Hasbro Stock

Good morning, and welcome to the Hasbro Third Quarter 2026 Earnings Conference Call.

[Operator Instructions]

Today's conference is being recorded. If for any objections, you may disconnect at this time. At this time, I'd like to turn the call over to Fred Wightman, Vice President, Hasbro Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Joining me today are Chris Cocks, Hasbro's Chief Executive Officer; and Gina Goetter, Hasbro's Chief Financial Officer and Chief Operating Officer. We'll begin today's call with Chris and Gina providing commentary on the company's performance before taking 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 would now like to introduce Chris Cocks. Chris?

Thanks, Fred, and good morning, everyone. Hasbro delivered another strong quarter with record profitability. Revenue grew 15% and adjusted operating profit improved 52%, with growth across all 3 of our segments. Wizards of the Coast momentum continued, driven by the Magic Flywheel and our Consumer Products business posted another quarter of gains. We're increasing our outlook for the year, which Gina will walk through in her remarks. Despite all of the macro noise in the quarter, we stayed true to our superpower, inspiring a lifetime of play.

We do that by building deep lasting fandom around great IP. Magic is the clearest proof point. Magic revenue topped $600 million for the first time, growing 34% versus last year and beating the record we set last quarter. Strength was broad-based across tentpole releases, backlist and Secret Lair. The Hobbit, which launched in August is the fourth best-selling set in Magic's history, and it did that with a leaner product lineup. Shipments of Reality Fracture, which debuted in early October exceeded our expectations and Backlist and Secret Lair are on track for record years. Looking at Q4, Star Trek, our final set of the year arrived in November and early signs are encouraging. It's drawing Star Trek fans who were new to Magic, which is the core thesis behind Universes Beyond. You can see that demand and engagement. Hobbit prerelease participation across our 13,000 Wizards Play Network partners, was the highest we've seen for a Universes beyond release. And MagicCon Atlanta is sold out with bad sales up nearly 30% versus last year.

The clearest proof is the player base. take the first 9 months of 2026 and compare it with all of 2024, our last year without a tentpole universes beyond release. Organized play participants are up more than 40% with 3 months left in the year. Fans come in through IP they already love and expanded distribution makes it easier to find us. They stay because deep game play, married with best-in-class span experiences distinguishes Magic from other trading card games. In 2027, we expect Magic to grow on top of a record 2026. Each of our 6 tentpole releases next year has a full product suite with scaling production capacity to meet demand, and our fan base and retail distribution keep expanding. At New York Comic-Con, we announced Marvel Darkhold destiny. Our prior Marvel sets brought existing storylines into MAGIC. This one tells an original Marvel story centered on a brand-new character and a companion comic. All 6 sets next year are bangers, and we look forward to telling you more about them in the coming months.

Turning to digital games. At Games Con, we kicked off hands-on previews for Exodus and confirmed in April 7, 2027 launch date. We're excited to get Exodus in front of players with more demos and announcements in the coming months. Warlock, our D&D Action Adventure game, follows in 2027 and was the #1 most wishlist new game from opening night. We'll share more on both titles before year-end. Starting this quarter, we're providing additional information on our licensing business and it's a model we like. It's asset-light, which lets us focus on what we do best, while leaning into our partners' capital investments. Hasbro is a top 5 global licensor with more than $17 billion in annual retail sales, and we plan to build on that position across 5 priorities.

First, we're building an enterprise-wide franchise system that aligns story, product and retail around key moments. Peppa Pig's baby EV initiative is a proof point. Retail sales grew nearly 30%, while we spent 1/3 less on marketing. Second, we're scaling licensed consumer products anchored by Peppa Pig, TRANSFORMERS and MY LITTLE PONY, and extending into Magic and Dungeons & Dragons. Third, we're accelerating location-based entertainment, where we're the #1 licensor in the space. Fourth, we're diversifying digital licensing with a pipeline of mobile, PC and console titles. MONOPOLY GO! shows the asymmetric opportunity when you partner with industry leaders. Fifth, we're using entertainment and music to create fandom that pays off across the portfolio. What connects to all 5 strategies is the same asset-light model, and these businesses generate nearly $700 million in annual revenue across consumer products, digital and entertainment.

Turning to Consumer Products. Revenue grew 4% to $828 million, in line with our expectations, and our toy and game business delivered its fourth consecutive quarter of growth. Marvel product was the standout, with revenues up more than 35%, supported by theatrical releases from our partners at Marvel Studios. We're pleased with the momentum across our entertainment-led brands. Transformers 40th anniversary has been a great moment for fans as we brought the 1986 film back to theaters on Transformers Day, which coincided with strong retail events. In Marvel, Spider-Man remains strong following Brand-new Day and power charge Spiderman is featured in multiple holiday gift guides. Dr. Doom product is on shelf ahead of the Avengers Doomsday debut in December, with several items on retailers' top toy lists. We're entering the holidays with momentum, especially in our focused GEM Squared categories. Those parts have been toy industry that are gamified, entertainment-driven, multi-purchase and multigenerational.

The third quarter showed what happens when we stay true to our superpower of inspiring a lifetime of play. MAGIC is deepening its player base and setting records. Licensing extends our brands through great partners who bring their own capital, and our toy and game business has grown 4 quarters in a row. That is a balanced portfolio and it's the foundation for the outlook Gina will walk through. Before I turn things over, I want to thank our teams and partners around the world for delivering another great quarter. Gina?

Thanks, Chris, and good morning, everyone. Q3 was our strongest quarter of the year with revenue growth and margin expansion across all 3 segments. Revenue, profit and cash flow each came in ahead of our expectations, and the quarter gives us the confidence to raise our outlook again. Net revenue in the third quarter was $1.6 billion, up 15% year-over-year. Adjusted operating profit was $541 million, plus 52%, with an adjusted operating margin of 33.9%, up 830 basis points unfavorable business mix, cost productivity and the benefit of tariff refunds, which I'll detail in a moment.

Adjusted earnings per diluted share were $2.90, up 73%, reflecting operating leverage, higher interest income and a lower effective tax rate. Through the first 9 months, net revenue of $3.7 billion grew 15%, adjusted operating profit of $1.1 billion grew 35%, and adjusted operating margin expanded 440 basis points to 29.7%. Total Hasbro adjusted EBITDA was $605 million in the quarter, up 46% and $1.27 billion year-to-date, up 29%. Our cost transformation program remains on track, contributing $105 million through the first 9 months against our full year commitment of $150 million. Those savings are doing exactly what we designed them to do, absorbing higher royalties and input costs while funding the investment behind Magic and our 2027 digital game launches.

Turning to the segments. Wizards delivered another exceptional quarter. Segment revenue grew 31% to $747 million, with MAGIC growing 34% to $616 million behind the release of the Hobbit, Reality Fracture and solid backlist performance. Third quarter results include approximately $40 million of Magic sales that we had expected in the fourth quarter, primarily related to reality fracture. Predicting the timing of the set is difficult when a release falls right at the start of the quarter, so this is business as usual. Operating profit grew 46% to $367 million, with a 49.2% operating margin, up 520 basis points as volume and mix more than offset higher royalty expense and the step-up in marketing behind our upcoming video game launches. Digital and licensed gaming revenue was $134 million, up 3% with MONOPOLY GO! continuing to perform in line with our expectations.

The print operations decisions we discussed last quarter continued to pay off. Increasing initial print and distribution runs has given us the capacity to meet demand at launch, reduce costs and plan our manufacturing network more efficiently. Across Premier sets, universes beyond, Commander Decks and Secret Lair, we are producing more products than at any point in the brand's history and sell-through is confirming the demand is there to support it. Through 9 months, Magic revenue of $1.6 billion is up 34%, and the ecosystem remains healthy across both new releases and backlist. Consumer Products delivered the margin inflection we have been working towards. Revenue grew 4% to $828 million, with growth across almost all of our markets. Adjusted operating profit doubled to $178 million, inclusive of approximately $48 million of tariff refunds with an adjusted operating margin of 21.5% compared to 11.2% last year.

The underlying improvement is the durable part of the story, and it is broad-based. Supply chain productivity, lower distribution costs, disciplined operating expense and favorable business mix was more than able to offset higher input costs. Through the third quarter, CP revenue of $1.7 billion has grown 3% and adjusted operating margins of 7.7% have grown 410 basis points including the onetime tariff refund recognized in Q3. We also entered the holiday season in good shape operationally. Owned inventory ended the quarter at $359 million, down 10% versus last year. And both owned and retail inventory are clean and well positioned against the seasonal build, and the upcoming entertainment slate. The broader operating environment remains dynamic, and our teams continue to manage it well. The oil-related input costs we flagged earlier in the year are now flowing through the P&L, and the mitigation playbook we built is helping to offset that pressure.

On tariffs, the refunds recognized this quarter related to prior year duties, and we have updated our guidance to incorporate the lower China tariff rate of 12.5%. With greater stability in the trade environment, we are taking a more measured and flexible approach to our sourcing footprint, balancing cost, speed and resilience across our network and we remain focused on exiting the year with a dependable supply base and clean inventory on both sides of the shelf. Entertainment segment revenue was $20 million, up 9% and adjusted operating profit of $18 million contributed at a 91.1% margin driven by favorable mix and deal timing. Beginning this quarter, we are reporting licensing revenue as a separate line on the P&L. This disclosure puts together the licensing revenue for digital gaming, including MONOPOLY GO!, as well as our licensed consumer products business.

At roughly 11% of year-to-date revenue, it is a meaningful and capital-light contributor that spans the entire portfolio, and we believe the added transparency provides better visibility into our primary revenue streams. Total licensing revenue was $144 million in the quarter and $417 million year-to-date, which is down 4%, primarily due to $26 million of nonrecurring items across several licensing agreements in the prior year, as well as tough Kayou MY LITTLE PONY trading cards compares. From a balance sheet and cash flow perspective, through the first 9 months, we generated $907 million in operating cash flow, up 85% versus last year on earnings growth and improved working capital. We ended the quarter with $851 million of cash and $576 million of short-term investments, which are match dated against our November 2026 maturity. We contribute $226 million towards debt reduction and returned $445 million to shareholders through dividends and share repurchases.

Turning to our full year outlook. We are raising guidance for the year. We now expect consolidated revenue to grow 7% to 9% year-over-year on a constant currency basis and adjusted EBITDA to be in the range of $1.575 billion to $1.625 billion. At the segment level, Wizards is now expected to grow revenue between 16% to 18% with operating margins of approximately 44% to 45%. From a phasing standpoint, the fourth quarter carries a step-up in royalties as well as approximately $15 million of marketing spend behind the video game launches. Also note that the approximately $40 million of reality fracture and backlist revenue pre-shifts recognized in the third quarter, shifts out of our fourth quarter expectations. For Consumer Products, we continue to expect revenue to grow 1% to 3% for the year, with an increase in adjusted operating margin to 8% to 10% including the benefit from the tariff refunds.

The fourth quarter margin will step down sequentially from Q3 as the tariff refund benefit was completely recognized in Q3, and Q4 carries a heavier promotional and shipping mix. Entertainment segment revenue is now expected to grow 3% to 5% and with operating margins of approximately 65%. On capital allocation, our priorities are unchanged, but our capacity has grown. First, we continue to invest in the business behind our highest return growth opportunities led by Wizards, digital gaming and licensing. Second, we remain focused on paying down debt and maintaining a healthy balance sheet. Third is based on the continued strength of our cash flow, we are again increasing our share repurchase target for the year from $200 million to $400 million. We have repurchased $149 million through the first 9 months and expect to be active through the balance of the year.

And finally, we remain firmly committed to our dividend. As part of today's release, the Board has authorized the fourth quarter dividends. A few words on how we're thinking about next year. While we're not giving 2027 guidance today, directionally, the setup is a good one. Wizards enters the year with a deeper release pipeline and a supply chain that can support it. And we expect, over time, this segment to continue operating at a healthy margin profile in the high 30s and low 40% range. With 2 video games scheduled for next year, Exodus and Warlock, we expect the noncash amortization to result in 2027 margins in the high 30s range. As a reminder, amortization will show up as a depreciation charge within our cost of goods and it will not be added back to adjusted EBITDA. It will be broken out separately on our cash flow statement, making it easy to identify and added back in operating cash flow.

In Consumer Products, the productivity and mix work we completed this year carries forward, and we expect to build off a structurally cleaner cost base. And as previously noted, 2026 is the peak investment year for digital gaming, which means the spending curve begins to work in our favor from here. As we wrap up, Q3 was a quarter of execution. Wizards is scaling profitably and doing it at a size that was not possible 2 years ago. Consumer Products has delivered 4 quarters of revenue growth and has turned the corner on margin with the underlying improvement holding up even before the tariff recovery. And our cost discipline is funding the investments that will drive 2027 and beyond. We are raising our outlook with confidence, and we remain focused on closing the year from a position of strength. And with that, I'll turn it back to the operator for questions.

[Operator Instructions]

And the first question today comes from the line of Stephen Laszczyk with Goldman Sachs.

Maybe first for Chris. Magic continues to see really nice momentum. I would just be curious if you could maybe speak to some of the drivers of strength that you saw, particularly in the third quarter. What might have outperformed versus your expectations across some of those sets?

And then importantly, as you look ahead, it sounds like you're excited for each of the sets to come next year. I was curious if you could speak a little bit more about what you hope each of those new sets will contribute towards growing the franchise over the longer term or perhaps maybe more generally, what gives you confidence that magic can continue to grow off this higher base from here?

Sure Stephen, thanks for the question. Well, I would say what outperformed in Q3 for MAGIC everything. Reality fracture is one of the best-performing premier sets we've ever done. The Hobbit, despite being a much smaller product release in terms of the total number of SKUs performed like a premier set release with a lot more Commander Decks and supplementary SKUs associated with it. and back list continues to impress with its total number of sales. And I think it's a combination of 3 or 4 things.

First and foremost, it's new player growth and player engagement. The Hobbit prerelease was one of the biggest we've ever had our total number of players who are engaged -store play, which is probably our best kind of proxy for actual engagement is at record players are happy with the sets, giving us great feedback, repurchasing and investing behind them. Our distribution is up. Our distribution is up over 40% in mass over 30% in our WPN. It's broad-based. It's both North America as well as Europe and Southeast Asia. And just in general, I think we're seeing some great kind of category tailwinds as well.

Magic is performing well, but the overall category is seeing a boom and that's just consistent with our overall thesis that on what categories are going to perform, which we call GEM Squared, which is those categories that are gamified entertainment-driven multi-purchase and multigenerational. And I think trading cards over the last year have emerged as the #1 category in toys and games, I think they're actually bigger than building blocks now. and we see that as a generational structural shift and not just as kind of like a onetime thing.

Can I add more fun fact? I thought you'd say this fun fact. But Chris mentioned backlist through these first few weeks here in fourth quarter, our backlist contribution in 2026 year-to-date through these first couple of weeks fourth quarter has already surpassed what we saw in 2025. So to the point of like all of the engines are continuing to hum. We've got momentum across our front lines. We've got momentum across the backlist. And that's going to continue as we move into next year.

And I suppose I'll make it real on one practical item. So the Hobbit, much smaller release in terms of SKUs versus Lord of the Rings. The Hobbit, it's going to do about and maybe even more lifetime than Lord of the Rings will do, despite it being a smaller release, it's certainly done that to date. We would typically expect something like The Hobbit to do 50% to 100%, 50% less than what a comparable more full-featured relief to do. And that's a factor of player growth, player growth and the ability to be able to access product. And so we see that moving forward.

I think the second part of your question was what gives us what gives us confidence in 2027 and beyond, it's all those factors. So fourth quarter, Magic will likely be down, but a big part of that is -- we had some sales that happened earlier this quarter -- or sorry, that happened this quarter that should have happened early next quarter because our supply chain was able to deliver a bit earlier and the channel wanted it. And we have some product in next quarter that we shifted into Q1. So minus those shifts, Magic would have had another growth quarter in the high single digits, low double digits for Q4. Now it will probably be down, call it, low single digits, mid-single digits. But barring that, it would have been up around 8% to 10%. And so instead, you're going to see a big growth like you had a 30% plus in Q3. You'll have a modest kind of decline in Q4, and then you're going to see another big spike in Q1 and we expect the momentum to carry forward in 2027 with continued growth on the back of all those factors.

That's great color. Very helpful. I can leave it there and pass it on.

Our next question is from the line of James Hardiman with Citi.

So Chris, you just gave us a lot to chew on there in that last little follow-up. I just want to make sure I just want to make sure I understand sort of where we were and where we are. I believe your initial and previous expectation was that Wizards would be down in the fourth quarter. You're still saying it's going to be down in the fourth quarter, but had you not moved the timing both from 4Q into 3Q, and from 4Q into 1Q of next year, we would now be talking about Wizards going from being down to being up high singles, low doubles. Just want to make sure I have all those moving pieces, right, because certainly, one of the big questions we're getting a fourth quarter that was worse than sort of where the Street was thinking about it, just need to make double-check that.

Yes, you totally captured it, James, I think the bottom line on Wizards is we manage the game for the fans and not for quarterly results. Like that should be an expectation moving forward. We're going to pace the sets based on the logical pacing, especially as we do more kind of IP collaborations and we're working with outside companies to make sure that we make the biggest moments possible. And I think the honest answer also is we're chasing demand.

