Hasbro, Inc.

Good morning. Welcome to Hasbro's third quarter 2025 earnings conference call. At this time, all parties will be in a listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Today's conference is being recorded. If you have any objections, you may disconnect at this time. At this time, I would like to turn the call over to Fred Reitman, Vice President, 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 will begin with Chris and Gina providing commentary on the company's performance, and then we'll take your questions. Our 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 are 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?

Thanks, Fred, and good morning. Hasbro delivered another strong quarter in Q3, extending our growth trajectory in 2025. Net revenue and operating profit both showed robust year-over-year gains, underscoring the power of our playing-to-win strategy, which positions Hasbro as a diversified, digitally forward play company uniquely resilient in today's tariff-sensitive market. Key drivers were Magic, Marvel, Monopoly, Peppa Pig, Beyblade, and G.I. Joe, brands exemplifying durable, diversified growth that differentiate Hasbro from traditional competitors. Year-to-date, revenue is up 7%, and adjusted operating profit has increased 14%. We anticipate full-year revenue growth in the high single digits, and adjusted operating profit growth exceeding 20%. Magic continues to outperform expectations, posting 40% growth year-to-date. This success is fueled by unprecedented new player acquisition and standout collaborations with brands like Spider-Man and Final Fantasy. Our Universes Beyond strategy, leveraging Magic's depth with beloved IPs, is generating extraordinary engagement. Looking ahead, we'll build on this momentum in 2026 with original Magic IP sets and blockbuster collaborations, including Teenage Mutant Ninja Turtles, The Hobbit, Star Trek, and Marvel Super Heroes. Interest indicators like event attendance, search metrics, MagicCon participation, sales and new channels like mass and convenience, and player growth are all at record levels. We expect momentum to continue into the fourth quarter, fueled by upcoming Magic releases, including The Last Airbender and Final Fantasy's Holiday Set, alongside sustained momentum in Secret Lair and Backlist offerings. Wizards of the Coast is more than magic. The refreshed 2024 editions of D&D's Monster Manual, Player's Handbook, and DM Guide are off to the strongest-ever start for D&D books. D&D Beyond's new, accessible virtual tabletop has driven weekly traffic up nearly 50% since the September launch. Meanwhile, our digital licensing business, highlighted by Monopoly Go and our recent launch of Sorry World with Gameberry Labs, continues to outperform, with both games topping mobile player charts. In digital gaming, the Game Awards this December will showcase some new announcements from Hasbro, including updates on our upcoming sci-fi RPG Exodus, further cementing our commitment to innovative digital play experiences. Consumer products met our Q3 expectations, although retailer shifts pushed some revenue into Q4. We anticipate a solid bounce back in the fourth quarter, driven by innovation, entertainment tie-ins, and strategic partnerships. Key highlights include momentum from Peppa Pig and Marvel's blockbuster content lineup, steady growth from Beyblade, GI Joe's rebound post-supplier transition, and solid traction for new products like Nanimals, DJ Furby, Baby Eevee, Star Wars Kyber Forge lightsabers, Priorities, and Play-Doh Barbie. Retail shelf resets since late August have led to a mid-single-digit POS increase entering the holiday season and share gains for Hasbro across our focus categories. We expect consumer products to finish the year down mid single digits, primarily impacted by tariffs. However, because of our proactive supply chain diversification initiatives, we expect that by year end 2026, no single country outside the US will represent more than a third of the Hasbro supply chain. Additionally, new vendor and manufacturing partnerships will unlock attractive pricing opportunities globally, from bodegas in Santiago to dollar stores in Peoria. expanding our retail footprint and total addressable market significantly after a long turnaround effort we expect q4 to be the start of a long-term growth period for our toys business driven by innovation a killer entertainment slate and new partnerships just this week we announced an exciting collaboration tied to netflix hit film k-pop demon hunters product is expected to hit shelves in 2026 but for fans who can't wait Pre-orders are already live for our Monopoly Deal card game inspired by the film. In summary, Q3 reinforces that Hasbro's playing to win strategy is delivering results. We're confident in our ability to sustain long-term growth through diversified digital initiatives, strategic partnerships, and resilience against external pressures. Before I close, I want to thank our incredible employees and partners around the world. Hasbro's return to growth is a direct result of your creativity, focus, and belief in inspiring a lifetime of play. Now, over to Gina.

