if you're a mom or a dad, you're probably going to want to go and buy that early.

Got it. That's all really great color. Maybe as a follow-up, as I think about CP... And what happened in 2Q, I feel like I'm hearing two different factors here. One is the direct import versus domestic, which I think you believe is more just a timing issue, which you should get back in the second half. And then there's a piece of, well, maybe overall we think the category is a little slower than we thought. So maybe tease those pieces out. At the end of the day, everybody's trying to figure out how – conservative this guidance is. And I think some of it sort of depends on how you're thinking about some of those factors.

Yeah, in Q2, we definitely saw inventory kind of order pattern shift. So we did see retailers, you know, we talked about this last quarter, there's no need for them to be pre-buying discretionary holiday goods in the second quarter. So they made a lot of decisions to stop or pause or slow their direct imports in. And so then we are sitting at more of the inventory within domestic. We believe that order pattern, I mean, Christmas is gonna come, parents are gonna buy toys. We know that they will be pulling the inventory. It's just gonna be later and in line with their shelf resets, which again, many of them push their shelf resets out of kind of Q2 into later within Q3. So that is, I think, DI-DOM. There was a situation in Q2 that I think, as we move through Q3, Q4, goes back to more normal order patterns.

Got it. That's helpful. Thanks, guys.

Our next questions are from the line of Eric Handler with Ross Capital. Please receive your questions.

Good morning. Thanks for the question. A couple magic questions here. First, when the Final Fantasy set first got announced, I forget, over a year ago, there was an expectation that it would have a positive impact on international sales, particularly in Japan, which at the time, I believe, was your largest international market for Magic. How did that play out, and how does that have you thinking about future Magic sales going forward? And then I've got a follow-up.

Today, it's the second best-selling set of all time in Japan behind only Modern Horizons 2, but we anticipate it will beat Modern Horizons 2 within days or weeks. So it was a big seller there.

As I'm impacting your decisions on future international growth of Magic.

Sorry, I missed the second half of the question.

It was a sneaky second half of the question.

It's fine, it's fine. I'll count that all as one. We see Japan as a growth market for Magic. Obviously, we had a fantastic experience with Square Enix. They've got a lot of great IP. Generally speaking, we see Japan as a gold mine of potential licensed partners to work on Magic. Japan tends to be kind of like the learning lab for trading card games worldwide. It's probably one of the most innovative market for them. They have the greatest variety of them. So we're all in on the Japanese market. Likewise, I think things like Final Fantasy and what we're doing with Universes Beyond is also allowing us to be able to get into more mass drugstore games. non-traditional convenience store style distribution, both in the Japanese market and around the world. So I think you're seeing things like Final Fantasy, future sets like Spider-Man, helping to crack the door open on wider mass distribution, which will help us not just in Japan, but also in the US and Europe.

Great, that's helpful. And then with regards to your player demographics, in your By presentation, it says the average tabletop player is about 35 years old. Now you've got, you know, Spider-Man, which theoretically skews a bit younger. Avatar is more of a tweens type product. In Secret Lair, I think you have just put out or will soon be putting out a Secret Lair release for Sonic the Hedgehog. So I'm curious about how you're thinking about, you know, the demographic shift maybe getting younger for Magic.

I mean, I won't do the cheeky answer. Our new player average is always in kind of that 11 to 14-year-old range. The thing is that Magic players just never stop playing. So the median age goes up over time because people play into their 50s and 60s, and then it starts to become multi-generational. So, yeah, we see things like Spider-Man, things like Sonic the Hedgehog, you know, general kind of efforts that we have like Secret Lair that just help us test and learn new IPs as ways for us to be able to expand the demos of the game. And then, you know, it's not just about age. Magic, I think, does better than most hardcore games or enthusiast games in terms of penetration with people who identify as female. But we still have a ways to go there. I think about 30% of the player base today are women. And we'd like to see that increase over time. So we're also looking at, you know, IPs that could have some resonance there. So, you know, don't be surprised if you see us poking into Romanacy. Don't be surprised if you see us looking at K-pop bands. You know, nothing's off the table.

Very helpful. Thanks, Chris. Thank you. Next questions are from the line of Christopher Horvitz with JP Morgan. Please receive your questions.

Thanks. Good morning, everybody. So understanding that you've only seen a little tariff impact so far given production timing and orders, but are you seeing prices seep in from others already in the market? And how do you think the U.S. consumer is reacting to tariffs at the category level? So, you know, said another way, how did you see POS trend at the industry level in 2Q? And a sneaky second one, as we assess the estimate of lost sales from 2Q that you're putting into the guide, how does your POS trend relative to the industry?