Like we're going to be opportunistic about when we supply. Our supply chain team is doing a great job. They're helping like chase one of the hottest categories in toys and games. And those 2 factors, occasionally, we're going to have a quarter that's down modestly. But I think you can count on the fact that, that's not a demand signal. That's just the timing of when we ship and the timing of when we have product available. And a factor of when we chose to make a product available based off of the best possible time for our channel partners and for our fans.

Yes, the add I'd have kind of quantitatively, when we were sitting in July doing earnings and looking at our Wizards back half, we have thought that it would be up collectively, call it, low single digits. Now we're going to exit the year with a back half that is, call it, high single digits, low double-digit rates. So the overall improvement or kind of momentum of Wizards is continuing. To Chris' point, like there are things that can shift meaningful revenue as we're seeing, like 1 week can make a difference, a meaningful difference in the quarter.

And I think you've got that compounding factor of just when we're launching our first set in and now reality fracture of how much was shipped that first week that just take Q4 down, but the overall back half is well ahead of our expectations.

Got it. That makes a ton of sense. I just think everybody is, I think, rightfully just trying to understand what's signal and what's noise here for sure.

Yes. We were staring at the same math ourselves as we were prepping and we knew that was going to be the top -- one of the top questions.

So did we answer both your questions?

So actually I did have a second question on sort of margins, but it's the same sort of general topic of sort of signal versus noise, margins for Wizards just continue to blow away. I think even our most optimistic expectations were pushing nearly 50% year-to-date. Obviously, you've talked about that being in the high 30s next year.

I guess what I'm trying to figure out is how to think about sort of core Wizard margins. Obviously, there are some, I don't want to call them onetimers because maybe that's the new normal. But is there any reason to think that relative to the really strong performance here year-to-date that core Wizards margins would actually compress in 2027 or is it just some of the things that you've laid out, obviously, video games and some of the other, if you want to call them, idiosyncratic factors. Maybe help us think through sort of core versus other items in the context of 2027 and beyond.

Sure, sure. Good question. I mean, obviously, this year, the volume growth that we're seeing on the business kicks off a favorable tailwind on leverage, so that you see that showing up in our '26 margins. And as we look forward to '27, as we've talked about, we expect the Wizards business to grow. We expect that to be, call it, mid- to high single digits in that range. But we're not going to plan for that business to grow at the double-digit rate that we're guiding to now. So there's a little bit more leverage that kicks off in '26 that we we'll see some leverage next year, just not as great. But to your point, the single biggest thing that will weigh on our margins next year that will keep it in the high 30s is that amortization expense. That will flow through for both games.

And remember, as we've talked about Exodus, now we have the launch date of Exodus being April 7. And the first 3 months, we'll see the majority of that amortization flow through. So it will be a Q2 event where we'll see most of that -- or I would say, 65% of that cost come through 85% of the depreciation hits within the first 12 months. So we'll then pick up some to Exodus as we go through the balance of the year and then we get -- we've got Warlock that's coming kind of in the back half. So that's probably the single biggest atypical thing in '27 that will weigh on margins. Everything else, it puts and takes. We're going to royalty expense might be a little bit heavier just given our UB set releases, but that's within the realm of reason. We'll have puts and takes within operating expenses. We'll continue to expect cost productivity to offset inflation. It's really the amortization expense.

Our next questions are from the line of Xian Siew with BNP Paribas.

You talked about player growth and how that's kind of driving MAGIC: THE GATHERING demand. But can you also maybe talk a little bit about repeat players and what you're seeing in terms of players once they come into the ecosystem, be it maybe via UB or something else and then kind of staying and maybe spending more. Curious on that.

Yes, for sure. I think the best proxy for that is backlit sales. And as Gina mentioned, we already have sold more backlist this year than we did all of last year. that continues to grow at a rate as impressive as our front list is growing, backlist is actually growing faster. And I think that's a factor of we're bringing new players in, especially on things like universes beyond some Marvel fans, Avatar fans, turtle fans, Star Trek fans, and they decide that they really like this game and then they go and buy more sets and not just the Star Trek that they go and buy a reality fracture.

They'll go by Noctis, which is our first set -- our first premier set next year and they become magic fans and they stick around like a Magic fan and behave like a magic fan, which is usually a 5- to 7-year period of time where they play the game actively. And occasionally, they'll put the game down for maybe a year or 2 because they have a life stage, but then they come back. So Magic is a really special game. It's one that we don't measure retention in days and months. We really measure it in the years and generations and the new fans that we're attracting are just as engaged and just as valuable as the more traditional fans that we've had over a 35-year history.

And maybe one other point of fact -- when you look at our backlist sales -- sorry, for this last quarter, to Chris' point of like the people coming in, playing the game and sticking our largest sets that sold for backlist in terms of distribution with foundation, Final Fantasy and believe it or not, Lord of the Rings. And that was our -- Lord of the Rings for those newer to the story. That was our very first Universes Beyond set that we did. Is that '23? 23.

Yes. Sorry, you had question 2?

You had 2 questions. Yes, we're excited about that

No, makes sense. And then maybe on '27, I think I heard you say Wizards maybe can grow in the mid- to high single-digit range. I guess that's including some of the maybe incremental video games. But maybe zooming in a little bit on Magic. You also mentioned kind of the full product suite for all of the tentpole sets, scaling supply, you've grown distribution. So I don't know, it sounds like you've -- fuller set more supply, higher distribution, higher player count. It sounds like it's still setting up quite strong for '27. And any kind of further thoughts on that?

Gina's comment on mid- to high single digits was Magic, not Wizards. So we expect Magic continue to grow at pace.

The next question is from the line of Arpine Kocharyan with UBS.

And thanks, Chris, for that clarification. That was going to be my follow-up question to you because as we think about Exodus absolutely add to the top line. But the question really is related to MAGIC THE GATHERING distribution that went up further this quarter. Could you maybe talk a little bit about what's driving that? And should we expect to see further expansion in Wizards Play Network sequentially as we get into Q4 and into 2027? And then I have a quick follow-up.

Sure. I think you should expect, as long as the hobby is growing and there's vitality in the player base, I think you should expect new player, new store growth to follow new player growth. In through third quarter of 2026, we've seen about a 38% growth rate in the number of WPN stores. We have over 13,000 now. On mass, we've seen about a 28% growth rate on the number of stores, like Magic is available now in close to 40,000 doors. And that's just a testament of more people were buying Magic and more people are buying in the category and more retailers want to be part of that story, whether it's a GameStop or a Walmart, or a care for or a Smith, or a MAX boarding house style, we see a lot of upside there.

And there's many more hobby shops and game cafes and board game cafes than 13,000 around the world. Those are just the ones that qualify into the Wizards Play network today and many, many more of them ask us to become part of that because they see the benefits of being part of our engagement loop and part of our reward cycle.

That's very helpful. And just to switch to Consumer Products, just because we're in the back half of the year and holiday ahead of us, you've talked about consumer products up low single digits for Q4, is that still the case? How you're thinking about Q4? And just for housekeeping and math purposes, what's your as reported implied revenue guide, is it around 1 percentage better than constant FX of 7% to 9%? Am I calculating that correctly?

Yes. Yes, you're calculating that correctly. On -- overall, as we look at consumer products, again, looking at the back half of the year, we expect the back half to be up low single digits. I believe that means our Q4 it will be flattish, maybe slightly positive. Another similar story like Wizards, where we had a pretty big comp last year because of all of the goofiness on tariffs and shelf set timing changing, replan orders were stronger in fourth quarter last year.

So overall, our back half is really strong as the retailers have moved to kind of more normal shelf set timing and shipping patterns, but there is a little bit of comp noise in our Q4 for CP as well.

The next question is from the line of Eric Handler with ROTH Capital.

First, I wonder if you could just be willing to dissect a little bit the Magic revenue, like what percentage of the revenue is frontline versus backlist versus secret lair? And how has that changed, like, let's say, going back 2 years -- 2, 3 years?

Good morning, Eric. Yes, we -- thank you for the question. We typically don't provide those levels of splits. It's suffice it to say, just given kind of how our frontlist is stacked. The majority of our revenue comes from the front list. The growth rates, as Chris was saying, like the growth rate on backlist has been pretty strong. Our growth rate on secret lair, but the majority of the revenue is going to come from that front list.

Okay. That's helpful. And then there has been a lot of concern, macro concerns about will the consumer potentially roll over a bit, just given inflationary concerns and consumer sentiment. It doesn't seem like there's really any concerns with Magic. When you look at your Consumer Products business, how are you thinking about that with your 4Q product line?

Yes. We're continuing to see a pretty resilient consumer especially given how we've shifted our portfolio and our portfolio mix to those Gem-squared categories, we're definitely seeing momentum there. So there's nothing that we see going into the holidays that has us concerned about the consumer.

Our next question is from the line of Anthony Bonadio with Wells Fargo.

I wanted to ask about 27 sets and specifically Marvel Darko. I know you guys sort of talked about the alignment of Marvel sets and your fan base. This one seems like it might be a little more synergistic. I guess just thoughts on that expectations there? And then maybe more broadly, just how you're thinking about the quality the 27 sets you've announced so far versus what you put out this year?

Well, I think a couple of things. [ Darko ] Destiny should be pretty cool. It's an original storyline. There'll be an original character. I think it really represents how we want to work with partners. We want to represent their IP authentically. And ideally, we'd like to make them really a part of Magic. And I think this is a great example of it. I think fans will be excited by it. It will -- like there's been some jokes a little bit in the fan community about how New York was one of our most frequent settings for Magic sets over the last year. And I think this kind of brings Magic into superheroes and Marvel style action and characters and storytelling, which should be fun.

I think an important thing you and all of the analysts should also be thinking about is the composition of the sets. So this year and for the last couple of years, we've had sets that have had Commander Decks in them, some sets that haven't had Commander Decks and some sets that have had a full suite of collectible products, some sets that have had a more limited suite of collectible products. Next year, each of our 6 major sets will be full sets. They'll have all the Commander Decks and all the collectible products associated with them. And then as I mentioned, we see upwards of a 50% or even greater difference in sales per set when you have that full product suite. And so that's something I think you need to factor in as well.

We haven't shared all the details about all the sets next year. There's a couple secret ones in the back half of the year that we think our fans will be pretty excited by. I think needless to say, we feel like all of them are going to be super high quality, really great IP, and we've had great partnerships with each.

Super helpful. And then maybe just 1 quick on Exodus. Just any changes to how you're thinking about the range of outcomes there? And now that we've got the April 7 date, just key data points to watch from here as we get closer to that at least.

Well, I think the biggest thing that we're looking for is kind of wish list and preorder activity. And on which list so far, so good, it's approaching 1 million wish lists, which based on what we're benchmarking from releases over the last couple of years, that's benchmarking pretty favorably. We're going to have a big December. Actually, we're going to have a big couple of months about new news associated with the game, but in particular, we're going to have some major news on the game in December, and we'll be watching those metrics very, very carefully as we kind of head into the end of the year and shape our thinking about what we expect it to do commercially when it launches in April.

The next question is from the line of Gerrick Johnson with Seaport Research.

First question, can you just go over the retail sales, the POS in the quarter for both Magic and Consumer Products?

POS overall for us in the quarter was, call it, up low single digits overall. I think that includes when I'm saying that, that's just in toy and game, yes. yes. And the trading cards would have been kind of up high single digits, low double digits numbers. Yes. there's a little bit of a timing lag of when we're doing this call and we'll see final September results come in actually today. So maybe when we talk later on today, Gerrick, we'll have some more additional information.

But overall, categories we're performing. I think most notably, we should look at how our Gem-Squared categories are performing year-to-date and those are up almost 14%. So again, when you think about our strategy and how we're shifting our portfolio mix to have those categories growing at a kind of low double-digit pace, that's a good thing for us.

Okay. Great. And one follow-up. Can you just discuss the distribution of Magic understanding use distributors for your hobby shops and then I guess you go direct to mass. Can you just discuss how you do distribute between the 2 channels and what maybe the margin differential might be. But also, the lag between when you recognize revenue and when perhaps the hobby shop realizes retail sale?

Gerrick, we use distribution quite extensively for both channels. We do do direct for some. But I would say the vast mass vast majority of what we do is through distribution. And the margins are pretty comparable between distribution and direct for us. We've got a lot of good partnerships usually in a given territory, like in the U.S., I think we have somewhere in the neighborhood of 6 to 8 major distributors in Europe. I think we have a bit less, but it's still like 3 or 4.

We want to make sure a hobby shop has a choice and can get fulfilled real time. Usually, our typical hobby shop gets fulfilled in an order in 24 to 48 hours from when they ship it. And usually, our distributors will take products anywhere from -- on the low side, 2 weeks, on the high side, 6 weeks before a major release. And really, that just has to do with the composition of when the product is ready, when we can ship it out and how complex the release looks like.

Our next question is from the line of Andrew Didora with Bank of America.

I guess, Chris, Magic gets a lot of the airtime and rightfully so, but I just wanted to turn to the consumer products piece for a second. I guess how do you think about the medium-term growth prospects within that division? Is this a segment that can sort of eke out low single-digit top line with some modest margin improvement? Or do you think about that segment differently?

I think our Consumer Products division inside of the midterm can do better than low single digits. If you look at just like the new licenses that we have for 2027 alone, we'll start shipping Harry Potter at the very tail end of this year. I think the series debuts in the Christmas time frame. Then we'll follow that up with a full line in Q1 and Q2. We'll have the Legend of Zelda, which is a brand-new license for us. We'll have 3 quarters of K-Pop Demon Hunters that effectively have had no comp. And then you're going to have another stacked movie lineup next year.

You're going to have a new Spider-Man movie, you're going to have another Avengers film. Star Wars 50 is the anniversary, the Legend of Zelda the movie, the new Harry Potter series, which I got -- I was lucky enough to do a tour of the set as magical, like no pun intended. I think all of those combined really sets up for a healthy 2027. And frankly, it's pretty favorable for 2028. And then from a margin perspective, as we drive incremental upside in terms of the top line, you just get some favorable leverage from that. And then I think our CP team has done a good job with managing their costs and getting that to something that we think is a lot more competitive.

So I feel like we can get CP margins my goal is to get it into the double digits and make it be really resilient in that midterm time frame, which is consistent with the guidance that we've given you guys.

That's great color. Just a quick follow-up. I know you spoke in your prepared remarks about your spending curve being torque in your favor. I think the CapEx guide this year was $225 million. You've done about $200 million or so the last several years? Just how should we think about CapEx over the next 18, 24 months? And is the savings that you have there, should we think about that going towards shareholder returns?

Got it. Yes, the commentary specifically was on our digital CapEx coming down. And I believe we said last quarter, by 2028, those development costs will be down 20% to 25%. To your point, since we've been capitalizing that, that will come directly out of that $225 million of dollars that we were using. And in short, yes, as that cash flow frees up, it gives us flexibility to either reinvest back into the business to fund more towards share repurchases or to continue to buy back debt.

At this time, this will conclude our question-and-answer session, and will also conclude today's conference. We thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.

Good morning, and welcome to the Hasbro Second Quarter 2026 Earnings Conference Call. [Operator Instructions] 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 Wightman, Vice President, Hasbro Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Joining me today are Chris Cocks, Hasbro's Chief Executive Officer; and Gina Goetter, Hasbro's Chief Financial Officer and Chief Operating Officer. We'll begin today's call with Chris and Gina providing commentary on the company's performance before taking 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'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 Cocks. Chris?

Thanks, Fred, and good morning, everyone. Hasbro delivered another strong quarter, capping off a remarkable first half of 2026. Despite headwinds from oil and trade policy, the business delivered 15% growth for the first half with profits up appreciably.

Wizards continues to grow at a strong clip, the toy business posted another quarter of growth, and our momentum is broad-based with Magic, D&D, Hasbro Games, Peppa Pig, Star Wars and Marvel, all showing solid year-over-year performance.

Magic is off to a ripping start, up over 32% in Q2 and over 34% in the first half. And on that strength, we're raising our full year Wizards outlook, which Gina will size in her section.

Marvel Super Heroes set a record for day 1 and month 1 revenue and became the fastest set to reach $300 million in revenue with solid reorders and sell-through.

The Hobbit is also tracking like a fan favorite. And the growth is broad-based, expanded distribution, real player growth and Universes Beyond continuing to pull new fans in through IP they already love.

I'm not surprised by the level of interest and questions we get about Magic, while it's by far our biggest brand, in many ways, it's also the least understood. So let's define it.

While Magic's routes are based in the thousands of local game stores around the world, Magic is not a niche hoppy business. It is a mega franchise. Magic: The Gathering belongs in the same company as Pokemon, EA Sports, World of Warcraft, and Minecraft. Profitable, durable franchises built to compound for decades.

What sets Magic apart is longevity. Magic has been compounding for more than 30 years. It's also a deep game, and that depth and complexity is precisely what our players love. Magic fans play and collect for years because mastery never ends, and that retention is what powers a robust secondary market and a passionate community of tens of millions of fans who treat the game as a lifelong pursuit rather than a passing trend.

The numbers beared out. Since 2009, our tabletop and digital Magic businesses compounded revenue at over 17% a year and grew in 15 of the last 17 years. And those 2 years, it didn't grow, each were declines of less than 3%.

Step back and look at Magic over any real horizon, and you see one of the most consistent compounding franchises in entertainment, a genuine peer to the biggest names in gaming. It is a leader in one of the biggest categories in toys, collectibles and games. And with Universes Beyond, it is bigger than just a game. It is a platform with platform-level economics and potential.

Turning to Consumer Products. Revenue grew 5% in the quarter, and our toy and game business delivered its third consecutive quarter of growth. We're continuing to see benefits from our focus on GEM-squared categories. Those parts of the toy industry that are gamified, entertainment-driven, multi-purchased, and multigenerational, which continue to outperform the broader industry.