Thanks, Chris, and good morning, everyone. We delivered another solid quarter, outperforming expectations on revenue and profit while operating with discipline in a dynamic macro environment. Our results reflect the strength of Wizards, ongoing cost transformation, and continued progress toward our 2027 profitability goals. Net revenue in the third quarter was $1.4 billion, up 8% versus last year, driven by double-digit growth in wizards and steady execution across consumer products. Adjusted operating profit increased 8% to $356 million, with an adjusted operating margin of 25.6%, holding steady versus last year, despite increased cost pressure. Adjusted earnings per diluted share were $1.68, down 3% driven by a higher tax rate and FX impacts. Year-to-date total Hasbro revenue is up 7%, and adjusted operating profit has increased 14%, underscoring the strength of our diversified portfolio and the impact of our transformation efforts. The growth in Magic, coupled with sequential improvement in consumer products, is fueling our overall financial performance. Turning to our segments, Wizards once again led our performance in the quarter. Revenue grew 42% to $572 million with broad-based gains across both tabletop and digital. Magic revenue increased 55% to $459 million driven by engagement with our universes beyond sets, our core IP edge of eternities, as well as continued momentum across secret layer and backlist products. Operating profit rose 39% to $252 million, delivering an exceptional 44% operating margin, reflecting the positive benefit of scale and mix within the magic portfolio. Consumer products navigated a complex quarter, And the team demonstrated agility as we adjusted to delayed on-shelf dates from retailers and lapped a difficult comparison last year in licensing. Revenue of $797 million was down 7% versus last year, with growth in Europe offsetting softer performance in North America. Adjusted operating profit was $89 million with an 11.2% margin compared to 15.1% last year. The margin change was driven primarily by tariff expense and unfavorable mix, offset in part by productivity improvements across our supply chain and expense management. The entertainment segment delivered revenue of $19 million, up 8%, and an adjusted operating margin of 61%, which is consistent with the asset-light model we're building in this segment. Year-to-date adjusted EBITDA stands at $989 million, up 11 percent versus last year, demonstrating the combined impact of top-line growth, operational excellence, and discipline investment. Year-to-date, we generated $490 million in operating cash flow, returned $294 million to shareholders via the dividend, and spent $120 million on debt reduction, through the combination of bond repurchases and pre-funding our 2026 maturity via treasuries, a proactive step that provides flexibility while keeping us ahead of our long-term leverage targets. We continue to see tangible benefits from our cost transformation efforts. Through the first nine months, we delivered approximately $150 million in realized gross savings, keeping us on track to achieve our full-year target. Operational efficiencies expense management, and productivity gains across sourcing and logistics are driving strong margin performance, even as we absorb higher royalty costs at Wizards and trade-related headwinds in consumer products. These savings are translating directly into margin resilience and giving us the flexibility to reinvest behind our highest return growth engines. We're executing our tariff remediation playbook decisively, mitigating risk, and protecting profitability. Maintaining our assumption that the China tariff rate stays at 30% and Vietnam at 20%, we continue to expect $60 million of impact in our 2025 P&L. Owned inventory levels remain healthy and firmly aligned with our year-end targets. We believe we have appropriate inventory in our warehouses to fulfill the anticipated holiday build and replenishment orders. With a robust entertainment lineup scheduled for 2026, we remain laser-focused on exiting the year with clean company-owned and retail inventories. We are continuing with our diversification efforts to build resiliency across the supply chain, and coupling those with the incredible growth in Magic, by 2026, we expect approximately 30% of our total Hasbro toy and game revenue will be sourced from China, and 30% of our revenue will be based in the U.S. as we opportunistically lean into our U.S. manufacturing capacity. As we enter the final quarter, our momentum will reign strong and we are raising our full-year guidance. We now expect Hasbro revenue to grow high single digits with an adjusted operating margin between 22 to 23 percent. This results in our adjusted EBITDA increasing to approximately $1.25 billion at the midpoint. For wizards, we expect full-year revenue growth between 36% to 38%, with an operating margin of approximately 44%. This improved guidance reflects the magic over-delivery in Q3 and sustained engagement in high demand through year-end releases. In consumer products, we are holding our latest guidance and continue to expect revenue to decline 5% to 8% year-over-year, with margins between 4% to 6%. as productivity works to mitigate cost pressures. Our capital allocation priorities are unchanged, and with our updated outlook, we will likely achieve our two and a half times leverage target at the end of this year. The board has declared a quarterly dividend of 70 cents per share, consistent with our capital allocation priorities to return cash to shareholders. We remain focused on execution and operational efficiency in our core toy business. At the same time, we're thoughtfully investing for the future with a disciplined, returns-driven approach, particularly in digital gaming and with strategic partners who help bring our brands to new audiences and categories. We are on track to close the year from a position of strength, delivering profitable growth, deepening engagement in our most valuable brands, and advancing toward our long-term financial and strategic goals. And with that, I'll turn it back to the operator for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up question. Our first question is from Megan Klaps with Morgan Stanley. Please proceed.

