This Company Struggles to Recover From Another Company’s Bankruptcy
When companies enter bankruptcy, investors in that company often suffer large losses. But the bankruptcy of one company can have effects far beyond that single company. At times, a bankruptcy can affect an entire industry and the companies that remain might struggle for years.
Before its bankruptcy filing, Toys R Us was Hasbro’s third largest customer in the U.S. and its second largest customer in Europe and Asia. So, Hasbro and rival toy maker Mattel had to scramble to find new retail locations for their products in the wake of Toys R Us’ disappearance from the market.
While several retailers, including Target, Walmart, and even drugstores, expanded their toy sections this past holiday season, there were still far fewer shelves showcasing toys in 2018 than in previous years.”
One Trade, Once a Week, One Hundred Percent Profit Targets
Simplify your trading with Jeff’s highest-conviction trade ideas. Bullseye Trading is all about 1 trade, 1 time a week, sent directly to your inbox every Monday morning before market open.
It’s that easy.
Learn how you can get one high conviction trade (weekly) from millionaire options trading guru Jeff Bishop.
The loss of shelf space appeared to disproportionately affect Hasbro, especially during the holidays.
In the fourth quarter ended Dec. 31, revenue fell 13 percent to $1.39 billion from $1.6 billion a year earlier.
“2018 was a very disruptive year, driven by the bankruptcy and liquidation of Toys R Us across most of the world and a rapidly shifting consumer and retail landscape,” CEO Brian Goldner recently said in a statement.
The disruption can be seen in the stock price of HAS.
Alternatives Remain Elusive
TheStreet continued. “Since it was announced that Toys R Us would no longer be a major player in Hasbro’s distribution plans, the company has been introducing new strategies to right its sales.
The company has been working on capitalizing on alternative ways of shopping outside of traditional brick and mortar stores and keying in to trends within the industry, like launching lines of toys based on the popular game Fortnite, executives said at an investor event on Friday.
With these changes, Hasbro hopes to return to the same profitability levels it achieved in 2017, the year before Toys R Us closed, by 2020.”
Among the alternatives, “…Hasbro is turning to e-commerce instead of brick and mortar locations and increasingly using social media to reach shoppers. In 2018, Hasbro began using 1-click shopping on social media platforms like Alphabet’s YouTube, Facebook and Instagram.
The company had “320 shoppable social posts” last year, which allows customers to order products easily online and not have to go to a store.
Hasbro has made a big push on social media over the last few years. In total, the company has more than 10 million subscribers across all of its YouTube channels and more than 27 million followers across its brands on Facebook and Instagram.
These social media platforms are a huge part of the lives of one of Hasbro’s biggest demographics of users: children aged three to 12. The company said that 65 percent of this age group uses or owns a tablet and 59 percent of them use or own a smartphone.
Another e-commerce avenue for Hasbro is the newly launched Hasbro Pulse. The website is set to replace Hasbro.com as a place for fans of brands like “Star Wars,” Marvel and “Transformers” to buy toys and other merchandise.
Hasbro Pulse is a hub for collectors and casual customers to purchase goods but also get a behind-the-scenes look at the company and its products. This platform will have a loyalty program as well as the ability to pre-order highly sought after toys.”
Pulse will not replace Amazon, however. Hasbro executives made it clear…that the online retailer is still very much a big part of the company’s distribution plans.
Last year, Hasbro was the No. 1 toy and game company on Amazon in the U.S. and Canada. Amazon was also the largest customer for sales in Europe in 2018.
Another way for Hasbro to drive sales in 2019 is by partnering with Walt Disney’s “Star Wars,” Marvel and even Fortnite to include their brands on its own toys and games.
Hasbro’s Monopoly brand had its biggest year of sales ever thanks to a Fortnite version of the game, which became the No. 1 Fortnite product of any brand, according to the company.
This year, Hasbro has designed one of its largest collections of Nerf guns ever, all under the Fortnite banner. The company expects these toys to do just as well as the Monopoly set did last year.
These initiatives may be useful in the long run, but in the short run, the stock remains locked in a down trend.
A Trading Strategy To Benefit From Weakness
A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.
In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.
Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.
One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.
Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So this strategy will always generate a credit when it is opened and will always have limited risk.
The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.
Source: The Options Industry Council
While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.
You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.
Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
A Bear Call Spread in HAS
For HAS, we could sell an April 18 $85 call for about $4.40 and buy an April 18 $90 call for about $1.92. This trade generates a credit of $2.48, which is the difference in the amount of premium for the call that is sold and the call.
Remember that each contract covers 100 shares, opening this position results in immediate income of $248. The credit received when the trade is opened, $208 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $252. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($248).
This trade offers a potential return of about 98% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if HAS is below $85 when the options expire, a likely event given the stock’s trend.
Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $252 for this trade in HAS.