We're continuing to expand the reach of our brands through product innovation and partnerships. We recently launched Blooms, our new aged up product for Play-Doh. Response for consumers, creators, and retail partners has been strong, with the initial launch selling out at major retailers in less than 24 hours.

And late last week, we announced a multiyear licensing agreement with Nintendo to develop products inspired by the Legend of Zelda franchise. You'll begin to see that collaboration come to life in 2027, starting with product reveals at San Diego Comic Con later this week.

Our licensing team continues to extend Hasbra's brands through great partners and new categories. Tonies launched the first Hasbro games for Toniebox 2, delivering the strongest preorders in Tonies' history.

Kayou brought My Little Pony trading cards to the U.S. and Monopoly Big Board Bucks became one of the premium slot titles in the industry from our partners at Aristocrat.

Taken together, our second quarter results reinforce what makes Hasbro different. Magic continues to lead the category for product innovation and fan engagement. Licensing is expanding the reach of our brands across categories and channels. And in toys and games, better execution and stronger decision are driving growth. That's a balanced portfolio built for durable long-term value.

Before I turn things over to Gina, I want to spend a few minutes on digital. Over the last several quarters, we have reviewed our portfolio and updated our plans for Hasbro's digital future. That work included canceling several games scheduled for release in 2028 and beyond and recording a $56 million non-cash write-down this quarter for related capitalized costs.

The write-down reflects the standard we are applying a portfolio. We are focusing our digital investment behind the franchises, platforms and partners where we see the clearest upside and where Hasbro has the strongest right to win.

Four priorities will guide our digital strategy: focus, cost discipline, ownable platforms and partnership. First, focus. Our digital investment will center on trading card games and role playing games with brands that can become a significant digital franchise and expand across media over time. We already have strong proof points. Magic: The Gathering Arena is one of the most successful digital TCGs of all time.

Baldur's Gate 3 is one of the biggest and most awarded role-playing games of the last decade. Exodus and Warlock are our next 2 significant owned games, both planned for 2027. Exodus extends our role playing strength into science fiction. Warlock expands on one of the most popular classes in D&D. Both meet the bar we are setting for owned publishing, big audience potential, strong genre fit, franchise potential and meaningful opportunities beyond the initial game.

Second, cost discipline. 2026 should be our peak year for digital investment as Exodus and Warlock enter their finishing phases. As we move into the next generation of games, our model becomes more efficient. We are past the start-up phase. We now have more mature tools, teams and production processes. We are shifting more development to lower cost regions with strong talent with Montreal as our base for digital games. And we are increasingly co-developing and co-publishing with partners who bring genre expertise, operating discipline, and cost advantages. As a result, we expect our total digital spend to decrease at least 25% annually by 2028.

Third, ownable platforms. Hasbro already controls 2 of the more valuable platforms in TCGs and tabletop role-playing games. Magic: The Gathering Arena has generated nearly $1 billion since its introduction in 2019. The D&D Beyond has more than 30 million registered accounts and reaches more than 3 in 4 Hobby role playing games each year.

We also recently announced CharacterOS, our new behavioral licensing platform. CharacterOS is early, but it is a comparatively modest and scalable B2B investments that can bring Hasbro characters into new digital context from location-based entertainment to customer support to interactive avatars. A dozen Hasbro characters are already available for licensing pilots through our Sixth Wall AI studio and our close partner, ElevenLabs' iconic marketplace. Arena, D&D Beyond, and CharacterOS are uniquely Hasbro opportunities with attractive underlying economics and meaningful upside.

Fourth, partnership. As Scopely previously shared, MONOPOLY GO! is on track to exceed $8 billion in lifetime revenue this summer. It proves that Hasbro can create major digital economics without carrying all the costs and risk ourselves.

Going forward, Hasbro will lean into a focused set of platforms and genres to create community hubs and major franchise moments for our brands. Our partners will help us scale with more than 200 projects that are active or in development across mobile, casino gaming, console and PC. That includes work with Scopely, Aristocrat, Tripledot, Marmalade, Gameberry Labs, Ubisoft and Gameloft.

So the digital strategy is straightforward. We are taking lower conviction projects out of the portfolio, reducing our annual spend base and concentrating investment behind the places where Hasbro has the best chance to build durable digital franchises. Magic, D&D, owned platforms, partner-led economics and a concentrated number of high conviction on titles.

Hasbro is already the #1 digital life there in the world between our internal teams and a robust partner road map. Our plan is to press that advantage for more upside for our brands and our investors.

Now I'll pass it over to Gina to share more about the numbers and the growth we delivered across our brands and segments. Gina?

Thanks, Chris, and good morning, everyone. We delivered another strong quarter with continued revenue momentum across both Wizards and Consumer Products and focused operations as we fully recovered from the cyber incident.

In the second quarter, net revenue was $1.14 billion, up 16% year-over-year, with growth across both Wizards and Consumer Products. Adjusted operating profit was $282 million, up 14% versus last year, with an adjusted operating margin of 24.8%, down about 40 basis points driven by incremental operating expenses and a non-cash impairment as we tightened the scope of our digital gaming efforts initially planned for release in 2028 and beyond.

Adjusted earnings per diluted share were $1.28, down 2% as a result of the write-off. Through the first half of the year, net revenue of $2.1 billion grew 15%, adjusted operating profit of $569 million grew 21% and adjusted operating margin expanded by 150 basis points, largely driven by the outperformance in Magic.

Total Hasbro adjusted EBITDA was $330 million in the quarter, up 9% and $670 million for the first half, up 16%. The savings across supply chain, product development, and operating expense continues to support margin even as we absorb higher input costs, royalties, and ongoing investment behind our upcoming Digital Game launches in 2027.

Through the first half, our cost transformation program remains on track, contributing $70 million against our full year commitment of $150 million.

Turning to the segments. Wizards delivered another stellar quarter. Segment revenue grew 27% to $664 million, powered by Magic, which was up 32% behind the release slate of Strixhaven and Marvel Super Heroes.

Operating profit grew 12% to $270 million, and margin came in at 40.7%, down 560 basis points from a year ago due to the impairment. And during the year, we made a deliberate decision to increase initial print and distribution runs for Magic releases. That reflected our confidence in the strength of the brand, while also improving operational efficiency and positioning us to better meet demand at launch. We saw the benefits of that strategy in the second quarter.

Our operations team, together with our print partners, successfully executed the largest Magic premier release in the brand's history with Secrets of Strixhaven, followed by our largest day 1 release with Marvel Super Heroes. Delivering both milestones in a single quarter speaks to the progress we've made in scaling our supply chain and manufacturing capabilities, and we're continuing to invest in those capabilities across products, regions, and formats from Secret Lair drops to Commander Decks, we're expanding production capacity to better serve players while supporting the long-term growth of the Magic franchise.

Consumer Products revenue grew 5% to $463 million, with the North America business up 17% as we lap the impact from last year's later shelf set timing. The revenue impact from the cyber event was less than we forecasted with our operations being fully restored ahead of schedule.

In total, approximately $25 million of revenue was lost in the quarter compared to our previous assumption of $40 million to $60 million. Adjusted operating loss was $7.5 million due to higher input costs, royalties, and timing within our operating expenses.

Entertainment segment revenue was $12.8 million, down 20% against the difficult prior year compare and adjusted operating profit of $8.6 million contributed at a 67.2% margin, up more than 400 basis points on favorable mix within Family Brands and Film and TV.

From a balance sheet and cash flow perspective, through the first half of the year, we generated $604 million in operating cash flow, contributed $147 million towards debt reduction and returned $239 million to shareholders via dividends and share repurchases.

Regarding the cyber incident, operations are back to normal. Cash flow remained healthy throughout the quarter and outstanding receivables are in line with historical averages. A huge thank you to the technology, finance and operations teams who successfully navigated the challenge.

Our performance through the first half of the year puts us on pace to exceed our initial expectations. In the second quarter, we accomplished several milestones, including exceeding expectations on our Marvel Super Heroes launch, resuming normal business operations and executing the playbook to offset rising oil costs.

Turning to our full year outlook. We are increasing our guidance for the year. We now expect consolidated revenue to grow 5% to 7% year-over-year on a constant currency basis, with growth across each segment.

We are raising adjusted operating margins to 25% to 26% and adjusted EBITDA in the range of $1.45 billion to $1.5 billion. At the segment level, Wizards is now expected to grow revenue in the low double-digit range, with operating margins continuing in the low 40% range as volume growth more than offsets the impact of higher royalties, the digital game [indiscernible] and operating expense.

On operating margin, the back half includes a step-up in royalties as well as operating expense including approximately $20 million of marketing spend associated with the video game launches.

For Consumer Products, we continue to expect revenue to grow low single digits for the year with adjusted operating margin in the 6% to 8% range. Overall volume growth and cost productivity will offset higher royalties and inflation. The lost revenue in Q2 is expected to be recouped in the back-half behind the entertainment slate and as we accelerate innovation for the holidays.

Back-half operating margin will be buoyed by cost productivity across the P&L, including distribution, advertising and promotion, and operating expenses. Entertainment segment revenue is expected to be slightly positive year-over-year with operating margins of approximately 50%. As we look forward into 2027, we continue to expect that Wizards' operating margins will remain in the high 30% to low 40% range, inclusive of the video game releases and amortization expense.

As Chris mentioned, we believe 2026 is the peak investment year for digital games, and we expect total digital spend to decline by at least 25% in 2028. For 2026, we are making a slight change to our capital allocation priorities for the year. We will continue to invest in the business, specifically behind our highest return growth opportunities, led by Wizards, digital gaming, and licensing.

Second, we remain focused on paying down debt and maintaining a healthy balance sheet. Based on the underlying strength in our cash flow, we are increasing our share repurchase target for the year from $100 million to a minimum of $200 million, and we remain committed to our dividend. As part of today's release, the Board has authorized the third quarter dividend.

As we wrap up, was an important milestone, putting us on track for another year of growing both the top and bottom line. Wizards continues to be our biggest driver of growth. Consumer Products is navigating near-term cost pressure, while continuing to grow the top line and our cost discipline is giving us room to invest behind the business. We are raising our full year outlook with confidence and we remain focused on translating this momentum into results for the balance of the year.

And with that, I'll turn it back to the operator for questions.

[Operator Instructions] And our first question comes from the line of Stephen Laszczyk with Goldman Sachs.

Maybe first for Chris. One of the biggest debates around the stock at the moment is around the durability of growth for Magic, both as you look out into the second half of this year. But then as you look out into 2027 and beyond, you called out the Magic Flywheel firing in all cylinders. I was hoping, Chris, you could maybe unpack that a bit more for us. What gives you confidence that Magic can grow off the higher base that we've seen over the last 12 months for the franchise? And then what levers come into focus beyond 2026 that you believe will drive continued growth for the business?

So first off, Magic player base is growing. New players are growing. We're reacquiring lapsed players I think that fundamentally, it all kind of comes down to the math of how many people are playing the game and purchasing cards.

Second, our distribution is growing double digits. It's roughly keeping on pace with overall revenue growth and there's a pretty high correlation with that. We're growing the size of the WPN. We're growing the number of mass market accounts, and it's just easier to be able to buy the product and experience the product, which also helps a lot.

And then third, I think we have some really exciting partnerships and new initiatives planned as well. We had a fantastic lineup of first-party sets this year at MagicCon: Amsterdam last week. We announced what our first-party line-up looks like for next year. We have some really strong, I think, fantasy adjacent Universes Beyond IPs coming up in 2027 and beyond that I think our fans are going to be thrilled by. And I continue to believe there's a lot of upside in digital as we invest in new digital initiatives to expand the game Beyond what we have for Arena.

Now those digital investments, I don't think we will really manifest in 2027. I think those will be more 2028 and beyond. But I think when you just look at a healthy growing player-based, reengaging lapsed fans, a highly engaged existing player base and really strong underlying growth in distribution. I think it gives a bull case for underlying fundamentals for the brand and for continued growth.

Great. That's helpful. And then maybe a second one for Gina. Just on the outlook. We've now seen strong beats for both the first and the second quarter. It seems like Magic has a lot of momentum at its back. I was hoping maybe you could walk us through the puts and takes of the updated guidance for today, the thought process behind the raise. And then to the extent there is upside or downside risk relative to the ranges that you put out today where those would lie in the back half of the year?

Look, we feel really good about our year. And what the implied guidance now is saying is that the front half, we're basically passing through the front half upside that we delivered. I'll break it down by each of the pieces.

So if we look at the Wizards segment and what this means for the back half, our guidance is really unchanged on Waters in the back half of the year. It really factors in that in total, Magic is going to be, call it, up kind of low single digits, which is comprised of the Q3 that is up mid-single digits in a Q4, that is down low single digits. Again, that Q4 being down is unchanged. We've had that assumption all year and is a factor of two things.

One is that we're comping a really ginormous Q4 in 2025. Plus, as you look at the release schedule now that was -- that we made public at the last MagicCon: Amsterdam, you can see that our Q1 release in 2027 is going to be in early February. This compares to Lorwyn, which we launched this year, which was in the middle of, call it, late January. That difference in launch timing for our Q1 set is the difference of $40 million or so falling into Q4 versus Q1. This is very typical within Magic that Q1 timing can sway how our Q4 finishes, and that's what we've embedded in our guide.

So as Chris has said, we have a lot of momentum. We believe there's a lot of durability in the brand itself. So what you're seeing in the back half is really a mass problem, and we feel good about us stepping into 2027.

On the CP business, the pivot that we're making here is we are moving into growth, a continued growth in Q3, Q4. Each of those quarters is kind of sized the same way, call it up low single digits behind the strength in both, I would say, the innovation that is coming in time for the holidays as well as we're in this normal pattern with our retailers in terms of shelf reset timing. So there's not as much volatility in consumer products compared to what I just walked through on Magic.

Our next questions are from the line of Xian Siew with BNP Paribas.

Can you talk a little bit more about the supply and ability to print Magic cards? I think, last time, you had mentioned about reprints taking a bit longer, but then you also mentioned the initial trends are maybe bigger given kind of the increase in confidence and demand. So maybe can you talk about the puts and takes of how you're thinking about supply and then longer-term ability to deliver on demand, especially as distribution is growing?

Got it. I'll -- I guess I'll end with the punch lines, we feel very confident in our ability to supply that to Magic. And to your point, how you worded the question, the strategy that we took at the beginning of the year was to go in with larger initial print run so that we could supply that first distribution push as well as in supply and lead into the backlist or leading to reorders. But -- and that's very different than where we were last year where we felt like we were chasing demand.

And in 2025, I think for some of our sets, we would absolutely say that we left some demand on the table. So we made that pivot as we were entering into '26 and you could see that strategy really playing through with our Q2 results. So it is true that our reruns are taking longer, but it's not an issue per se because we went in with higher production from the get-go.

And then alongside of that, looking at not only the demand forecast for '26, but looking at for '27 and '28 that gave us confidence to work with all of our print partners to start increasing kind of fundamental capacity within their facilities. So by the time we get to next year and the year after that, we feel really confident about our ability to supply.

Great. And then maybe can you talk a little bit more about the $56 million of impairment charge and kind of the decision to maybe not adjust that out of results. I mean, I understand it probably also related to the capitalized cost, you want to show it somewhere. But I guess underlying Wizards seem to be even stronger if we kind of think of that impairment charge, maybe as a bit of a onetime or transitory cost. I mean, is that kind of fair? And then I guess maybe higher level, it's kind of reiterating your point of focusing on the profitability of Digital Games.

Yes, correct. And we've been pretty clear within our digital strategy that we're not going to adjust out, like, all the amortization is going to hit the P&L, and it's not going to be adjusted out of EBITDA. So this impairment took that same treatment. And as Chris said, it was really a matter of us honing in on our digital strategy and reassessing the portfolio and figuring out which pieces fit, which pieces didn't fit, and it's as simple as that. So it is onetime in nature, but it is going to continue to stay as part of -- it was an investment that we made that we now are undoing.

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

So I think a lot has been made fair or unfair about sort of this Marvel Super Heroes versus Final Fantasy comparison. Anything you can give us on 2Q year-over-year? At this point, I don't think anybody expects that we'll see anywhere near the same sell-in, in the second half from Super Heros with Final Fantasy. You guys have made a comment about record day 1 and month 1 revenue. I'm assuming that's all wholesale and that the retail might look a little bit different. But anything -- any color you could give us there and any way to think about sort of 2Q as a portion of sort of the full year contribution of those 2 sort of massive titles that will obviously move the needle?

James, I'll take this, then I'll turn it over to Gina when if I say anything I missed. I would say Marvel Super Heroes is off to a really strong start. We're super pleased by it. Likewise, we were very pleased by Final Fantasy. I think if you can connect the dots with kind of what Gina was talking about, about our approach to supply chain and our approach to supplying the channel, we have bigger allocations to sell in initially, and that certainly has benefited Marvel versus where we were maybe a year ago with Final Fantasy. But the reorders and all of the sell-through that we can track have also been quite strong for Marvel Super Heroes.

So -- it's not just a matter of pushing a bunch of things into the channel and letting them sit on inventory. The inventory is at quite reasonable levels. The sell-through is quite brisk, and we've been seeing consistent reorders from across our channel partners for it. That said, who is going to be -- is ultimately going to take the title as the biggest Magic set of all time. Currently, it's Final Fantasy. Final Fantasy is fantastic. It continues to get reordered today. I would say Final Fantasy probably had a bit stronger of a set of follow-up kind of ancillary products that came after the launch. But we're pretty pleased with both.