Hi, good morning. Thanks for taking my question. Maybe Gina wanted to start with just ending with your comments there just on the implied 4Q outlook. At least on the EBITDA line, it does seem to be above what the street was expecting and from a profitability standpoint implies that your growth accelerates first the third quarter. It does seem like versus the third quarter, both segments are contributing. So can you just walk through some of the puts and takes by segment as we think about 3Q versus 4Q profitability? And related to that on the top line for CP, I think the guide implies flattish sort of top line growth for the fourth quarter. I think you talked about, Chris, POS accelerating. How should we think about kind of the timing of retailer ordering shifts into the fourth quarter and POS being positive in the context of what I think is a flat guide for the top line? Thank you.

Hey, Megan, I'll start and then I'll turn it over to Gina. I think for CP, we do expect modest revenue growth. I think toy and games will have a little bit more robust and it'll be offset by some licensing comp headwinds we have last year related to My Little Pony, which had just a An amazing quarter based on My Little Pony trading cards, which has since settled into more of a run rate. We also expect Wizards is going to have a heck of a quarter as well. The early reads on Avatar The Last Airbender look terrific. And then we have another bite at the Final Fantasy Apple with our holiday set. So overall, we're expecting pretty good top line growth and some nice operating profit growth as well. I'll turn it over to Gina to kind of dig into point B, C, D, and E of your first question.

Good morning, Megan. uh all right let's start so you you're correct like we are we're raising guidance a lot of it is driven by the strength that we're seeing play through and continue to play through really all year on magic in q3 and really firming up our outlook for consumer products as we move into q4 when you peel apart wizards the the increase or the raise there is all based on revenue So we've continued to see momentum. And as we look out at the set releases that we've got planned in Q4, coupled with, remember, we have a holiday release this year that drives nice revenue. It also drives leverage throughout the P&L. The one thing that we've talked about a lot as we came into the year on Wizards is the royalty expense. So just from a modeling standpoint, what we saw in royalty expense in Q3 will largely be the same as what we see in Q4. So the raise in wizards is really all due to the revenue momentum that we're seeing and just the trickle on the positive benefit that that has down the line in the P&L. On our CP business, to your point, you know, relatively flat outlook. I mean, depending on which range you go, you can see us getting to some growth within the quarter. We have seen our POS momentum accelerate as we came out of Q3. We've continued to see that as we've moved here into Q4. And with the whole retail order shipments, we, many in the industry, were talking about these later shelf resets that absolutely impacted Q2. we started seeing their shipments pick up in Q3. And again, we've seen that continue into Q4. So our expectations for CP as we move through the holiday period is that we're going to have shipments outpacing what our POS is. So that benefit will help, again, create some leverage within the P&L as well from a margin standpoint.

Okay, perfect. Thank you.

Did I hit all of your points?

You did. Yes, thank you. A quick follow-up just on the balance sheet and capital allocation. So you said leverage target by the end of this year, free cash flow growth has been quite strong, and I think that should continue into 26. So how are you thinking about capital allocation priorities as we head into 26 with the balance sheet now at your leverage target?

Yeah, where we sit today, without getting too much into 26 guidance, unchanged priorities. You know, we continue to first and foremost want to invest back into the business and invest into our growth drivers. So you'll continue to see us do that. Obviously we have the dividend and we're committed to the dividend. And then lastly, we will continue to pay down debt. So we feel great that we're going to be at a point from a leverage ratio standpoint that will be at two and a half times. We still think there's opportunities for us to bring that down even further to just create more optionality and flexibility for us as a business. So as we turn the corner into 26, we'll come back and see if any of those are changed. But for now, we're sticking with those.

Our next question is from Arpreen Kacharan with UBS. Please proceed.

Hi, good morning. Thanks for taking my question. What do you think is driving this acceleration in retail POS for you and for the industry? And what are some of the indicators that you look at to decide whether this holds up in the next 40 days as you compare it to sort of prior holiday seasons or what you know about the consumer? Then I have a quick follow-up.