Hey, Chris. So I think in terms of how the consumer is holding up in the second quarter, I think they're generally holding up pretty well. The toy industry is up through the second quarter, but a lot of that is concentrated in, frankly, trading cards and maybe building sets. And then outside of that, I think the industry is behaving about what we thought, which was flat, slightly down. Our categories are behaving about what we figured they would. We have a lineup that is very back path weighted in terms of where our new products are coming out. But where we have seen success, it's been with great entertainment partnerships like what we saw with Transformers, which Transformers 1 had a modest box office, but it's had an excellent set of toy sales. So mission accomplished as far as we're concerned. Marvel's back to growth, particularly with Captain America, and we're looking forward to The Fantastic Four. And then I think the industry is generally seeing a similar trend where, you know, four quadrant theatrical is really working, whether it's Minecraft or Sonic the Hedgehog or most recently Jurassic World. And then innovation is also paying dividends. So, you know, we're seeing that with Beyblade. You know, we've only had a couple weeks of sales at a couple retailers, so it didn't really affect our POS. but we're very pleased with the early impact of our collaboration with Mattel on Play-Doh Barbie. The new baby Eevee has really turned around the Peppa Pig brand inside of toys. And so we see that as part of our thesis in the back half of the year with sequential growth with toys being replenishment-based kind of tracking with POS. Now, in terms of how tariffs have impacted the category, I think the answer is it hasn't impacted takeaway from the consumer that much yet, because usually it takes five to eight months for a toy to go from the factory to the shelf. But I think you started to see some indications that toy prices were starting to creep up in May and June. And we think that will happen slowly and consistently, likely through the balance of the year and into next year. I don't think you're going to magically see one day toy prices go from X to Y. I think it's going to be kind of more line by line, skew by skew, and over several months as the general industry kind of gets a feel for what the consumer can bear.

And the only ad I have is on mix as well. So I think pricing will start to get muted based on the mix of products. And just speaking to the discussions that we've been having with our retailers, It's a lot of focus on how do you protect, again, those magic price points and keeping them to where we think consumers are going to be able to come in and buy. So I would anticipate in the back half and into 26, you'll see some big shifts happening broadly across the category as we try to keep the prices low.

Got it. And I guess that's some of the assumed tariff headwind, which is like, anything above a certain magic price point, just there would be too much inflation and the elasticity would be net negative.

Yeah, that's right. And then my follow-up is – sorry, go ahead. Some of that math or that logic has informed how we've thought about our portfolio in the back half of this year and into 26, meaning if the product itself couldn't kind of survive huge pricing, we've taken – because it would have just popped it to a price point that was just not going to be palatable for the consumer. We've taken decisions to not bring that product into the U.S.

And then my follow-up is, you know, you have two of your largest retailers have big marketplaces. I'm curious if they're asking you to more directly bear the inventory risk, i.e., we'll fulfill it for you. We'll put it in our DC, but you know, it's going to be a marketplace item. It's not going to be in store and you're going to still own that inventory. So curious if that, if that's something that's accelerating as well.

No, we haven't seen that though.

Like the DI to domestic definitely is a, that's a risk shift. Got it. Understood. Thanks very much. No worries.

Our next question is from the line of Alex Perry with Bank of America. Pleased to see you with your questions.

Hi, thanks for taking my questions here and congrats on a strong quarter. I guess just first, can you talk about the health of the Magic player base? I think you said up 40% year over year in the first half in terms of unique players. Just a little more color on sort of how you're measuring that. How many new players are the Universes Beyond sets bringing into the game? And how sticky are those new entrants that you're seeing from the Universes Beyond sets? Thanks.

Yeah, so the 40% unique increase is specific to people who participate in organized play. So that's a subset of the total player base, but it's probably the most measurable that we have week to week. And so Final Fantasy has been, generally speaking, the overall active player base in terms of playing in store has been leaping up 40%. It's a pretty impressive growth metric. Final Fantasy specifically has been very effective at bringing in new players into our organized play network. I think we did more new players in two weeks of Final Fantasy than we would typically do over a 12-week period for any other set that we've ever done. In terms of the total player base, we don't have a formal metric that we can share yet. We are working on a very robust kind of model for us to be able to track that. The challenge is most of the play with Magic is offline. Only about 15 or so percent of the player base plays on something like Arena or something like in a store. But every metric we can see from... Social listening to search queries to POS reports to organized play to MagicCon to backlist sales indicates that the total player base is growing quite robustly. And when we acquire a new player, even on something like a Universes Beyond, we tend to see a long tail and we tend to see repeat purchases for future sets.

Got it. That's incredibly helpful. And then I just wanted to follow up on some of the consumer products sort of line of questioning from earlier. So I think the guide down 5% to 8% is sort of a downgrade from the flat to down 4% the last time you provided, I think, formal quantitative guidance. So I guess just parsing it out, did you see holiday orders sort of cut in the quarter or more cautious stance by retailers? Obviously, we have some of the DI, DOM sort of shift, but just wanted to get a little more color on sort of the downgrade in the CP guide. Thanks.