Got it. And then obviously -- sorry, did you have anything to add to that Gina or?

No. My only point is going to be that Super Heroes is our second largest TV set. So to the point of it's not quite as big as Final Fantasy yet with an asterisk, it's still a pretty darn good set.

I think you're also going to have a tough time getting us to compare third-party IPs against each other. That's probably something we'd love to do.

Makes sense. And then obviously, with another really strong quarter out of Magic, I think that bear case has sort of been asked and answered, at least for now. I guess the one hesitation that I think a lot of investors have at this point is just getting out in front of this video game launch next year. Anything you could tell us at this point that would help us sort of size how to think about the impact of that game?

Obviously, it's really early. You don't know how many it's going to sell, but if I just think about sort of the low 40s margin for this year and then high 30s to low 40s next year is the biggest gap sort of what you're assuming for the impact of the video games. And I apologize. Just one point of clarification, ex the impairment that low 40s would have gone a little higher this year. Is that right?

Correct. Yes.

Yes. And I think the way you should think about Wizards is we continue to believe fundamentally in the business broadly, inclusive of digital and what we do on tabletop. So our guidance of high 30s to low 40s is the same guidance we've been given for the segment for -- since we initiated our midterm guidance 2 years ago, and that remains unchanged.

The KPIs that we have on the new game releases, each are meeting our expectations, if not above our expectations. We feel like the games will be quality releases. They're newer franchises, they're improving genres, where we've seen success either through ourselves or through our partners. But there is going to be a range of outcomes. But I think as we've thought about the overall strength of the portfolio and the balance of the portfolio and the fundamentals associated with it, we continue to remain bullish on both the short and the long term for Wizards.

Yes. And the math I would add to, there's really no difference in assumptions. So the development costs for both games continues to be in the range with which we've talked about. That range where we said the, call it, $100 million to $250 million. Exodus is at one end, I would say that Warlock is that another. So that is no different. Our assumption on how the amortization itself is going to work with kind of 2/3 of it flushing through within the first 3 months of launch.

And then if you think about that high 30s to low 40s number, you'll have the amortization expense, but then you also have additional marketing. And it's for all of Wizards, inclusive of Magic. So the entirety of Wizards next year, there's anywhere from, call it, $50 milion to $75 million of incremental marketing expense that we're going to put into this segment to support all of the growth levers, both the video games as well as Magic itself.

So I think those pieces, the amortization and the incremental marketing is what probably takes that number -- that creates that range in that number.

The next questions are from the line of Arpine Kocharyan with UBS.

Just to briefly go back to back-off guidance. If I take your unchanged guidance for Wizards of low single digits in the back half after really strong first half and it seems like consumer product outlook that's unchanged, you're already pretty comfortable in that 7% range of top line for the year. So I'm wondering what does the midpoint or the low end of guidance range sort of factoring what type of scenario? Is it more kind of the uncertainty with the holiday season in the back half within consumer product? Or you still have obviously a massive comp in Q4, you have to offset? Just trying to see how you get to remotely close to 5% for the year? And then I have a quick follow-up.

Yes. Yes, it's very simply on the holiday. I mean, we've I think, learned our lesson over the years that a lot can change between September and December. So it just allows us a little bit of protection.

Now with that said, we feel really good about how we're forecasting the back half of the year. Wizards is a little bit easier in this sense, because it's not as holiday and consumer macro consumer dependent. But again, the retail side of the business always creates a question mark as we head in. But again, feeling good about the guidance we put out.

Great. Great. That makes a lot of sense. And just quickly, looking into 2027 for Magic, I was wondering if you could give some more detail on, should we expect a similar split of Universes Beyond set releases into 2027 versus 2026 just percentage-wise? Or are you still sort of working through maybe the timing and cadence of those releases? Anything you could share to bring us closer to kind of what growth rate for Wizards could look like, looking out beyond 2026 would be very helpful.

Well, so for Magic, we announced 3 of our first-party sets last week at MagicCon: Amsterdam. And so those will be spread pretty evenly out throughout the year. We haven't announced what the Universes Beyond sets will be, but there will be 3 of them as well. So this year, I think the simple math is this year, we did 7 sets, but assume a pretty good hunk of the first set was sold in the prior year, so call it 6.5. Next year, we will formally announce 6 sets, 3 Universes Beyond and 3 first-party IP. But likely, there will be a bit of 2028 at the end of 2027.

So on a like-for-like basis, there will be roughly the same number of sets year-over-year. I would anticipate that the percentage of first-party versus third-party would actually increase a bit just because we had a few more Universes Beyond releases this year than we did first-party releases this year.

The next questions are from the line of Anthony Bonadio with Wells Fargo.

So just on Marvel, I wanted to follow-up given the strength you've seen there so far. Can you just talk a little bit more about the contour of those sales as we think about the mass channel versus your typical independent hobby stores and just how that performed with your legacy player base versus newer players to the extent you have visibility?

I would say that Marvel has done well across every channel and has particularly excelled with new players and in less traditional channels. So -- which is what you'd expect with an IP of that caliber. So mass, selling it in Disney theme parks, game stores that maybe don't have as much organized play like a GameStop, it's really done quite well there.

Got it. And then maybe one for Gina. Just on the $56 million impairment charge on digital games. I guess does that at all change how you're thinking about the spending outlook for '27? Or maybe put another way, does the fact that we're writing that off today bode incrementally well for how we should be modeling '27 expense?

Well, that $56 million was related to game releases in '28 and beyond. So it doesn't really change the economics for 2027. And so our -- if you go back to our prepared remarks, '26 will really be the peak year for spend on digital, and then we'll start to step it down. That's how I'd think about it.

The next questions are from the line of Kylie Cohu with Jefferies.

I was just wondering if we can maybe dimensionalize the largest sources of potential upside in the back half of the year. I really appreciate all the color you gave on what's baked in, but just kind of curious what could go right and where you would expect to see that potentially?

Well, always, I think there's potentially some upside in Magic. So we've certainly experienced that for the last 19 years. So certainly, Magic is a strong underlying franchise. D&D is actually performing quite well as well, particularly D&D Beyond. We've been re-tuning that business, and that's been performing well. It's kind of a little overshadowed by how large and how important Magic is, but D&D has some nice upside.

And then inside of our toys business, we have a number of releases related to our GEM2 theme, really kind of going after older, maybe less traditional collectors and players and crafters. Blooms by Play-Doh is one of the first examples of that. It's basically being able to craft beautiful flower bouquets with Play-Doh and a very innovative set of new tools that are very simple and easy to use.

And I think you'll see a number of those kinds of product releases from us that will lean into that. And then last but not least, our partners at Disney have a just fantastic lineup of films this year. We saw some nice benefit from Toy Story with Potato Head so far. Marvel -- sorry, Star Wars has been doing well, particularly with the Collector segment. And the new Spider-Man and the New Avengers, we're already seeing Spider-Man pop off the shelves, and we expect Avengers to be no different in the holiday period.

Awesome. Super helpful. I guess just a follow-up on that. with Magic being so strong, obviously, Marvel doing well, I think you also mentioned the upcoming Hobbit release. Anything to kind of contextualize there about what's kind of going to contribute to the back half growth for Magic?

Well, the one thing I'd just counsel people as you model Magic is not every set has the same composition of SKUs or card density or complexity. So Marvel is a quite large release, very consistent with what we would have done several years ago with Lord of the Rings or what we did last year with Final Fantasy. The Hobbit will be still a big release, but it will be comparatively smaller in terms of the number of SKUs and number of cards that we release associated with that.

So you should scale those. Those correlate quite closely with overall sales potential. So -- and that's just a factor is how we think about quarter-over-quarter for Magic. Not every release is going to be exactly the same. Not every release even year-over-year is going to comp the same because we just move things around based on its readiness, based on anniversaries for IPs, fighting and making sure themes stay fresh, and we don't kind of overindulge in any one kind of trope. So I think you need to kind of think about that as you go through.

Our next question is from the line of Gerrick Johnson with Seaport Research Partners.

I was curious a little bit about distribution and Magic if we get more detail on how much of Magic goes through the mass channel these days? How much through hobby shops and specialty and then also international versus North America?

Yes, roughly the bulk -- I mean, the bulk of our distribution continues to flow through hobby. So call it, 70-ish percent is flowing through hobby. Mass is about 20% and international is about 10%. And frankly, all 3 of those tranches are continuing to grow.

Okay. And then on toys, all the retailers on the April quarter had nice comps up mid-single digits and all called out toys, all of them, Target, Walmart, Five Below, GameStop. So are these retailers reacting? Are they placing larger orders for the fall sets? Are they getting less cautious than they have been before?

No, I don't see a material change in the retailers. Remember, last year Q2, it was crazy because of what was happening in the tariff environment. So we're comping a pretty atypical Q2. And what I would characterize '26 is we're back to kind of historical patterns within toy, where the shelf set timing is where you typically would expect it right after kind of that back-to-school holiday.

And so the order books themselves are reverting back to where we would have seen them in '24 and '23. So I think the momentum on the category itself has remained strong. That's allowing retailers to have confidence in their shelf set. I think order books are building as expected or as historically we've seen. I don't see anything materially different.

Gerrick, the only color I'd add is retailers are traditionally pretty conservative. I think we've improved our ability to be able to provide them real-time product. So that's kind of changed the mix about how much inventory they want to have on shelf. Where they are leaning in though and are pretty eager for more product and frankly, consumers are giving them these tells is in those GEM2 categories, the gamified, entertainment-driven, multi-purchase, multi-generational, basically the stuff for kid. And that's why we're seeing such a great response with Magic. That's why we're seeing such a great response with Blooms. That's why we're seeing such a great response with things like Star Wars fan product, anything that has Spider-Man on the box. And then we anticipate that anything that will have Dr. Doom on the box as well.

The next question is from the line of Eric Handler with ROTH Capital.

Chris, wondering if you could talk a little bit about your video game development. You've now had a couple of games canceled this year, which, quite frankly, is no different than any other video game studio. But what does that leave you in terms of the number of games you have in development? Sort of how are you thinking about the potential for an annual cadence of releases? And if anything changes in terms of what you are looking to do internally versus licensing out?

Eric, yes, thanks for the question. Yes, I would say prior, we had been saying from 2027 on, we'd have 1 to 2 significant game releases per year. I don't think that changes, but I think the composition of the types of games and the level of spending on those games and maybe how we go to market with them will change. So we will still do some big games. I think those won't be every year. But I think we'll have a combination of big games and then more service-oriented games and potentially some smaller, more focused content bets inside of games as well.

I think a lot more of our games are going to be us working with a co-publisher and leveraging their expertise and leveraging their capital while they leverage our brands and kind of our fandom. And so I think that will kind of like lower the downside risk associated with it. And I definitely think you're going to see us shifting more and more to those lower-cost partners and evolving our studio infrastructure such that more and more of our people sit in very high talent density, but much lower man-month markets.

And I think just the combination of that, inclusive of marketing and inclusive of our total development spend is you're going to see a pretty meaningful step down in the amount of investment that it will take for us to build the business, but we still are bullish about what that future of the business looks like. I think it's probably just going to be more focused and more profitable.

Very helpful. And then now that -- regarding Magic, now that you sort of -- you've come out with your -- at least announced what the first-party Magic sets are going to be in 2027. I wondered if you could sort of qualitatively discuss how it compares with '26 in terms of is there -- are there new series that are coming out? Are there more sequels with the first-party sets?

Well, certainly, Kamigawa is a sequel to -- so when the last Kamigawa came out, it became the best-selling first-party set of all time. But then basically every other first-party set that came out after that kind of took the crown. I would anticipate that the new Kamigawa will do likewise. It should be pretty fun.

The other 2 sets are more original settings for us. And then in terms of the Universes Beyond that we will have next year, I don't want to give away too much on those. Each of them, I think, will be pretty cool. I think we have a different kind of announced strategy, which is more IP specific around some significant dates and significant events associated with those. I think the one thing I'll say on the Universes Beyond partners that we have next year is they'll probably be a bit more fantasy adjacent. So -- and I don't think any of them will take place in because we definitely have gotten that feedback from some fans.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.

Hello, and welcome to Hasbro's 2026 Annual Meeting of Shareholders. Please note that today's meeting is being recorded. It is now my pleasure to turn today's meeting over to Richard Stoddart, Chair of the Board of Directors of Hasbro. Mr. Stoddart, the floor is yours.

Good morning, ladies and gentlemen. I'm Rich Stoddart, the Chair of the Board of Directors of Hasbro. It's my pleasure to welcome you to Hasbro's 2026 Annual Meeting of Shareholders. We are holding today's meeting as a live virtual webcast. I will act as the Chair of the meeting. The time is now 11:00 a.m. Eastern Time on June 11, 2026, and I hereby call this meeting to order. Matt Gilman, Senior Vice President, Legal and Assistant Secretary, will act as Secretary of this meeting, and with me will conduct the formal meeting today.

We also have members of our Board of Directors and executive team attending our meeting today as well as Danielle Mann of Computershare Trust Company, our independent Inspector of Election; and representatives from KPMG LLP, our independent public accounting firm.

Before we begin, I would like to take a moment to recognize and thank Mary Beth West for her significant contributions to the Board and the company throughout her tenure on the Board. Mary Beth will be retiring from the Board at the meeting. Mary Beth has been a true leader on the Board and her experience and expertise has provided great value to Hasbro during its transformation.

We will miss her and wish her all the best in her future endeavors. Thank you, Mary Beth. In order to ensure that the business of the meeting proceeds in an orderly fashion, we ask that you please observe the rules of conduct for the meeting, which may be accessed on the virtual meeting website.

We do not expect any technical difficulties today. However, in the event we lose our webcast connection or otherwise experience technical difficulties, please allow for some time for these difficulties to be resolved. Our operator may also provide updates through the phone bridge. This annual meeting is being held in accordance with Rhode Island Law and the company's organizational documents.

During the meeting, we will address the matters described in the company's proxy statement dated April 17, 2026. Notice of the annual meeting was distributed to all shareholders as of the record date for this meeting on or about April 17, 2026. We will give a short business presentation and hold a question-and-answer session after we have concluded the formal part of our meeting.

Questions or comments must comply with the rules of conduct for the meeting. Shareholders can submit questions at any time by entering their question into the Q&A icon at the top of your screen.

The Inspector of Election has in her possession a list of the company's shareholders of record as of the record date. A list of the company's shareholders as of the record date is also available at the meeting website for examination by any shareholder present and by any proxy holder who is representing a shareholder. We have been advised by the Inspector of Election that a quorum is present at this time.

Thank you, Matt. We will now take up the formal business of this meeting. I now declare the polls open for each matter to be voted upon today. You may vote until I announce that the polls are closed. Matt will now briefly describe the voting procedures and the items of business to be acted upon at today's meeting.

Shareholders of record, legal proxy holders who preregistered for the meeting and beneficial holders who have a control number may vote during the meeting by clicking on the voting link located on the top right of the virtual meeting website. If you have already submitted a proxy to vote your shares, you do not need to vote by ballot unless you want to change or revoke your vote.

Voting by ballot at this meeting revokes any prior proxy you may have submitted. Remember, you must submit your completed ballot before the polls close in order for it to be counted. There are 3 items of business that may be properly acted upon at the meeting. The first item of business is the election of directors.

As indicated in the company's proxy statement at today's meeting, 11 directors will be elected to serve on the Board until the 2027 Annual Meeting of Shareholders and until their successors are duly elected and qualified or until their earlier death, resignation or removal.

Our Nominating, Corporate Governance and Social Responsibility Committee has recommended and our Board has approved and hereby nominates Douglas Bowser, Hope Cochran, Chris Cocks, Lisa Gersh, Frank Gibeau, Elizabeth Hamren, Darin Harris, Owen Mahoney, Laurel Ritchie, Richard Stoddart and Carla Vernón as nominees for election as directors at this meeting. All of the company's nominees have been duly nominated. The company has not received valid notice of any other nominees. I hereby declare the nominations closed.

The second item of business is an advisory vote to approve the compensation of the company's named executive officers. And the third item of business is to ratify the selection of KPMG as the company's independent registered public accounting firm for fiscal year 2026.

Our Board of Directors has unanimously recommended that you vote for all of the Board's director nominees and for all of the other proposals. Our proxy statement for this meeting contains information about each proposal. If you have already voted, there is no need to vote again today unless you wish to change your vote. If you are voting today, you must submit your votes at this time in order for them to be counted by the Inspector of Election.

The Inspector of Election will not accept ballots, proxies or votes or any changes or revocations thereof submitted after the closing of the polls. We will pause for a moment to give anyone a final chance to vote.

[Voting]

The polls for each matter to be voted on at this meeting will close shortly. It is now 11:07 a.m. Eastern Time, and the polls for each matter to be voted on this meeting are now closed.

Based on preliminary tabulation by the Inspector of Election, each of the company's director nominees has been elected to serve on the Board until the company's 2027 Annual Meeting of Shareholders. The advisory vote to approve the compensation of the company's named executive officers has been approved and the proposal to ratify the selection of KPMG as the company's independent registered public accounting firm for fiscal year 2026 has also been approved.