Sure. Hey, Arpina. Good morning. I think a couple things. Each product is a little different. For instance, with GI Joe, we just didn't have supply because we were going through a supplier transition for the first half of the year. And so we're in catch-up mode. On others, I think it has to do with just great innovation. You know, Nanimals, DJ Furby, some of our new board games are hitting the mark and hitting what we think players want. And then still others, I think, just are kind of bulwarked by fantastic brands and really strong content. You know, Marvel in particular is one that's really doing well this year, and we expect that to continue moving forward. Transformers has been benefiting from that throughout the year. Even though we don't have new content this year, last year's Transformers 1 has had a nice long tail for us. So, you know, we've been pleased with it. We've been seeing acceleration in POS for probably the last seven to eight weeks. And usually what we see in September and October is a pretty good harbinger for what's going to happen throughout the holidays.

Very helpful. Thank you. And then, oh, sorry, go ahead.

My one ad that I would have is on, just as you think about the overall category and pricing as a dynamic, we really haven't seen overall huge increases in ASPs. We've seen some mixed shift, but not big increases in ASPs. And as you look at where the consumer could be heading and how our portfolio shapes, roughly call it 40% to 50% of our portfolio is priced under that $20 kind of magic price point. So as we're innovating, as we're executing with our retailers, our prices are staying in that nice zone for consumers heading into the holidays. That's very helpful. Thank you, Gina.

So just a quick follow up. You have had incredible growth in Magic this year and will likely finish the year on a strong note. There is a bit of concern how you left that next year. And arguably, you know, Marvel strength in the second half of this year has probably lagged well into the first half of next year. I would imagine, but this business is very much driven by the timing of set releases. Anything you could tell us to help think through how you left these very strong numbers from this year into 2026? And Gina, just a quick question for you. The licensing expense under Magic for the backup, you had raised that from $40 million range to closer to $60 plus. Is the updated number now $70 million plus, just given the outperformance in that segment?

Is that, are you talking about the digital, magic digital?

Correct. I'm talking about the royalty expense within a wizard tied to third party IP.

Oh, the royalty expense. I see. Yeah. The back half of the year was always going to be back weighted in terms of expense, just given the timing of the universes beyond set releases. So we had Avatar and the Spider-Man are falling in the back half of the year, whereas it was just Final Fantasy in the front half of the year. So that's why you see that weighting. It'll be roughly, call it $50, $60 million of royalty expense in the back half of the year. And then, of course, what we accrued in the front half, I think total royalty expense change is $80 million year over year, I believe. So it's a pretty sizable step up in expense.

Yeah, Arpina, in terms of your your question about the underlying durability of magic's growth. I think there's a couple of things going on. Um, you know, at the easiest level this year we had call it six and a half sets, uh, because one of our sets was a little bit of a, a little bit of crossover in terms of selling between Q4 and Q1. Um, next year we're going to have about the equivalent of seven sets. So just, you're naturally going to have more content to sell, which generally is correlated with higher sales. Then when you look at kind of like the momentum that we have on Backlist, I think we continue to see that as being kind of like a nice kind of floor for the business that is continuing to raise. I mean, our Backlist business, I think, is 70% ahead of what it was last year already for the full year basis. And last year was a record. And then I think like the last one is Universes Beyond is just working. The whole theory of the business was it's going to increase our distribution. It's going to increase our number of active players. It's going to bring in new fans that were adjacent to Magic. And that has just worked. Like basically every set we've done in Universes Beyond has set records in terms of new player engagement, in terms of search queries, in terms of a number of people who are going into stores in terms of sales in non-traditional outlets like mass and convenience for us. And we don't see that slowing down. If anything, you know, I think there's potential to accelerate it just with the quality of partners we have next year and the early reads we're getting on those partners. You know, Teenage Mutant Ninja Turtles, Marvel superheroes, The Hobbit, Star Trek, which for a big nerd like myself is near and dear to my heart. I think all of those have had excellent initial reactions and bode well for continued robust sales.

Our next question is from Steven Lazacek with Goldman Sachs. Please proceed.

Hey, good morning. Thanks for taking the questions. Maybe first on consumer products for Chris and Gina. Just be curious to get your latest thoughts on higher prices and just generally how they're being digested by retailers and consumers. Curious, you know, what you're seeing so far, the types of conversations you're having with retailers this fall and if that's influencing your strategy as you look at promotional activity into the back part of the year and then maybe opportunities to take pricing if needed in 2026.