Yeah, morning, Alex. Yeah, it was some of the factors we've talked already about on the call. So in Q2, we definitely saw retailers pausing, bringing in inventory, discretionary inventory for the holidays. They took decisions as well to push back the resets of their shelf to Q3. So both of those impacted the quarter, but then also impacted how we're thinking about the annual outlook. And then as we look at the back half of the year, we've gotten a better line of sight now to just, you know, how the shelves are going to set, what the promotional activity is going to be, what our call is with each of the retailers in terms of where they are going to pull in inventory. So all of those factors went into the updated guide. Not only, you know, what happened in Q2, but then how that was going to trickle into Q3 and Q4.

Perfect. That's incredibly helpful. Best of luck going forward.

Thank you. The next questions are from the line of Jamie Katz with Morningstar. Please proceed with your questions.

Hey, good morning. I just wanted to ask a question on Wizards of the Coast and digital margins. I think beyond this year, the operating margins of the segment were expected to fall back under 40%. I'm curious if you guys would be able to reset expectations for that. Are there any structural changes maybe that you've seen that can lift that to above 40? Or is there something else that may sort of normalize that profit margin in that segment going forward?

Got it. Morning, Jamie. No, there's no update to the margin as we look out. Keep in mind, as we start in 26, we'll have the depreciation hitting for Exodus and then any subsequent games after that. So that's one factor that isn't in our base today that will be a margin drag as we move forward.

Okay. And then I think skew rationalization was mentioned in the prepared remarks. Can you talk about, I guess, maybe what that means more concisely and then what that portends for CP, particularly next year? Do you think we'll be able to return to growth in that segment? Or is there more to maybe be pruned or outsourced to other manufacturers? Thanks. Thanks.

I definitely think we'll be returning to growth in CP next year. The entertainment lineup that we have is second to none. You have Spider-Man, Star Wars, and then Avengers Doomsday. That alone is a pretty stacked lineup and pretty meaningful top-line growth across our market portfolio. And then I think you'll be lapping... especially in the first half, a lot of quality innovation that we're seeing very positive early signs on this year. Play-Doh Barbie, Peppa Pig. We'll have a full year of Iron Man and his awesome friends. I know Spider-Man has amazing friends. Iron Man has awesome ones. And animals. A lot of back half innovation that we have early indications will be good hits.

Yeah, and on the SKU rationalization front, you know, we have been on a journey the past couple of years as part of our transformation to really hone in, take the complexity out. When you get into an environment like this where not only, you know, our retailers but us are managing our inventory very carefully, looking and continuing to prune and look at those kind of call it C and D level SKUs is always on the docket. We've also taken decisions, as I said earlier, of products that were probably not going to be fit for the U.S. market given the tariff impact and where we would have to price them. So we culled those out of bringing into the U.S. It doesn't mean that they're not going to be shipping elsewhere in the world, but we have taken some different decisions on the portfolio for the U.S. just given the environment. Excellent. Thanks.

Thank you. Thank you. Our final question is from the line of Kylie Kohut with Jefferies. Please proceed with your questions.

Hey, good morning, you guys, and congrats on a strong quarter. You've kind of gone into detail on this already, but curious what you're specifically seeing in terms of the mix of new, lapsed, and existing customers for Magic specifically. Are you kind of seeing more new growth, or are you really kind of seeing your existing players also spend more on the cards? Thanks.

I think to get to the detailed player demographics, we're probably going to have to go offline. I would generally say that we're seeing a stronger mix of new players than we've seen in prior years this year. I can't give you a precise quantitative breakdown, though. But like I said in the prior questions, every metric we're seeing, it all points to There's more people playing Magic, and there's more people who've never played Magic who are now playing Magic than ever before. And it's quite meaningful.

Gotcha. No, that's super helpful. And then last one for me is just looking at that step-up in inventory. Could you give us a little more color on what drove that? I know you called out a combination of planned build versus the FX-tariff, but just any more color there would be helpful. Thank you. Absolutely.

Yeah. And, you know, we're at that time of the year where we would naturally be seeing a step up in inventory, right? We're building. But a couple of unique factors this quarter. So obviously the tariff cost itself is an increased cost of inventory. We've got roughly, call it $15 million of cost of tariffs tied up on the balance sheet right now, just to give you a sense of magnitude. I should say through Q2, we had about $15 million of cost tied up on the balance sheet. So that's one piece of it. FX is another. It's making our inventory a little bit more expensive. But then lastly, it's this piece that we've been talking about in terms of DOM DI. So as the retailers stop pulling or slowed or paused their DI shipments, we were still producing and bringing it in and having it sit within our domestic inventory. So those are the three factors. As I said in our prepared remarks, we have the path that we know how the inventory is going to flow in Q3, Q4. We think we may end the year slightly higher than where we were last year, but everything right now is kind of in line with expectation.

Great. Thank you so much.

Thanks.

Thank you.

Thank you. This now concludes our question and answer session and will also conclude today's call. Ladies and gentlemen, thank you for your participation. You may now disconnect your lines at this time and have a wonderful day.