The final results will be reported in a current report on Form 8-K that the company will file with the SEC. This concludes the formal business of today's meeting. Now we would like to proceed with a business presentation by our CEO, Chris Cocks, and we will then answer questions. Let me first remind you of our safe harbor and the fact that we will make some forward-looking statements, and our actual results may differ materially from those forward-looking statements. For a discussion of these factors, I encourage you to look at the risk factors discussed in our SEC filings. As a reminder, if you have any questions, you may submit them by clicking on the Q&A tab on your screen.

Thanks, Matt, and good morning, and thank you to everyone for joining us. When we introduced our Play to Win strategy, we said Hasbro's future would be built around 2 enduring strengths: the power of play and the strength of partnership. Over the past year, we've demonstrated that strategy is working. 2025 was a year of meaningful progress. We returned Hasbro to growth, expanded margins, delivered record profitability and continue transforming the company into a more focused, franchise-driven organization.

More importantly, we built momentum that is continuing into 2026. Today, Hasbro is operating from a position of strength. We have one of the world's most valuable portfolios of play and entertainment IP, deep strategic partnerships and talented teams executing with greater speed, creativity and discipline. You can see that momentum clearly at Wizards of the Coast. MAGIC: THE GATHERING continues to perform at an exceptional level.

Strong player engagement, successful new releases, expanding organized play and Universes Beyond collaborations are driving growth across tabletop, digital and live experiences. Our strategy is straightforward, create multiple ways for fans to engage with MAGIC while continuing to expand the audience globally. That strategy is working, and we remain confident in MAGIC's long-term growth potential.

Consumer products is also showing momentum as we focus investment behind higher-growth categories and franchise-led innovation. Our strategy is centered around a concept we call GEM Squared, categories that are gamified, entertainment-driven, multi-purchase and multigenerational. These categories consistently outperform the broader toy industry and align directly with Hasbro's strength. At the same time, we continue evolving Hasbro into a broader play and IP company, reaching consumers not only through toys and games, but also through digital gaming, licensing, live experiences and storytelling.

Partnerships remain foundational to Hasbro, and we continue to expand our ecosystem across both owned and partner brands. Within Wizards, our Universes Beyond slate continues to demonstrate the power of combining great gameplay with beloved global IP. In toys, we secured several important new licenses, including Kpop Demon Hunters and Harry Potter, while continuing to work with our long-time partners at The Walt Disney Company. This evolution is helping create a more diversified business with deeper consumer engagement and long-term opportunities.

Looking ahead, our priorities are clear: continue scaling Wizards of the Coast in digital gaming, drive profitable growth in consumer products, expand strategic partnerships and unlock the full value of Hasbro's IP across every platform where fans engage. We believe Hasbro is uniquely positioned at the intersection of play, fandom and storytelling.

Our brands now reach more than 1 billion kids, families and fans every year. Our partnerships continue to expand. Our digital capabilities are growing, and our teams are executing with a clear strategy and long-term mindset. To our shareholders, thank you for your continued support and confidence. We are excited about the road ahead. Thank you. And with that, we'll take your questions.

We will now open the meeting for questions from shareholders. Again, we will continue to observe the rules of conduct for the meeting as posted on the virtual meeting website. Shareholders may submit questions during the meeting by clicking on the Q&A tab at the top of your screen and typing in your question. Let me take a moment to check with Fred Wightman, our Vice President of Investor Relations and Corporate Development, to see if there are any questions. Fred, do we have any questions?

Rich, there are no questions.

As there are no questions, I'd like to thank you for attending today's meeting and for your ongoing support of Hasbro. I declare that the 2026 Annual Meeting of Shareholders is hereby adjourned.

The meeting has concluded. You may now disconnect.

Good morning, and welcome to the Hasbro First Quarter 2026 Earnings Call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Finally, I'd like to turn the call over to Fred Wightman, Vice President, Hasbro Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Joining me today are Chris Cocks, Hasbro's Chief Executive Officer; and Gina Goetter, Hasbro's Chief Financial Officer and Chief Operating Officer. We'll begin today's call with Chris and Gina providing commentary on the company's performance before taking 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 would now like to introduce Chris Cocks. Chris?

Thanks, Fred, and good morning, everyone. Hasbro started 2026 with momentum. Revenue grew 13%, powered by Wizards of the Coast, while Consumer Products posted point-of-sale growth and share gains across our key GEM2 categories. These results reinforce our confidence in the Playing to Win strategy, as Hasbro's deep IP vault, industry-leading licensing capabilities, and world-class partners position us for success today and into the future.

Let's dig into results, starting with Wizards of the Coast. Q1 showed that MAGIC's record 2025 was no fluke. Lorwyn Eclipsed, which debuted in January, became the best-selling MAGIC Premier set of all-time and delivered the highest engagement and Organized Play statistics we've seen since the pandemic.

We followed that with a Teenage Mutant Ninja Turtles Universes Beyond collaboration that outpaced internal expectations, more proof that our multi-franchise strategy is expanding the MAGIC audience. Backlist was once again a standout, setting a quarterly record, thanks to demand for Avatar: The Last Airbender and Final Fantasy.

We're only one quarter into the year, but 2026 already represents the third-largest backlist year in MAGIC's history. We're seeing record demand extend beyond tabletop and digital into live experiences, too. MagicCon Las Vegas sold more than 23,000 badges, making it the largest MAGIC event ever. That demand is global. MagicCon: Amsterdam is on track to sell out as well.

From our Tentpole MagicCons to weekly Organized Play events across more than 11,000 Wizards Play Network stores, the flywheel of new player acquisition, distribution growth, and durable retention are showing up in the numbers.

MAGIC's momentum has carried into Q2 where Secrets of Strixhaven already have surpassed Lorwyn Eclipsed as the largest MAGIC Premier set ever. The rest of the year features a blockbuster Universes Beyond slate with Marvel Super Heroes, The Hobbit, and Star Trek.

And yesterday, in partnership with The Walt Disney Company, we announced MAGIC ARENA will feature full digital rights for the upcoming Marvel Super Heroes launch. This is a meaningful step forward in our strategy to extend the MAGIC ecosystem across platforms and reach new fans wherever they play.

Outside of MAGIC, Wizards of the Coast teams are polishing our AAA video game launches: Exodus from Archetype and Warlock from Invoke. Both titles remain on schedule to launch next year, and we're excited to share Exodus' extended showcase with fans later this summer.

D&D is on a great trajectory. We launched Dungeon Masters, our first official D&D actual-play series on YouTube, featuring talent from Baldur's Gate 3 alongside top creators in the tabletop space.

Turning to Consumer Products. We're continuing to see POS momentum with positive trends in first quarter, that have continued through the end of April. With lean retailer inventories, we remain on plan to grow the segment for the year.

Our focus on GEM2 categories, those parts of the toy industry that are gamified, entertainment-driven, Multi-purchase and multi-generational, continues to pay dividends. These are structurally advantaged categories with above industry growth, and we gained share in many of our key categories in the first quarter.

Looking ahead, we're two days away from Star Wars' return to theaters for the first time since 2019 with The Mandalorian and Grogu. We have a strong lineup of product on shelves, and if early demand for our Ultimate Grogu is any indication, fans are as excited as we are.

We have three additional tentpole releases ahead, including Disney and Pixar's Toy Story 5, Spider-Man: Brand New Day, and Marvel Studios' Avengers: Doomsday. That is a stacked content lineup that creates real opportunity across Consumer Products.

With positive early reads from FIFA MONOPOLY, including blaster boxes that are resonating with collectors and live sellers alike, category-first innovation from the PLAY-DOH brand this summer and KPop Demon Hunters product hitting shelves in July, there's a lot to look forward to at Hasbro.

Before I hand off to Gina to walk through the financials, I want to offer a sincere thank you to our team and partners for delivering a great start to 2026. I want to give a special call out to our IT, Sales, Finance and Operations teams that have kept Hasbro open for business, despite the cybersecurity incident and enhanced precautions we have taken.

With that, I'll turn it over to Gina.

Thanks, Chris, and good morning, everyone. We delivered a strong start to 2026, with Q1 results on track across revenue, profit, and margin. Net revenue in the first quarter was $1.0 billion, up 13% year-over-year, driven by performance in Wizards.

Adjusted operating profit of $287 million increased 29%, with an adjusted operating margin of 28.7%, up 360 basis points versus last year from favorable business mix and cost savings. Adjusted earnings per diluted share were $1.47, up 41% year-over-year, reflecting strong operating leverage and disciplined execution.

Looking more closely at the segments, Wizards momentum continued. Segment revenue grew 26% to $582 million, behind the strength in MAGIC. Operating profit increased 29% to $298 million, with a 51.2% operating margin, up 140 basis points versus last year. Product mix and scale were more than able to offset the headwind of higher royalty and operating expense.

The MAGIC ecosystem remained healthy through the quarter with both Backlist and Secret Lair posting double-digit growth, and we achieved meaningful distribution gains within the Wizards Play Network, underscoring the durability of the franchise.

Digital & Licensing revenue was up 3% and Monopoly Go! delivered $41 million of revenue, in line with our expectations.

Consumer Products revenue was $398 million, essentially flat year-over-year with growth in Toy & Game volume offset by a decline in licensing as we lapped challenging prior year compares. Adjusted operating loss was $41 million, a decline of roughly $10 million versus last year on an adjusted basis. The loss reflects higher royalty expense, incremental tariffs and the impact of prior year licensing strength.

As we moved through the quarter, POS performance was in line with expectations and both owned and retail inventory levels remain healthy, providing a good set-up in advance of key theatrical windows, as well as the upcoming seasonal build.

The Entertainment segment delivered $20 million in revenue and $20 million in adjusted operating profit, which was also in line with expectations. Q1 profitability was favorably impacted by the timing of entertainment-backed revenues in the Consumer Product segment, namely for PEPPA PIG.

Our cost transformation efforts delivered $37 million in gross savings, which has us on track for our full year commitment of $150 million. Total Hasbro adjusted EBITDA was $339 million and up 24% versus last year behind planned efficiencies across supply chain, product development, and SG&A supporting margin expansion, even as we absorbed elevated royalties and incremental investments for our upcoming 2027 digital game launches.

From a balance sheet and cash flow perspective, we generated $338 million in operating cash flow, funded $50 million in strategic investments, and returned $99 million to shareholders via our dividend, and we started share repurchases under our recently authorized share repurchase program.

Finally, we issued $400 million of new notes with the proceeds going towards fully repaying the November 2026 maturities and the balance applied to the repurchase of higher-rate, longer-dated debt.

We are encouraged by our strong start to the year and believe we are well positioned to continue the momentum and deliver on our full-year financial commitments. The macro environment continues to require agility, including absorbing and offsetting the impact of rising oil costs across the business, which impacts our freight, resin and packaging costs.

While the impact of higher inputs won't be realized until the back-half of 2026, we have several actions underway across a variety of operating levers, including freight optimization, mix management and operating spend reductions to mitigate the impact.

As we look to our full-year outlook, we are maintaining guidance for the year. We continue to expect consolidated revenue to grow 3% to 5% year-over-year on a constant currency basis, with growth planned across each segment. We expect adjusted operating margins of 24% to 25%, and adjusted EBITDA in the range of $1.40 billion to $1.45 billion.

At the segment level, Wizards is on track to deliver mid-single digit revenue growth, with operating margins in the low-40% range. The volume growth is absorbing the impact of incremental royalties and back-half investments behind our 2027 digital game releases, Exodus and Warlock.

From a phasing standpoint, revenue growth remains robust during the first half of the year supported by the upcoming Marvel Super Heroes release, before moderating in the back-half due to tougher Q4 compares.

On operating margin, year-to-go performance incorporates higher royalties, as well as a step-up in operating expenses behind video game marketing spend and other investments.

Consumer Products is expected to grow low single digits for the year, with adjusted operating margins in the 6% to 8% range. Relative to our initial guidance, the CP margin range reflects the benefit of lower tariff expense offset by higher oil-related input costs, with continued productivity and pricing mix providing further support.

Operating margin continues to strengthen as we move through the year driven by volume leverage and these productivity step-ups. Entertainment segment revenue is expected to be slightly positive year-over-year with operating margins of approximately 50%.

Our capital allocation priorities remain unchanged. We will continue to invest in the business specifically behind our highest-return growth opportunities led by Wizards, Digital Gaming and Licensing. Second, we are focused on paying down debt and maintaining a healthy balance sheet. And we remain firmly committed to returning cash to shareholders through our dividend and share repurchases. As part of today's release, the Board has authorized the second quarter dividend.

In connection with the cyber incident that occurred at the end of March, we expect 3 impacts to 2026. First, we expect to incur approximately $20 million of additional operating expenses associated with remediation. These expenses are one-time and will not impact adjusted EBITDA.

Second, we expect approximately $40 million to $60 million of Consumer Products revenue to be delayed from Q2 to the back-half of the year. Given the strong POS we're seeing, along with the upcoming entertainment slate, we have good line-of-sight into the recovery.

And finally, given our delay in invoicing, we expect some receivables to shift from Q2 into Q3 impacting cash flow. All these impacts are embedded in our guidance.

As we wrap up, Q1 gives us a clean foundation. We are on track, our capital allocation priorities are clear, and we are focused on execution. Wizards is providing growth momentum, Consumer Products is stable and improving, and our cost discipline continues to translate into real margin performance. We are managing through a dynamic macro environment and changing consumer patterns with clarity and focus. And we remain fully committed to delivering on our full-year guidance.

Before we open the line for questions, I want to echo Chris's comments and again recognize the Hasbro teams for their outstanding work navigating a dynamic environment over the past few months. Their focus, agility and execution have helped mitigate the impact of the cyber event and have us on track to deliver the year.

With that, I'll turn it back to the operator for questions.

[Operator Instructions] Our first question comes from the line of Megan Clapp with Morgan Stanley.

Maybe we can start with the guidance. So you reiterated the full year. You obviously had a really nice beat at least versus what consensus was looking for in the first quarter and talked a lot about the momentum you're seeing quarter-to-date. At the same time, you talked about some higher costs for CP, but maintaining the guide there with lower tariff rates coming through as well. So can you just help us understand whether the guidance reiteration at this point is just consistent with your typical approach from what we've seen in terms of holding guidance after the first quarter? Or is there anything incremental that you're seeing either on the demand or the cost side? A lot has obviously changed in the last couple of months that's giving you any less confidence in the outlook for either of the key segments?

Gina and I will take this in turn. I would say it's the former. It's consistent with our typical practice, it's early in the year. We've got a lot of new releases coming out. We've got a lot of entertainment on tap. And we think that's the prudent move. I would say Q1 was a great start to the year. I think there's a lot of tailwinds that are buoying the business. And in terms of some of the headwinds we have like the cost of oil and uncertainty around tariffs, I think Gina and the team, particularly in the supply chain side and the operations side are increasingly getting a better and better handle on our cost structure and ability to navigate that.

Yes, Megan, the only other piece that I'd add to what Chris just said is, we're still working through the final phases of our cyber remediation. So again, using Chris's word of prudent, just taking all those factors together, it just -- it made sense for us to hold this quarter out. But we're very pleased with how the first quarter performed.

Okay. That's super helpful. And then maybe could you just put a finer point on what we should expect for the second quarter? I think, if I'm doing my math correctly, that $40 million to $60 million of CP revenue is maybe 5-ish points. And I think previously, you had expected the segment to be up maybe double digits, low double digits in the second quarter just on the easy lap from last year. So maybe CP up high single digits now? And any commentary on Wizards as we think about the second quarter? Just trying to put a finer point on 2Q.

Got it. Yes. Let's take them in pieces for Consumer Products as we came into the year, remember, we thought Q2 was going to be our big quarter because we were lapping all of the noise from tariffs last year. But given the cyber event, it now shifts out to Q3. So we still expect Q2 for consumer products to grow, albeit it's going to be kind of a low single-digit rate. And then we expect that double-digit growth to really come into Q3. We think most of that $40 million to $60 million is going to shift into Q3. There'll be some trickle on into Q4, but most of it is just a shift from Q2 and into Q3.

And for Wizards, Q2 is looking quite robust. I mean, it's -- we had a big quarter last year. We expect this quarter to be really big, but that's behind both our Strixhaven and then the Super Heroes launch. And then for Wizards, as we go into Q3 and Q4, that's where you start to see some more moderated growth rates.

Our next question comes from the line of Eric Handler with ROTH Capital Partners.

I wonder, if you could give a little bit of an update regarding your tariff claims? How big of a claim have you filed? And any expectation about when you may or may not get anything back?

Yes. Good question. So roughly, think about it as $50 million is the rough size of our claim. We are in the reconciliation process. So right now, in terms of timing, that part of the refund hasn't been given a time line. So it's not embedded in any of our outlook for this year right now. We're still waiting to understand when the government is going to get to that piece of the rebate process.

Okay. And then just looking at your cash flow statement, your cash flow from operations was very strong, $200 million increase year-over-year, a good swing in working capital. Is that going to be something that reverses? Or you track -- are you just getting better cash conversion as we go throughout the rest of the year?

Yes, good question. I would say in the first quarter, it was a lot of MAGIC, because of the strength in MAGIC deliveries, both in terms of Q4 MAGIC as well as Q1 MAGIC that is contributing to the higher cash flow. We're going to see, given the cyber event, a little bit of lumpiness in cash as we move through the year. Our invoicing was shut off for a while. So the cash flow that we would have expected in Q2, some of it is going to come into Q3. So as we sit here in July, you're going to see us with a much lower operating cash flow and then that will pick up and kind of recover as we move into Q3 and Q4.

Our next question comes from the line of Xian Siew with BNP Paribas.