Yeah, I would say pricing so far has been relatively muted in the category. We started seeing evidence of it like in July, August. I think you'll see more of it in September and October. We've been pretty surgical in where we've chosen to price. We've chosen to put it usually against brands that have some pretty robust content and latent demand associated with it. and trying to hit price points where we think the consumer tends to be a little less price sensitive, particularly under that kind of $15 threshold, maybe the $20 threshold. And we haven't seen a tremendous amount of elasticity so far based on the early reads. In terms of ongoing pricing, I think we just kind of have to see how the holiday goes and how the consumer holds up. Right now, I think it's really kind of a tale of two consumers The top 20%, particularly in the US, the top 20% of households continue to spend pretty robustly. We've got a nice fan business with them. We've got a nice trading card and gaming business with them. The balance of households are watching their wallets a little bit more promotional and price sensitive. And as Gina mentioned, about 50% of our items that we're selling are under that $20 price range. And we think that's going to expand as we go into 2026 with some of the new suppliers we're working with and some of the new product we're working with. So net net so far, so good.

That's great. And then maybe one on 2026 around Exodus. Gina, it sounds like we're about a year from Exodus being released. I'm just curious if there's any way you can maybe help investors size the cost impact expected from the game next year. you know, perhaps over the course of 26 and 27. I appreciate we'll probably learn more in December, but anything or any frameworks you could provide at the moment to help set the frame of mind looking into next year.

Got it, yeah, good question. And you're right, we'll provide more specifics when we get to December. So I'll give you some tidbits on the framing and how to think about it from an accounting standpoint without getting too deep into unit expectations. But when you look at our balance sheet, you'll see that line that says capitalized software. And there's roughly $350 million that's sitting on our balance sheet. This includes development costs for Exodus, as well as all of the other games that are within our portfolio. So it is not just an Exodus charge. It's the entire pipeline of games that we're working on. And how that will come off of the balance sheet through the P&L. So as Exodus ships and we launch the units, that cost will depreciate alongside with units. It will flow through our cost of goods. So that's where you'll see it. It will impact our gross margins. That's where you'll see it flow through. And then the other important thing to call out is because it is a product development cost, it's an input cost, it will not be an add back into EBITDA. So it will show up as a depreciation charge within cost of goods, but it's not going to be added back on an EBITDA basis. In terms of Exodus and how to think about the dollar impact, when we're modeling it out, roughly kind of rule of thumb, 65% of that development cost is going to hit in the quarter that we launch the game. And in the four quarters in that first year, roughly 85% of that development cost will have been worked through the P&L. That's right now how we're modeling it out. Obviously, as we get sharper on the absolute units and the absolute timeline for when we're going to launch, that will impact it, but that's the good rule of thumb. In terms of how we're thinking about the overall expense standpoint, you've heard us talk about how AAA video games, some of them can be very, very expensive. We are not playing in that range. You've heard us talk in the The previous calls that, you know, our development budgets are anywhere from, you know, call it $100 million if we're working with partners up to call it, you know, $200, $250 million. So that's the range of outcome in terms of absolute expense and absolute depreciation that you'll see come through the P&L. Now, obviously, that's the P&L impact. As we launch the game, as we, you know, have the units, have the revenue, there's going to be a pretty material uplift in our cash flow. So we kind of have to look at it through what's going to happen in the balance sheet, that capitalized asset comes down, P&L, the depreciation hit goes in, but then we have a nice uptick in our operating cash.

Does that help, Stephen?

Our next question is from Christopher Horvitz with JPMorgan Chase. Please proceed.

Thanks. Good morning, everybody. So maybe talk a little bit about what the gross net headwinds from tariffs were in the third quarter. As you churn through more sales, does that dollar headwind actually worsen as you get into the fourth quarter? And then stepping back, thinking longer term about the potential profitability of the CP business, Is the expectation ultimately that you can get the tariff rate pressure back over time through pricing, or does the long-term outlook for CP profitability change?

Got it. Morning. So the tariff pressure in Q3 was roughly, call it, $20-ish million of cost. As we look into Q4, there's a bit more. So it's a bit of a heavier quarter. Still, the net impact is going to be $60 million-ish within 2025. As we look into 2026, we are fully running our tariff playbook. And so as we calculate the various scenarios of where that absolute rate will play out, we're really putting all of our levers to work from how we think about pricing, how we're thinking about our product mix, how we're thinking about our supply chain and how we're managing all of our operating expenses to mitigate and offset the impact.

Got it. But I'm guessing just is the net headwind next year smaller than the $60 million or do we have to lap through something similar? I would think just based on the seasonality of the business that it would be less.

It'll be less next. Overall for the year, the tariff cost itself will be bigger just because we'll have a full year. But the impact, we're still working through what the net kind of impact is as we put all of the levers to work. But the actual tariff cost itself, obviously with four quarters worth, we really didn't start seeing that impact to the P&L until third quarter.