It seems like your first-party, your premier set like Lorwyn, Strixhaven are having really strong momentum. Could you maybe talk a little bit about whether you're seeing consumers who came into the MAGIC ecosystem via maybe a Universes Beyond collab and then kind of coming in again for a first-party set? Anything you're kind of seeing on that trend?

Yes, we're definitely seeing that. In one quarter, we've done the third highest year ever of backlist sales. And that just means we're creating new MAGIC players that -- and that's powering new hobby stores and new WPN stores and creating a virtuous cycle for us. So I would say from a top line perspective to a bottom line perspective to an engagement funnel perspective, MAGIC is extremely healthy. And Universes Beyond is probably the most successful new player adoption initiative that we've ever done.

Okay. Great. Very helpful. And then on the second half guide for Wizards, I think you mentioned kind of more moderated growth rates. So I guess maybe to put a finer point, you're expecting still growth in the back half for Wizards? Or how should we kind of think about that?

I think Q4 is going to be the comp for MAGIC and Wizards just because we had a pretty big one last year. Q2 should be pretty good. Q3 should be pretty good. Q4 is the one where that might be down.

Yes. In total, I would say our back half, call it, up low single-digit rates when you combine both what we're going to see in Q3 versus the decline in Q4.

Our next question comes from the line of Gerrick Johnson with Seaport Research Partners.

On the network breach, perhaps you could provide a few more details. What specifically was delayed? Was it like specific lines or specific factories? And is there any risk of further delays? And do the delays affect anything that's time sensitive like shelf date for Spider-Man or Star Wars?

Yes. So we're not going to talk a ton about the details of the breach itself, but know that it didn't really impact any of our suppliers, because we use co-manufacturers for all of our supply.

So as it happened, we took down all of our systems to protect the environment. And what we've been working through since the end of March is bringing all of those systems back online. And we prioritized getting all of our financial systems stood up so that we could report our earnings and file our Q. And we are now in the process of turning back on all of our other systems impacting order management, shipping, invoicing, et cetera. We are on track to have that done by, call it, June time line. So we are proceeding at pace. The situation itself has been contained. We don't see -- foresee any future risk here. It's now just a matter of us getting everything back operational.

Okay. Great. And then on MAGIC on tabletop, what kind of printing capacity, card stock availability, card stock pricing, those sort of metrics, how are they trending this year versus last year?

Well, I'd say trading cards is probably the hottest category in all of toy and games. I mean, I think, it's fair to say the category is going to eclipse building sets either this year or next year in terms of total size, just given the trends. So supply is always a challenge, especially with a bunch of new entrants. I think the good news is, we have a lot of long-standing and diversified supply chain relationships. We have multiple paper and card stock sources that we've validated from multiple different countries, like we have a U.S. supplier, a German supplier and a Japanese supplier, just to name 3.

So I feel pretty good about our ability to chase demand. Where we might see some impact is on some shorter-term demand, like if something vaporizes or sells out really fast. We used to be able to accommodate a reprint inside of 6 weeks. Now that's more like 3 to 4 months. But I think when you look at the backlist rates, the MAGIC consumer, both the player and the collector is sticking around and being patient and they're willing to buy it. And we helped to accommodate that behavior by extending the time lines about how long cards stay in rotation. So it used to be a card that stay in rotation for 18 to 24 months, and now it's more like 32 to 36 months. So there's multiple ways to help to compensate when we do have little creases here and there in our ability to provide supply.

Our next question comes from the line of Kylie Cohu with Jefferies.

Target reported earnings earlier this morning as well. And on their call, they sounded pretty cautious on inventory buys. I was curious what you guys were hearing from retailers and if there was any changes in retailer posture specifically.

I think the retailers are behaving the way that we would expect them to behave. And we've got a lot of good products in a lot of categories that are growing very, very quickly. And our POS is good. Our GEM2 approach, gamified, entertainment, multi-purchase, multi-generational, those categories in 2025 grew about 22%, while the balance of the toy industry declined 3%. And so, I think, when our retailers see growth in those kinds of categories and those kind of brands with those kinds of demographics, they tend to have fairly liberal open-to-buy orders.

Yes, I agree. I mean, we came into the year with pretty healthy inventories, both owned and retail, and we continue to see that play through as we move through the first quarter. So adding on to what Chris said, plus the entertainment slate that we have coming up, we feel like we're in a really good position with our retailers.

Great. That's super helpful. And then you flagged oil-related cost pressure from freight, resin and packaging, really impacting more of the back half. Can you help us quantify any expected gross margin impact? How is that kind of -- how are you mitigating that with pricing, mix, productivity actions? And is this pressure largely contained to consumer products? Or is there any meaningful spillover in the Wizards?

Yes. Great question. It's largely contained to Consumer Products. I mean, obviously, freight impacts the entire company, but I would say most of it, just given where resin goes is in our Consumer Products. The rough impact for this year is about $30 million, and that is assuming that oil stays around that $100 price per barrel. And so we have some favorability that's coming in from tariffs. There's roughly about a $15 million good guy from when we started the year on tariffs, plus we've taken other actions to accelerate productivity, accelerate some of the cost savings that we had within operating expense.

We're managing our mix and pricing environment differently. So we feel like we're going to be able to mitigate the impact of just that kind of oil increase as we move through the back half. But you're right, it's all really Q3 and Q4 related. But our margins are planned to grow in Consumer Products in both Q3 and Q4. That's how much kind of ammo we've put onto it to be able to offset.

Our next question comes from the line of Arpine Kocharyan with UBS.

Great to hear from all of you. I wanted to follow up on some of the earlier comments on MAGIC. And I know you don't like to provide breakdown of different MAGIC releases, but would it be possible at all to give us a sense of how much of Q1 outperformance was driven by Ninja Turtles and how much of that set continues to contribute into Q2 MAGIC revenue? And I have a quick follow-up.

Ninja Turtles did at or above our expectations for the quarter. And I'd tell you what I think really overperformed was Lorwyn Eclipsed. It's not just beat the prior best-selling set, first-party set, it did it by quite a handsome margin. And the great news is Secrets of Strixhaven, which came out just 3 months later, handily beat Lorwyn Eclipsed as well. So we're seeing good underlying demand, whether it's Universes Beyond or first-party IP.

That's super helpful. And Chris, maybe this is a bigger picture question on MAGIC ARENA. I think ARENA is sub 10%, 15% of the business today. When it was first rolled out, I think it was as high as 20%, 25% of the MAGIC business. And you've said previously that we could see ARENA revamp to be more aligned with the strong growth you've seen in the rest of this business. The deal you announced for ARENA, I guess, is that part of the upside and in line of -- with what we should see more of? Or down the road, there is more strategically that you're considering for ARENA?

Well, I think it's important for us. So I think the one you're talking about is with the Walt Disney Company and getting Marvel and Spider-Man on there and future Marvel sets. It's important for us to have one-to-one compatibility between what a person can buy in a hobby shop or in a Walmart with what they can play online. That's just a more fun and more complete ecosystem. So I definitely think that's going to be a tailwind for digital MAGIC and for MAGIC as a whole.

I think though what you're seeing with ARENA and why it's a shrinking percentage of total MAGIC sales is ARENA was designed for one format of play, which is called Standard, which is kind of a one-on-one, very competitive form of play. It's a lot of fun and it's popular, but a lot of MAGIC's growth has been through collectibility through things like we've done with Collector Boosters and Secret Lair as well as more socially-oriented play like we've seen with Commander, which is now the most popular format of play in MAGIC.

And so I think in the future, what you'll see from us as we invest in new digital iterations of MAGIC, both on ARENA and outside of ARENA is leaning into those insights that have driven the overall ecosystem. So more Universes Beyond, more collectibility, more tradability and more social kind of multiplayer-oriented play. And I think we'll -- we're working on those. I think those will kind of roll out over the course of a couple of years. And it will be both from the ARENA team as well as other talented teams that we work with.

Our final question this morning comes from the line of Anthony Bonadio with Wells Fargo.

So I guess just to follow up on the MAGIC launches. Given the success you've seen with Strixhaven and Lorwyn, I guess, does that at all change your thoughts on the mix of Universes Beyond versus owned IP sets? And just more broadly, how you're thinking about that mix at this point?

I think we're always playing with what the right mix is. And really, it's kind of a combination of the creative inspiration of the MAGIC team, feedback from the audience, what's available when and just kind of has the vagaries of release cadences.

I think we're at a decent place right now. Could it be plus or minus 10% in terms of how much is first-party versus how much is Universes Beyond? Yes, do I think things like the new Netflix series, which is going to be killer, probably one of the biggest animation events, that certainly for fans, that Netflix has helped to invest in. I think that could influence the first-party mix in a positive direction.

And I think at the end of the day, it's just a win. It's a win for our fans because there'll be more of them and more excitement. It's a win for us because we'll be able to sell more MAGIC sets. And ultimately, it will be a win for our Universes Beyond partners because there'll just be more people buying MAGIC and playing MAGIC and more opportunity for them to participate in it as well.

Got it. That's helpful. And then just on Monopoly Go! it seems like that eased a little bit sequentially in Q1, but it's remained pretty consistent over the last few quarters. So can you just talk a little bit more what you're seeing there? And then what's included in guidance?

Yes. Monopoly Go! continues to, frankly, be a juggernaut. The Scopely team is absolutely killing it. They've got a great game. They've got great partnerships and fantastic collabs. And that's going to be a game that's going to meaningfully drive fan engagement for years and years to come and meaningfully contribute to Hasbro's bottom line. It's basically the equivalent of a couple of blockbuster movies worth of incremental licensing and product sales for us every year, which is just fantastic. And we really appreciate the partnership with Scopely, and we really appreciate the engagement our fans have in that game.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session and will conclude our call today. We thank you for your interest and participation. You may now disconnect your lines.

Good morning, and welcome to the Hasbro Fourth Quarter and Full Year 2025 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. [Operator Instructions]

At this time, I'd like to turn the call over to Fred Wightman, Vice President, Hasbro Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Joining me today are Chris Cocks, Hasbro's Chief Executive Officer; and Gina Goetter, Hasbro's Chief Financial Officer and Chief Operating Officer. We will begin today's call with Chris and Gina providing commentary on the company's performance before taking your questions.

Our earnings release and the 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 like to turn the call over to Chris Cocks. Chris?

Thanks, Fred, and good morning. Last year, we introduced Playing to Win, our strategic road map to guide Hasbro from turnaround into a new era of growth and profitability. Add score are two pillars: play and partnership. Those pillars define Hasbro. Our brands have been to lighting fans since 1860 when Milton Bradley introduced his first board game. Partnership has been equally foundational. We have worked with premier partners for more than 70 years, beginning with the Walt Disney Company in 1954. Today, we work with over 1,000 partners across more than 5,000 collaborations. Play in partnership anchor everything we do. They power our mission to bring joint community to fans of all ages through the magic of play. And our KPI for that mission is simple, delight. So how many kids, families and fans did we delight over the past year? When we announced Playing to Win, we used objective measures like YouTube views, [ Carcano ] point-of-sale, box office receipts and sensor tower data to estimate our annual reach. Our initial estimate was 585 million people. It turns out that was conservative. Since then, we have continued to refine our understanding of brand reach. In late 2025, we conducted a large-scale survey across eight major markets, reaching tens of thousands of consumers and combine those results with third-party data to better understand the reach of our brands. The result was clear. Hasbro now reaches more than 1 billion people every year.

From Transformers movies to families visiting Peppa Pig theme parks to Magic Plate and Hobby shops around the world has re positively impacted nearly 1 in 8 consumers globally. I'm incredibly proud of that. It puts into perspective why we do what we do, and why we are pushing so hard to position this company for its next century. Our brands and partnerships create joy for an enormous audience through the simple, powerful magic of play. That delight is not abstract. It is showing up directly in our results. Inspiring a lifetime of play is what animates our teams. And in 2025, they translated that passion into outstanding performance. In the fourth quarter, Hasbro grew revenues by more than 30%. Adjusted operating profit grew nearly 180%. Our Consumer Products business returned to growth, up over 7% with Monopoly, Peppa Pig and Marvel all growing. Wizards of the Coast capped off a remarkable year with 86% sales growth in the quarter, driven by the combined strength of Magic and Digital. For the full year, Hasbro grew revenue 14%. Adjusted operating profit margin reached a record level above 24%. Adjusted operating profit exceeded $1.1 billion, also a record. That momentum is being reinforced by partnerships across the company.

In toys, we added KPop Demon Hunters, the global phenomenon and Netflix's most popular film as a co-master toy licensee. That partnership is already underway with a Monopoly deal crossover and many more exciting new role play, interactive plush and games coming over the next few months. This morning, we also announced the primary toy license for the world of Harry Potter, and the upcoming HBO original Harry Potter series with Warner Bros. Discovery. Joining new recently announced partnerships for Voltron, with Amazon, MGM Studios and Street Fighter with legendary pictures. These collaborations will begin in the back half of 2026 and build into 2027. These are iconic franchises with global reach, and we are honored to partner with such world-class IP owners.

Shifting to Wizard of the Coast, Magic delivered a record fourth quarter and grew sales nearly 60% for the full year. We have a powerful lineup in 2026. It includes original IP like Lorwyn Eclipsed and Secrets of Strixhaven, alongside a blockbuster slate of universes Beyond collaborations, including Teenage Mutant Ninja Turtles, Marvel superheroes, The Hobbits and Star Trek. Avatar, the Last Airbender, which launched in late November, is now the third highest selling set in Magic's history, trailing only Lord of the Rings and Final Fantasy. At the same time, Secret Lair delivered its largest quarter ever and back with sales once again set a record. This balance of Tentpole releases, premium offerings in Evergreen Play reflects how the Magic system is designed to perform. That momentum has carried into the new year. Lorwyn Eclipsed has already become the fastest-selling Magic IP Premier set ever surpassing Tarkir. Player growth continues to underpin these results. Through the end of 2025, more than 1 million unique players participated in organized play, representing a 22% increase year-over-year. That growth is supported by a global play network. We now have more than 10,000 active Wizard display network stores worldwide, up over 20% year-over-year with expanded reach across traditional retail partners. Taken together, this reinforces our confidence in Magic's long-term growth. We are building a system of play with multiple entry points, product types and engagement paths, and that system is positioned to continue driving growth into 2026 and and beyond.

In the fourth quarter, we also shared more about our self-published video game strategy, including a new gameplay trailer for our science fiction RPG EXODUS and the first reveal of our D&D Action Adventure game, War Lock. Both titles have been in development since 2019 and are led by some of the most experienced, creative and development talent in the industry. The response has validated our confidence. Since debuting at the game awards, trailers for these titles have been viewed more than 100 million times across social, gaming and owned channels. We expect both games to launch in 2027, beginning with Exodus in the first part of the year. We will share much more later this year, including extended gameplay walk-throughs that allow fans to fully step into the world's Archetype Entertainment and Invoke have built. All of this reflects meaningful change, new partnerships, new distribution, new digital capabilities, and it represents only part of what we have in motion.

In 2026, we expect our largest year ever with our longest-standing partner, the Walt Disney Company. We are launching products tied to four major films. Disney and Pixar, Toy Story 5, Star Wars, the Mandalorian & Grogu, Spider-Man: Brand New Day and Marvel Studios Avengers: Doomsday, alongside an all-new Magic collaboration with Marvel Superheroes. We also have a strong lineup of collectibles and exclusives, including standout pulse drops later this year. We're introducing creative new ways to experience PLAY-DOH that age up the brand later this year. Peppa Pigs, Baby Sister EV will celebrate a year of first as she approaches her first birthday, and we recently announced that Peppa's younger brother, George is moderately deaf as we continue to champion stories that reflect real children and families around the world. Transformers will begin celebrating the 40th anniversary of the 1986 animated film with a new product line and surprises throughout the year. D&D has major category expansions coming later this year, alongside continued growth on D&D beyond. We also announced a partnership with HBO and Craig Mason on a Balder gate series. Coming off the success of the last of us, Craig demonstrated what is possible when games serve as premium source material. That success reinforces our strategy to unlock long-term value by bringing our world to life with top-tier creative partners across more than 60 active entertainment projects.

Before I close, I want to address AI, and how we're using it at Hasbro. We're taking a human-centric creator-led approach. AI is a tool that helps our teams move faster and focus on higher-value work, but people make the decisions and people own the creative outcomes. Teams also have choice in how they use it, including not to use it at all when it doesn't fit the work or the brand. We're beyond experimentation. We're deploying AI across financial planning, forecasting, order management, supply chain operations, training and everyday productivity, under enterprise controls and clear guidelines around responsible use and IP protection. Anyone who knows me knows I'm an enthusiastic AI user and that mindset extends across the enterprise. We're partnering with best-in-class platforms, including Google Gemini, OpenAI and 11 labs to embed AI into workflows where it adds real value. The impact is tangible. Over the next year, we anticipate these workflows will free up more than 1 million hours of lower-value work, and we're reinvesting that capacity into innovation, creativity and serving fans. Our portfolio of IP and the creators and talent behind it are the foundation of this strategy. Great IP plus great storytelling is durable as technology evolves, and it positions us to benefit from disruption rather than being displaced by it.