Yeah, Chris, I think if you think about the midterm, in terms of CP and total company. I think at a total company, we're very confident in our operating profit guidance. Our games business is performing very well, well ahead of plan. Our licensing business continues to perform very well and frankly at or ahead of plan. Toys were, I think, in the early innings of getting to the growth portion of the turnaround, which is great. And so from a top line perspective, I think we feel good about the guidance we gave in February. I think from a margin perspective for the CT business, if tariffs persist at a 20 and 30 percent range, it probably carves off a couple points of margin from the expectations for that business. So low double digits probably becomes high single digits. if nothing changes on the tariff front and nothing changes on the nature of the business. I think it's a little too early for us to call that ball. For CP, we feel pretty good about the partnerships we're inking, K-pop Demon Hunters just being the first. That's probably one of the hottest new entertainment properties of the year. We love what's going on with Star Wars and Marvel in terms of their content and how those brands are coming roaring back. So, you know, I think we'll have a more wholesome, a more fulsome update come February when we talk about 2026 and an update to midterm.

Got it. And then my follow-up is a follow-up to a prior question about Magic next year. Can you talk about, you know, how big is Final Fantasy this year? Obviously, it's played out exceptionally well and you have this holiday set. And as you think about the content that you have for next year, Is the strategy a little bit of like all of those UB sets combined are sort of like an aggregate become bigger? Or do you think maybe the Star Trek set, for example, could be actually bigger than Final Fantasy? Thanks so much.

Final Fantasy is a record-breaking set. It's already the biggest set in Magic's history. I won't tell you which one next year we think could rival or beat Final Fantasy, but we definitely see at least one that we think can do that.

That's good.

I think I'll stick it there. We haven't shared with you guys the content lineup that we have for 2027 and beyond, but we also feel pretty darn good about the partners we have lined up. This is a great deal for Magic in terms of hey, we get access to some of the premier IP in the world. It's a great opportunity for the partners because really there's never been an opportunity for them to access the trading card business. Certainly at the scale Magic the Gathering is delivering for them. And so we pretty much have had our pick of partners. And so I think if you can conceive of a collaboration that we could do with Magic, we probably have inked a deal or in conversations on a deal on that. So, you know, I think, again, we're still at the relatively early innings of what Universus Beyond can do. I think there's upside in terms of what the sets can do in the future. And then I think that's also just going to be buoyed by a very long and lucrative backlist as well, which we've been seeing play out in 2024 and definitely in 2025.

And we should probably say that our own Magic IP is also performing quite well.

Yeah, I think that's a great point. You know, people aren't just coming in and buying Final Fantasy. People are coming in and buying Edge of Eternities. They're buying other sets. And so we've also been setting records with what we've been doing with our own sets as well. So there's a nice halo here.

Our next question is from James Hardiman with Citi. Please proceed.

Hey, good morning. So to that last question, Chris, I'm not going to ask you which set you think can beat Final Fantasy. It sounds like. But I am curious. This K-pop Demon Hunters press release did mention Wizards of the Coast. You know, curious what the thoughts are there, how those two could integrate. And then just on the margin side of Wizards, you know, we came into the year thinking that margins would be down pretty materially. And obviously that's not going to be the case, you know, any thoughts on how to think about wizards margins into next year and, you know, any color on the royalty piece would also be helpful.

Yeah. We're pretty excited about K-pop. Um, I remember the weekend it came out, I watched it and, uh, sent a text over to Tim who runs our toy business. And I'm like, uh, why haven't we talked to these guys? Cause this thing's awesome. Uh, if you look at my Spotify playlist, it looks like a 12 year old kids. Uh, you know, I got soda pop that golden on there, uh, along with some other stuff. So I'm pretty, I'm pretty jazzed for K-pop. You know, we're working with Netflix, uh, Mattel's doing basically dolls and figurines. We're basically doing just about everything else. Uh, plush games, trading cards, as you mentioned, for something like Magic, as well as electronics and role play. So I think that's going to be a pretty lucrative license that's had incredible staying power. And frankly, it's just the first new partnership inside of our toys business that we're going to be really excited to share more details about over the coming couple quarters. I think there's a lot of reasons to believe that our toy business is in the early stages of a long-term growth, from entertainment to toy partnerships to new licenses, so I think that's good. And on your question about Magic, I think Magic has proven that it can fit a large number of IPs. One of the best-selling Secret Lair products of all time was SpongeBob SquarePants. And if we can figure out how to get people jazzed up about SpongeBob SquarePants collectible cards, I'm pretty sure we can do it with one of the biggest movies of all time.