In toys, AI-assisted design, paired with 3D printing has fundamentally improved our process. We've reduced time from concept to physical prototype by roughly 80%, enabling faster iteration and more experimentation with human judgment and human craft determining what ultimately gets selected and turned into a final product. We believe the winners in AI will be companies that combine deep IP, creative talent and disciplined deployment. That's exactly where Hasbro sits. As we enter 2026, we view Playing to Win and more importantly, the execution behind it by our Hasbro, Wizards of the Coast and digital studio teams as a clear success. Despite market volatility and a shift in consumer environment, we returned this company to growth in a meaningful way. We delighted more than 1 billion kids, families and fans, secured partnerships that further underwrite future growth, advanced our evolution to a digital-first play an IP company and delivered record profits for our shareholders. In 2026, we expect that momentum to continue. Hasbro is firmly back on the growth trajectory powered by play, partnership, new digital capabilities and most importantly, our extraordinary brands.

With that, I will turn it over to Gina to walk through the financial details and our outlook for 2026. Gina?

Thanks, Chris, and good morning, everyone. We closed 2025 with good momentum in the fourth quarter and clear evidence that our Playing to Win strategy is working. While the year included meaningful transformation actions and macro volatility, performance reflects the advantage of our diverse portfolio, the durability of our gaming-led growth model and disciplined execution. We delivered double-digit revenue growth, expanded adjusted operating margins, generated substantial cash flow and exited the year with increased financial flexibility.

Looking at the fourth quarter, net revenue was $1.5 billion, up 31% year-over-year, with growth coming from both of our main segments. Adjusted operating profit was $315 million, up 180% versus prior year, resulting in a 21.8% operating margin. Adjusted earnings per diluted share were $1.51, capping a year of accelerating momentum. For the full year, net revenue grew 14% to $4.7 billion driven by exceptional performance in Wizards and continued progress across the rest of the portfolio. Adjusted operating profit increased 36% to $1.1 billion with an adjusted operating margin of 24.2%, up nearly 400 basis points versus last year, driven by favorable mix and cost productivity. Adjusted earnings per diluted share were $5.54.

In terms of segment performance, in Q4, Wizards' revenue grew 86% to $630 million, driven by Magic, which was up 141% versus last year, behind the strength of Avatar, The Last Airbender, and Final Fantasy's holiday release. Operating profit in the quarter was $284 million, resulting in a 45% operating margin. For the full year, Wizards' revenue increased 45% to $2.2 billion, with operating profit of just over $1 billion and an operating margin of 46%. Magic's revenue grew nearly 60%, reinforcing its position as one of the strongest gaming franchises in the industry. Core Magic KPIs remain healthy with growth in distribution, and a record year for Secret Lair and backlist. Monopoly Go! continued to be a steady revenue and profit stream, contributing $168 million with the monthly revenue pool remaining largely consistent as we move through the year. The overall mix of business resulted in 420 basis point improvement in margin and a solid foundation heading into 2026.

Consumer Products executed well in the fourth quarter, delivering $800 million of revenue, up 7% behind the strength of Hasbro Gaming and Marvel. Adjusted operating profit was $54 million, reflecting improved product mix and promotional discipline, while supply chain productivity nearly offset the cost of tariffs. For the full year, Consumer Products revenue declined 4% to $2.4 billion, and delivered an adjusted operating profit of $113 million, demonstrating resilience and an improved cost structure, even after absorbing nearly $70 million of tariff impact. Owned and retail inventory positions remain healthy, and we exited the year with owned inventory at a record low of 75 days. Entertainment performed in line with expectations for the quarter and the year, delivering stable revenue and adjusted margins consistent with our asset-light strategy. Our cost transformation efforts contributed over $175 million in gross savings across supply chain, product development and operating expenses driving margin expansion and helping to offset the impacts from tariffs. Through 2025, we have delivered almost $800 million of gross cost savings and are well on our path to the $1 billion commitment.

From a cash and balance sheet perspective, 2025 was a strong year. We generated $893 million of operating cash flow, ended the year with $777 million of cash on the balance sheet. We returned $393 million to shareholders through dividends while continuing to reduce debt and invest behind growth. We reached our gross leverage target, finishing the year at 2.3x behind increased earnings and a reduced debt load. Looking ahead to 2026, we are entering the year with momentum clarity and a durable foundation. Wizards remains our primary growth engine, supported by a robust pipeline and sustained engagement across tabletop, digital and licensed gaming, and we expect consumer products will benefit from a healthy entertainment pipeline, which will enable improved consistency and margin performance.

Turning now to guidance. We expect Hasbro consolidated revenue to grow between 3% and 5% year-over-year on a constant currency basis, with growth across each of our segments. We expect operating margins to be between 24% and 25% for the year, reflecting continued operating leverage and disciplined execution. And we expect adjusted EBITDA to be in the range of $1.4 billion to $1.45 billion. At the segment level, Wizards is expected to deliver mid-single-digit revenue growth supported by a healthy release cadence and continued engagement across the Magic ecosystem. Operating margins are expected to remain in the low 40% range, reflecting the underlying strength of the business while absorbing higher royalty expense and incremental costs associated with our planned 2027 video game releases, Exodus and Warlock.

In Consumer Products, we expect revenue to grow low single digits year-over-year with operating profit margins in the 6% to 8% range. Revenue growth is buoyed by the strong entertainment slate from our partners at the Walt Disney Company, creating leverage through to the cost structure. Entertainment revenue is expected to be slightly positive year-over-year with operating margins of approximately 50%, reflecting the asset-light nature of the business and continued discipline around investments. The 2026 outlook assumes approximately $150 million of gross cost savings from initiatives across supply chain, including the manufacturing diversification efforts as well as a continuation of our transformation in several areas impacting operating expense. In terms of phasing, we expect stronger revenue growth in the first half driven by the timing of entertainment-related releases within consumer products, normalized retail order patterns and year-over-year shift in the cadence of Magic set releases. The stronger revenue growth in the first half will have a negative impact on margin as the growth in both segments carries a higher royalty expense.

Margin expansion will come in the second half driven by a favorable business mix within Consumer Products, a step-up in productivity across supply chain and leverage within operating expenses. Tariff costs will be relatively flat year-over-year in the back half with much of the incremental cost laying in the front half of the year. Capital allocation priorities are largely unchanged from last year. We will continue to invest in the business specifically behind our highest return growth opportunities, led by Wizards and digital gaming. Second, we are focused on paying down debt and maintaining a healthy balance sheet. And we remain firmly committed to returning cash to shareholders through our dividend. The board has authorized the first quarter dividend, reinforcing our confidence in the durability of our cash flows.

Finally, we are restarting share repurchases, and the board has authorized a new $1 billion share repurchase program, providing additional flexibility to return excess capital to shareholders over time. While we do not provide EPS guidance, there are a few important items below the operating line to highlight for modeling purposes. First, interest expense is expected to be higher year-over-year primarily related to planned refinancing activity. And second, we expect lower nonoperating income driven by translational foreign exchange impacts and the absence of prior year benefits related to the Swiss deferred tax asset. Taken together, these items represent approximately a $40 million year-over-year headwind to EPS, even as operating income continues to grow.

In summary, the 2026 outlook reflects the progress we've made as we executed the first year of our Plan to Win strategy and the durability of the business we're building. We are growing from a stronger earnings base, operating with greater discipline and allocating capital with intention. As we move through 2026, we believe the cadence of profitability becomes increasingly favorable, keeping us on track to our medium-term financial commitments.

And with that, I'll turn it back to the operator for questions.

[Operator Instructions] The first question comes from the line of Megan Clapp with Morgan Stanley.

I wanted to start with Magic. Obviously, really impressive growth in the fourth quarter in the year and really nice to hear the momentum has continued with Lorwyn into the start of the year. I think a key investor focus and question we still get a lot is how do you lap what you just delivered as we look into fiscal '26. You talked about kind of mid-single-digit top line growth for Wizards. I think most of that is probably driven by Magic. So can you just kind of take a step back and unpack some of the assumptions that are underlying your Magic guide for the year. You've got the extra half set. The back list, obviously, momentum remains strong there. You talked about Secret Lair record in the fourth quarter as well. And then the player growth up 20% year-over-year. Can you talk about just how what you're seeing from some of these newer players plays into it as well.

Yes. Good morning, Megan, I'll start, and then Gina can correct everything I say. I think it really comes down to several growth vectors. The first one is distribution growth. We're seeing meaningful growth in our Wizards Play Network, that was up 20% last year. We think it's going to be up double digits this year again. We're seeing incremental distribution as the brand expands and the player base expands. So I think mass market and non-WPN-based distribution growth exceeded last year, WPN growth and will exceed it again this year. Player growth has been robust. I think the organized play metrics we're giving you are just kind of hard core or core player growth, the people who play in stores. Our metrics for non kind of hardcore players are a little more loose, but we think that those are growing well in excess of that 20%. And importantly, as we're bringing on new kind of casual fans or new to Magic fans and collectors, they are sticking around, and you're seeing that evidenced in robust backlist and higher organized play participation. So what we're seeing going on with Magic is a virtuous cycle of there's more places to buy, there's more people playing. They're engaging longer and sticking around. And that just leads to increased set over set performance like we're seeing with Lorwyn, and we see that continuing into 2026. Not to mention, we've got a stacked lineup of partners. You've got Teenage Mutant Ninja Turtles, the Hobbits, Marvel Superheroes and Star Trek plus some real fan favorite sets like Lorwyn and Strixhaven on top for this year.

Yes. I guess, Megan, my add would be, as we think about the phasing for the year, there's a front half in the back half. And when you split really most of the growth for the business that's going to come in the front half of the year, just sheerly because of what we're comping in Q4. If you look kind of quarter-by-quarter basis, all three -- first three quarters are going to continue to grow for magic. It's really about that fourth quarter. So expect really strong performance in the front half of the year, really good performance in the back half of the year as well. It's just we have a massive comp in Q4.

Right. Okay, super helpful. And then maybe just a follow-up on partnerships. Chris, you talked a lot about Playing to Win and the growing role partnerships are playing in your prepared remarks, we've obviously seen a step-up in announcement over the last week, including Harry Potter this morning. Can you just talk a little bit about what's driving the momentum in this expanded partnership slate? And specifically, how the business is transformation, what you can maybe now offer the partners has changed the conversations and maybe made you more of a partner of choice? And then for Gina, like does this change how you think about the medium-term top line growth for CPU just as we only have strong year this year, but a lot of this will layer into '27?

Yes. So I read a lot of business books. I get out about them, I bore the management team with them. And Jim Collins is one of my favorite. He has this kind of concept called a hedge out concept, which is what's the thing that you're uniquely the best at in the world as a company or could be the best out in the world. We call it our superpower. And we believe Hasbro's Super Power is inspiring a lifetime of play. We are a company that uniquely can engage a consumer as young as 2 or 3, and extend that play relationship well into -- throughout their entire lives from 2 to 99 and beyond. And I think the partners that we're working with they have brands that are multigenerational, that have been around for a long time that appeal to preschoolers but also appeal to collectors. And I think what a partner chooses Hasbro, they choose us because we can uniquely do that among most toy and collectible companies out there. And so whether it's KPop Deman Hunters, which is Netflix's biggest film ever and really kind of appealing to kind of that tween and teen crowd or 52-year-old CEOs like myself. Harry Potter, which is celebrating what its 30th 25th anniversary, best-selling book series, hundreds of millions of fans, people flocking to theme parks. Voltron, which is like a seminal kind of collector brand from like the 1970s and '80s. I remember having my breakfast cereal watching Voltron, as a kid, or iconic video game series like The Street Fighter, it just works hand in glove with what Hasbro is great at. And so I think as you see us announce these partnerships, they're really going to lean into gamified product opportunities, entertainment and event-driven kind of brands that like supercharge inside of our distribution system, they're multi-purchase and highly collectible, and they're multigenerational. And I think that's true for the toy side of the business as well as the game side of the business. So you're seeing us execute this playbook on Magic. You're going to see us execute it on Dungeons & Dragons, and you're seeing us execute across our toys and collectibles.

Yes, Megan, my add would be -- first, I want to give a huge shout out to Tim Kilpin and his team for securing so many valuable partnerships for us on the toy and game side. We've been talking for years a couple of things that are going to continue to move us up the margin scale in CP and scale is one of them. And so these licenses help to build that scale in a very productive way for Hasbro. And so as we think about our midterm outlook, and really that top line number for CP, we see this year as the inflection point. We're back to growth. We're guiding to growth for CP. And when we look out into '27 and '28, we see that continuing. So we do think that these licenses are really valuable purpose and just bringing our entire kind of fleet of brands and capabilities to life.

The next question is from the line of James Hardiman with Citigroup.

I wanted to sort of follow along that path of obviously, Wizards top line was better certainly than any of us would have expected even the most bullish expectations coming into the year. But I wanted to unpack the margin a little bit because that also blew away expectations, right? I think you were assuming that margins would contract this year or last year, I guess, I should say, given the mix of the business, and I think it expanded 420 basis points, right? And so as we think about 2026, clearly, part of the reason we're again expecting contraction is the video games and their dilution to margins, but maybe help us unpack sort of the structural margins of Wizards versus sort of -- or at least a tabletop business versus some of these other offsets that may, for a period of time, compress that a little bit? Because it feels like this isn't just sort of a temporary, like things got better in '25 and then they'll contract back to where we thought they would be. It seems like this is maybe more of a permanent benefit.

Yes, good morning, James. Good question. The -- we've always said that the Wizard segment margins are going to kind of play and dance within that high 30s, low 40s. To your point, we ended the year '25 quite a bit more favorable than that, really driven by by mix and leverage that kind of flow through the P&L as well as we had some nice pickups in cost productivity through the fourth quarter within the supply chain that benefited us. As we look into 2026 and the overall mountain profile, we do expect to give back a little bit of that, mainly because royalty expense is going to continue to increase, plus as we move through the back half of the year, we will be stepping into some additional expenses related to the launch of the two games in 2027. So the -- to your point, the overall margin foundation is quite solid, being in that high 30s, low 40s is the right range for us. Now video games, when we get to that point in '27, that will be, as we've talked about in the last call, it will take a bit away from margin in that sense. But we're going to still be within that high 30s, low 40s business.

Got it. That makes sense. And then maybe switching to CP guidance, low single-digit revenues, operating profit, 6% to 8%, maybe help us unpack that. I mean, what are you assuming from a point-of-sale perspective? And are there any sort of tailwinds as we think about whether it's inventories being a little depleted heading into the year? Or I think you made the comment that retail ordering patterns were ultimately negative to the top line for '25 just based on the tariffs and the DI the [indiscernible]. Does that become a tailwind at all to 2026, or is CP revenues being up low single digits, pretty consistent with how you're thinking about retail?

Got it. Okay. So let's start with where we landed on the year on inventory. So coming out of the third quarter, if you go back to our comments there, our retail inventory was, call it, down mid-teens. We ended the year probably down high single digits at retail inventory. So probably filled a little bit of pipeline in through the fourth quarter. And I would call it the right resting spot for retail inventory just given the macro macro environment and what is still happening with tariffs. So I don't expect, as we move into 2026, any sort of retail inventory as being a big positive or negative for the year. It's just kind of kind of whole serve as we move throughout the year. The big tailwinds that I see for us in '26 really come on the back of a stronger entertainment slate. So I mean for movie releases from our partners at Disney usually lead to nice top line growth for us. And we have -- when you look at kind of front half, back half for CP pretty balanced. So we're expecting kind of low single-digit growth throughout the balance of the year. The one point that we call out when we think about the second quarter, just keep in mind, that was where we had all of the the tariff-related noise in 2025. So our second quarter is going to be pretty big. The cadence or CP will be -- the first quarter will be down, and that's largely driven by some onetime comps that we have within licensing. Q2 will be up pretty strong just given this comp that we have from the tariff event in '25. And then the back half of the year, I believe we've got -- Q3 is up and Q4 is up slightly. So it's a really balanced delivery for the business over the course of the year.

Our next question is from the line of Gerrick Johnson with Seaport Research.

So I want to ask on Magic. What do you think the ratio or the proportion of table top sales go to players or go to games being played. And what proportion go to collectors and collections?

Gerrick, first half welcome back. It's great to have you back on the call. I would say Magic is overwhelmingly player base or player collector. And that's unique among a lot of trading card games. I think some of our competitors are much more heavily collector based. So what's good about that is it gives us kind of the stable base of play and community that I think can last if there's any kind of wobbles in kind of collector sentiment, or overall kind of like value pool available to collectors. If you ask me to kind of pin me down to a number, I think we're probably 80% to 90% players or player collectors and relatively small portion of collector only.

Okay. Fantastic. And it's toys -- your licensing revenue was down, and I thought that was a major plank in the strategy. So has that out-licensing program stalled, or what's going on there? And why did that not grow?

Yes, good question. That is -- so no, it has not stalled. That is really our -- my Little Pony Trading Cards Comp that we had coming out of '24. So there's that one -- our partner, Caio, had a huge year in '24, and I think it was the first part of 2025, but then we started comping that as we move through the year. But all of the other kind of underpinnings of the business are quite healthy.

Yes. Our point of sale for out-licensed toys was up mid-teens, location-based entertainment was up like probably 20 or 30 locations year-over-year off of a base of around 200. It's now like around 225 music and entertainment were both pretty solid. A little bit of that is also you have some MGs, and you have some revenue recognition, which smooths out over time. But really, the wobble last year was My Little Pony trading card specifically in China.

Our next question is from the line of Stephen Laszczyk with Goldman Sachs.

Chris, on the theme of AI, I'd be curious to get your latest views on how AI impacts the video game industry, whether that's on the cost curve, barriers to entry into the industry itself or the type of game play that consumers will come to expect. And then within that, would be curious, if you could just detail how Hasbro is positioning itself. I guess maybe AI as an emerging factor here as a relative newcomer to the video game industry.