And if you look at the margins, we're not going to get into 2026 guides today. But we've always said that our Wizards segment is going to be in that high 30s, low 40s. If you look back over our recent history, you'll see that we're dancing around those levels over multiple years. And this is where we're going to expect to run that business. And that's what we're asking our teams to deliver, even knowing that that is our growth engine. So we're going to continue to make sure that we're making the appropriate investments back into the business. But I would say without giving guidance, we've always talked about a high 30s, low 40s wizard segment. And that's what you should expect from us over time.

Got it. That's helpful. And then just real quick, on the inventory front, there's a lot of discussion, obviously, about shifting orders between 3Q and 4Q. Where are retailers with respect to your product versus last year? I'm assuming... there's a deficit versus a year ago and that we'll ultimately sort of bridge that deficit as we make our way through the fourth quarter. So maybe speak to that a little bit.

Yeah, our retail inventories were down kind of mid to high teens in the U.S. coming into fourth quarter. Our order book has accelerated versus what we've seen in previous fourth quarters. Domestic is actually doing pretty well. DI is maybe a little bit behind. But everything kind of augurs towards continued robust kind of replenishment from our retailers. And I think we would expect that, let's use the mid-teens as kind of like the anchor point. We think retail inventories will be down by the end of the year. But if current trends persist, we'd probably cut that ratio in half. And, you know, that's kind of what underscores our belief that fourth quarter will be a pretty good quarter for CP.

I think this is our first quarter that we've talked about actual restocking happening as we've moved into the fourth quarter. So we're definitely seeing that.

We can see that play through in our early October shipment data.

Our next question is from Alex Perry with Bank of America. Please proceed.

Hi, thanks for taking my questions here. I guess as a follow-up to the last line of questioning, but more consumer products focused, can you help us think about the building blocks for next year for the EBIT margin on the CP segment with the cost saves versus tariff impact versus potential volume leverage? And then I guess on the content side for consumer products, what are you most excited about next year thinking about that? Thanks.

Thanks for the question, Alex. We're not going to get too much into the building blocks for 2026 quite yet. We do think we've got some nice tailwinds as we're exiting the year that set us up nicely from a top-line perspective. Obviously, we've talked about how not having top line creates a D-Lev impact on the P&L. So that flips to positive next year. That becomes a benefit for us. We're actively working all of our levers to offset the margin impact from tariffs. And we continue to stay on our trajectory to deliver that billion dollars of cost savings in 2027. So obviously, The next time you talk with us in February, we'll get a lot more detail on where the CP kind of outlook will be for 26.

I mean, I think a couple of breadcrumbs that are public, you know, certainly we're bullish on the potential of K-pop. We've got a lot of really cool ideas. It's been fun working with Netflix on it in a fairly quick order. We already have a product that's for sale with the Monopoly deal. And, you know, hopefully we'll have a couple pre-orders up for some cool items for fans before the end of the year. And then the content lineup that we have, particularly from the Walt Disney Company, is amazing. You have, you know, Toy Story 5, which always helps to drive Mr. Potato Head sales in a big way. You have a new star Wars movie with, uh, uh, Grogu and the Mandalorian. You have a new Spider-Man movie and you have the Avengers returning to form with Robert Downey Jr. In the role of Dr. Doom. I couldn't imagine a much more stacked content lineup than what we have kind of, uh, forming a tailwind for us next year.

That's very exciting. Um, And I guess my follow up question is on on magic and specifically, could you talk through the magic growth that you're seeing in the mass channel, especially how the universe is beyond strategy sort of plays into it. And I think, you know, based on some of the disclosure, the retail distribution network for for wizards continues to grow nicely, I think. you know, store counts sort of up 7% sequentially versus the last quarter. Can you talk about, you know, sort of where that is coming from and where you're seeing the growth there? Thanks.

Yeah. So hobby store growth continues to pace. Um, I don't think, think it's so much that there's more hobby stores. I think it's just more that are qualifying to become part of the wizard's play network and leaning into magic. And what we tend to find is when a hobby store really adopts magic, it becomes a big section of their mix and they help to propel player growth and player engagement in a positive way. And then mass, it's just a very easy sell with mass. When you go in and say, Hey, Here's a video game that you've sold tens of millions of copies of, like Final Fantasy. There's obvious demand for it. Let's expand distribution inside of Magic. Or, hey, here's a superhero that is beloved and everyone from two years old through adulthood wants to collect and play with like we have with Spider-Man. So that's just caused us to be able to have both incremental placements within the store new promotion within the store, as well as opening up new doors for us, especially in underserved markets for Magic, like a lot of Europe, where we haven't had as robust of a mass offering. And we've been able to do things with, you know, the Tescos of the world and the Carefords of the world with some pretty meaningful and enduring results.

Our next question is from Kylie Koh with Jefferies. Please proceed.

Good morning, and thank you for taking my question. Kind of already touched on this, but I was curious what you were seeing specifically in terms of promotional cadence. One of your peers might have said that it's intensifying heading into the holidays. Just kind of curious what you guys are seeing.

Yeah, yeah. So, you know, we've been pretty choiceful with our pricing through this year. And so, you know, that's benefiting us in terms of incremental promotion opportunities with basically every major U.S. vendor, Amazon, Walmart, and Target in particular. And so, you know, that kind of underscores some of the order growth that we think we can see and the sustainability of our point of sale for this holiday as well. And then last year we had, you know, some replenishment outages for things like board games that we won't be lapping this year that again, we think will kind of help to underscore it. So, you know, as we've leaned in on trying to provide value to consumers, especially in hot categories where we're the category leader in like board games, like action figures, like compounds, the retailers have responded in kind leaning back with us and giving us extra opportunities to share that value with consumers.

And I think it's a bit early to say the quality and kind of when your word intensifying because of the shelf reset and that moving back, we're really just starting to see the impact of promotion start playing through. So, you know, obviously everyone from a retail standpoint, they were really concentrating on all that sitting within Q4.

Gotcha. Thank you for the context. And then I know this is kind of small potatoes, but I was curious a little bit if you could expand on your expectations for the entertainment segment, both in Q4 and then beyond in like steady state as well.

Yeah, good question. Overall, you should expect more of the same on entertainment. You know, it's going to be roughly that same revenue base at roughly that call it 50 to 60 percent margin as we're moving forward. And really think about that. That is all the either the content that we're creating for brands like Peppa or it is rights that we are giving to other studios to develop our IP. The delivery of the revenue gets a little bit lumpy just because it's based on when deals are inked. But overall, that's how you should think about the mix of how it's going to play out this year and the balance of next year.

Yeah, I think we think of entertainment as a long-term brand development pipeline. There's some revenue associated with it. It's advertising that pays for itself with fantastic content partners. And I think at Last Count, we have something like 45, maybe 50 shows and movies and reality TV offerings in development across a range of partners. And we work with the best of the best. We're working with Paramount, Warner Brothers, Netflix, Universal, Disney, you name it, Lionsgate. So, you know, we'll have more to share on that as those kind of deals matriculate. We tend to not announce like a development deal. We tend to wait until it's actually in production. So, you know, those are starting to kind of go through and, you know, probably in 2026, there'll be a lot more to share.

But we're going to continue with the asset-light model. That's why you're going to see just a high margin within that segment moving forward.

Great. Helpful caller. Thanks.

Our next question is from Jamie Katz with Morningstar Research. Please proceed.

Hi. Good morning. I was hoping to touch on product development spend. It has stepped up a little bit in 2025, but I think Given everything that you guys have said about content and innovation coming on, can we think about this staying sort of structurally higher than it maybe has been in the past?

Yeah, I mean, you hit on it. The increase or the step-up that you're seeing is largely driven by wizards and digital. You know, there's some this year within TOI, just as we've kind of revamped our innovation pipeline as we started going out. You've heard us talk about K-pop and securing some of these new licenses, but the bulk of the uptick has been within Wizards. As we look into next year, we're probably at that right watermark level. We've been slowly increasing that cost over time, and we're probably in that zone as we think about next year. Okay.

And then, you know, D&D hasn't really been discussed, but there's obviously a little bit more emphasis on the brand as you guys expand into more space. Can you just maybe help us think about what the long-term growth prognosis is for D&D relative to Magic, or maybe what incrementally it might add to Wizards of the Coast over time?

Yeah, so I think the big thing for D&D is going to be digital games. We have several games in development. We're working with some fantastic creators in that space. And again, like I said, for entertainment, we tend to be a little gun-shy talking about projects too early, but very likely over the next, call it, couple quarters, you're going to start to see more of our digital ambitions come to life with D&D and understand some of the things we have in development. And I think they're going to be pretty exciting. Baldur's Gate 3 was a seminal project. I think it really showed that if we build something that's great, consumers will come. And so there's probably... five projects in development for Dungeons & Dragons across our portfolio, ranging from more casual and kid-oriented to very high-end action-adventure and role-playing games. And that's in addition to a continued focus on building out kind of the core business, the core TRPG, with a special emphasis on D&D Beyond as kind of like the best place to play a TRPG.

Thanks.

Thanks.

With no further questions, ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines and have a wonderful day.