Well, I'll break it down short term, midterm, long term. Short term, I think AI is just a productivity boom, and that will affect every industry. Whether it's finance, operations, how you think about inventory management, forecast planning, it's just a significant time saver we conservatively think it's going to save us about 1 million people hours' worth of work this year, a lot of which we already outsourced and can kind of harvest that into savings and reinvest into the business. So instead of having to like manage touch a bunch of orders, we can spend that time and innovate or deliver for our customers or our partners. And I think that will be true inside of video games as well. Midterm, I obviously think AI kind of transforms how you think about concepting, how you think about idea generation, even how you think about asset creation. I think though that, that's going to be executed on a game-by-game and brand-by-brand basis based on what the consumer wants and what your partners want you to do. And I think that's going to take a couple of years to kind of play out, but you're already seeing AI embedded in creative workflows like the Adobe Creative Suite. It's just going to be something that will make things faster. We're seeing tangible benefits from that, particularly in toys, where our ability to concept and make an early kind of prototype real has 10x in terms of speed. And so we're -- instead of like -- instead of saving and just doing 1 toy concept, we do 10 toy concepts in the same amount of time at the same amount of cost. And it just allows us to be able to bring an idea to life better and choose a higher hit rate. And then long term, I really think you have to not think about, hey, how can I make a current game cheaper or a current toy cheaper or better I think it's going to open up all new categories of play and all new opportunities that we can barely imagine today. I think you're going to see some of those products from Hasbro. I think they're going to be physical as well as digital. And I think our focus is going to be on the collector market and adults initially. But I think over time that that's going to spread as the technology matures and as consumers kind of become more comfortable with it. and it's going to open up all new engagement opportunities and all new revenue opportunities.

Great. And then maybe secondly, on Monopoly Go!. It's holding much better than most of us have been expecting coming into the year. Just be curious if you could unpack some of the key drivers there as we went into year-end and then your expectations as we look ahead into the 2026 on what the top line contributions from the game could be this year?

Yes, good morning. Really looking into '26, we see it staying pretty stable. So call it that $12 million to $14 million run rate per month is what we're planning for. We're seeing the decay rates in line with expectations and where we've been able to pick up is just the UA expense itself has gone down. So we see that our overall revenue pool is staying pretty consistent.

I'd say scope has been pretty adept at value capture as well in terms of like the ways in which people can buy a product, buy a dice or buy product inside of the experience. That's also helped.

The next question is from the line of Arpine Kocharyan with UBS.

Great quarter, congratulations. All the details you provided for segment look is very helpful. I was wondering when I look at your overall revenue guidance of 3% to 5%, I was wondering if you could talk a little bit about overall top line growth put and takes and specifically what will result in the lower end of that range and what needs to happen for upper end of that range or better. I'm mostly trying to understand whether the lower end of that range is more driven by consumer product business. And then just really for my second question, you had talked about two digital game releases a year. It seems like Monopoly Go! is still going pretty strong, which is incredible. But could you maybe talk about the pipeline of that you're looking at that you think sort of lend itself well into digital gaming and what those opportunities could mean for Hasbro for 2026 and 2027.

Arpine, good morning. A couple of things on the range and what dictates it. I think there are probably 3 factors that probably play into it the most. The first is our ability to provide supply and chase product. Actually, Magic was rate constrained last year based on our ability to just produce and drive reprints. And you typically have a little bit of wobble inside of your supply chain in terms of availability and timing. And so I think that will play in both in magic as well as toys. I think we have a heck of an entertainment slate on tap for this year. from Disney, from Amazon, from legendary pictures. And depending on how those go, that could be quite a big over-under for us. And then I think the last thing, which is always kind of omnipresent is just what's the strength of the consumer. Right now, we continue to see kind of a tale of two cities, the top 20% of households in terms of wealth are really driving a lot of demand and are staying pretty resilient. The lower quintiles of kind of wealth and income, their pennies are pinched. And so we're trying to appeal to both. If the economy proves better, if like some of the tax refunds that are untapped in like the U.S. market proves to be kind of shared out versus like going into the bank account, that could be a boon for us as well.

I might only add our opinion would be by the middle of the year, we will have a better sense for how some of these things are shaking out. And how strong the movie releases are, how strong kind of the EV sets are. But there's -- we feel good about the guidance range that we went out with.

So I'm sorry, you had a part two, Arpine, I want to make sure we...

Yes, about digital gaming and the pipeline, what that looks like?

Yes. So we have -- we continue to have a really strong digital licensing business, which continues to grow. Last year, we had SORRY! WORLD from Gameberry Labs that did pretty well. We have Monopoly Go!, which continues to do really well. It's probably one of the most successful mobile game launches in history, and Scopely have been fantastic partners. From our self-published side, we feel pretty good about the early demand indicators and interest indicators for both Exodus and Warlock. Those will be two pretty big tests for us next year, and we continue to invest in digital games. As we're thinking about the portfolio moving forward, I think the good thing about digital games is we're getting past kind of like the start-up phase. You typically have a lot of costs associated with starting studios and building up publishing capacity. I think that will help with profitability as we get past 2027. We're also doing a lot of new partnerships. Last year, we announced a joint venture with Sabre on a game. We're going to have several more that we're going to announce, and that will help with the risk to frame in. And then we're investing more heavily in new talent markets for games. So Montreal is about half the cost of what -- like the West Coast or Texas is in the U.S. we're leaning in there. And likewise, we're leaning into a lot of Eastern European and offshore-based talent, which, again, I think could even be half the cost of what even Canada is. And so that will allow us to make better games. That will allow us to be able to put more man years into the games and have more content and hopefully also allow them to be even more profitable over time as we scale the franchises.

The next question is from the line of Eric Handler with [indiscernible].

Wonder if you could just discuss your thoughts on Toy Industry POS outlook for 2026?

Sure. I might have a bit of a cheeky response to this. So here, I'll start and Gina can let...

It's still funny.

No, no, no. For us, I almost think it's the wrong question. We segment the market in our own unique way. We call it GEM Squared. It's an acronym which stands for gamified entertainment-driven multi-purchase and multigenerational. Those categories, 70%, 80% of Hasbro's existing point-of-sale is focused on those categories, and probably 90% to 95% of our investments is going to those categories for the future. We think those categories have a mid- to high single-digit CAGR, and they are just structurally advantaged. Peers who operate in those categories, they typically have a forward multiple of 20x, maybe a 25x. Those are companies like a pop Mart or a LEGO or a Bandinamco, and we would put Hasbro squarely inside of those, that peers. The other side of the toy market, the more traditional kind of kids-oriented one-off purchase way market I think there's opportunities to grow there. There's certainly a lot of innovation there. But I think that's in a structural set of decline, and it's probably going to continue to decline over the next several years and has been. And the reality there is there's just less babies being born and there's more substitution happening at earlier ages. So if you ask me kind of what the overall toy industry is going to do, I'd probably give you and I don't know. If you ask me what the side of the industry that Hasbro's investing in is going to do. I think it's pretty robust growth.

Okay. That's helpful. And I know a lot of this stuff goes hand in hand. You're spending a lot of time talking about entertainment-driven properties for your consumer products. Wondered if you could talk about the outlook in 2026 or sort of like your first-party types of products?

Yes. Well, certainly, I think Magic is going to do pretty well. I think D&D is going to do pretty well as well, and Peppa Pig has some significant room to grow. I think our board games and PLAY-DOH also look pretty good. Some of our more entertainment-driven properties like Transformers are probably going to have a down year. But that's held up remarkably well. We grew Transformers last year despite not having any entertainment. And so I think for our first party, we see upside. We would like to grow that as a percentage of our business while still working with partners and growing them because obviously, it's margin accretive. And we feel pretty good about the hand that we have. I don't know, Gina, do you have anything to add?

Ferby will be down here, I'm just think about that one.

Ferb is kind of getting near the end of its life cycle.

[indiscernible] going to have a good year just given the Toys for release. So...

For sure.

The next question is from the line of Chris Horvers with JPMorgan.

So maybe, Gina, if you could simplify the operating margin outlook. You have a range of about 30 basis points of expansion at the midpoint versus the 50 to 100 algo. Could you bucket the headwinds that bring you down from that between royalties, digital gaming costs and tariffs. Given access in D&D digital game doesn't launch until '27, we wouldn't have expected that to be a headwind because the amortization comes in '27.

Got it. Good morning. The couple of things that are -- well, I'll start with the good guys first. So obviously, volume and mix and pricing that is a good positive margin contributor for us in 2026. Royalties is going to be a headwind. So we have increased royalties across both of our businesses now, just again, given the entertainment slate on CP coupled with the Universe is Beyond Set. So that's, call it, 1 point, 1.5 points of margin drag that we'll have coming into 2026. The other thing is tariff. So we'll have a full year of tariff cost. In '25, we had roughly $40 million of tariff costs hitting the supply chain. Right now, we're modeling that out to be about $60 million of cost. So an incremental $20-ish million. And even though we have cost productivity within the supply chain that's able to offset typically, our normal model is that, that cost productivity is adding to our margin. This year, it's just kind of -- that cost productivity is just helping to offset that tariff impact that's coming at us. And then I would say the last thing that I call it as a headwind is just the investments that we'll have towards the end of the year. I shouldn't say really at the end of the year, but marketing will step up as we move through the year, especially in advance of these video game releases as well as just broad increases in product development as we move through 2026.

That's very helpful. And then just a follow-up on CP margins. We see the presentation how you lay out the margin change year-over-year, but you could help us and narrate that because you did have strong sales growth and margins were down year-over-year. So I understand the tariff impact. But if you could just narrate the puts and takes between sales allowances versus cost savings versus tariffs.

Yes. So I mean in the fourth quarter, to your point, we had nice volume growth. And our team did a really nice job working with our retail partners and getting a good mix of business in and not going way beyond on promotional spending, a really nice positive kind of volume and mix impact from the fourth quarter. The pieces that came against us were tariffs, largely speaking, fourth quarter was all about tariffs. So again, of that $40 million of costs that we had in '25, about 60%, 65% of it hit in the fourth quarter. So that's what really weighed on the margin profile as we move through the year. So as we go into 2026, while volume and mix for CP is going to be a positive for us. We're continuing to have the tariff headwind, plus we'll have a step-up in royalty expense as well that kind of keeps that in that 6% to 8% range.

Our final question is from the line of Kylie Cohu with Jefferies.

Congratulations on a strong quarter. Just kind of a small one for me. How would you describe sell-through or like the POS cadence throughout the quarter? Anything unusual to call out, or was it kind of as usual?

I would say for toys, we felt pretty good just given that the SNAP benefits were kind of taken away just given the government shutdown. Other than that level, we felt pretty good about the direction of point of sale. I think from September through end of December, we gained share in our key categories in 16, 17, maybe even 18 out of 20 weeks, and that's pretty good. And we think that momentum continues into this year and it augurs well for kind of our outlook for '26.

Thank you. At this time, this will conclude today's question-and-answer session and will also conclude today's conference. Thank you for your participation. You may now disconnect your lines, and have a wonderful day.

Good morning. Welcome to Hasbro's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] 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 Wightman, Vice President, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Joining me today are Chris Cocks, Hasbro's Chief Executive Officer; and Gina Goetter, 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'd 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 Cocks. 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 GI 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 steps 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 Superheroes. Interest indicators like event attendance, search metrics, Magic Con participation, sales in 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 Layer and Backlist offerings. Wizards of the Coast is more than MAGIC. The refreshed 2024 additions of D&D's Monster Manual Players 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 with Game Berry Labs continues to outperform with both games timing mobile player charts. In digital gaming, the game awards in December will showcase some new announcements from Hasbro, including updates on our upcoming Si-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 Manimals, DJ Furby, Big EV, Star Wars, 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 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 U.S. will represent more than 1/3 of the Hasbro supply chain. Additionally, new vendor and manufacturing partnerships will unlock attractive pricing opportunities globally from Bodegas in Santiago to Dollar stores into Europe, 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 KPop Demon Hunters. Product is expected to hit shelves in 2026, but for fans who can't wait preorders 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 alternatives 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 the segment. Year-to-date adjusted EBITDA stands at $989 million, up 11% versus last year, demonstrating the combined impact of top line growth, operational excellence and disciplined 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 prefunding 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 9 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 to mitigate 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 remains 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%.

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 and 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 2.5x leverage target at the end of this year. The Board has declared a quarterly dividend of $0.70 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.

[Operator Instructions] Our first question is from Megan Clapp with Morgan Stanley.

Maybe Gina, I 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, it implies that your growth accelerates versus 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. So 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.

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 will be offset by some licensing comp headwinds we have last year related to MY LITTLE PONY, which had just an amazing order 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 looked 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. Your first question.

Megan, all right. Let's start. So you're correct. Like 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 Wizards, 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, a relatively flat outlook. I mean depending on which range you go, you could 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 the 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 expectation for CP as we move through kind of 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. Did I hit all of your points?

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?

Yes, where we sit today without getting too much into '26 guidance, unchanged priorities. 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 2.5x.

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 to '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 Arpine Kocharvan with UBS.

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 pull up in the next 40 days, if you compare it to sort of prior holiday seasons or what do you know about the consumer? And then I have a quick follow-up.

Arpine, sure. I think a couple of 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, Manimals, 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 bull worked by fantastic brands and really strong content.

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, Transformers 1 has had a nice long tail for us. So we've been pleased with it. We've been seeing acceleration in POS for probably the last 7 to 8 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. And then -- sorry, go ahead. .

One add that I would have is on, just as you think about the overall category and pricing is a dynamic, we really haven't seen overall huge increases in ASPs. We've seen some mix 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. 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 lap that next year. And arguably, Marvel's 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 let these very strong numbers from this year into 2026.

And Gina, just a quick question for you. The licensing expense under MAGIC for the back half, you had raised that from $40 million range to closer to $60 million 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 Wizard tied to third-party IP. .

Oh, the royalty expense, I see. Yes, 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 waiting. It would be roughly call it $50 million, $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.

Yes, Arpine, in terms of your question about the underlying durability of MAGIC's growth, I think there's a couple of things going on. At the easiest level, this year, we had, call it, 6.5 sets because one of our sets was a little bit of a little bit of crossover in terms of sell-in between Q4 and Q1. Next year, we're going to have about the equivalent of 7 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 back list, I think we continue to see that as being kind of like a nice kind of floor for the business that will -- 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 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 at 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 nontraditional outlets like mass and convenience stores.

And we don't see that slowing down. If anything, I think there's a potential to accelerate it just with the quality of partners we have next year and the early reads we're getting on those partners. 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 Stephen Laszczyk with Goldman Sachs.

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 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.

Yes. 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 2 consumers, the top 20% -- particularly in the U.S., 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 bit more, 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 products 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 was just curious if there is any way you can maybe help investors size the cost impact expected from the game next year, perhaps over the course of '26 and '27. I appreciate we'll probably more and more in December. But anything or any framework you could provide at the moment to help set the frame of mind looking into next year?

Yes. Yes. 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 launched the units, that cost will depreciate alongside -- along with units. It will flow through our cost of goods. So that's what you'll see it will impact our gross margins. That's what 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 launched the game. And in the 4 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 time line 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 previous calls that our development budgets are anywhere from, call it, $100 million if we're working with partners up to, call it, $200 million, $250 million. So that's the range of outcome in terms of absolute expense and absolute decrease that you'll see come through P&L.

Now obviously, that's the P&L impact. as we launch the game as we 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 Horvers with JPMorgan.

Maybe talk a little bit about what the gross net headwinds from tariffs were in the third quarter. As you turn 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. 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 rates 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 will 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 4 quarters worth, we really didn't start seeing that impacted the P&L until third quarter.

Yes. Chris, I think as you think about the midterm in terms of CP and total company, I think as 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 CP business, if tariffs persist at a 20% and 30% range, it probably carves off a couple of 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 KPop 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 I think we'll have a 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 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 in aggregate become bigger? Or do you think maybe the Star Trek set, for example, could be actually bigger than Final Fantasy?

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 will we think could rival or beat spinal fantasy, but we definitely see at least one that we think can do that. .

That's good.

That's I think I'll stick it there. And then 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. I mean, 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 the deal or in conversations on a deal on that. So I think, again, we're still at the relatively early innings of what Universes 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 back list as well, which we've been seeing play out in 2024 and definitely in 2025.

We should probably say that our owned MAGIC IP is also performing quite well.

Yes. I mean that's a great point. 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.

So to that last question, Chris, I'm not going to ask you, which set you think can be kind of Fantasy, it sounds like -- but I am curious this KPop Demon Hunters press release did mention Wizards of the Coast, curious what the thoughts are there, how those 2 could integrate. And then just on the margin side of Wizards, we came into the year thinking that margins would be down pretty materially. And obviously, that's not going to be a kick. Any thoughts on how to think about Wizards' margins into next year and any color on the royalty piece would also be helpful.

Yes. We're pretty excited about K-Pop. I remember the weekend it came out, I watched it and sent a text over to Tim, who runs our toy business. And I'm like why haven't we talked to these guys because this thing is awesome. If you look at my Spotify playlist, it looks like a 12-year-old kids. I get Soda Pop Golden on there, along with some other stuff. So I'm pretty jazzed for KPop. We're working with Netflix. Mattel is doing basically dolls and figurines. We're basically doing just about everything else, 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 been -- 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 of 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 layer 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 our -- 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 retailer 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.

Yes. 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 may be 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 probably cut that ratio in half. And 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.

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 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, it creates a delev impact on the P&L. So as 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. And we continue to stay on our -- that margin impact from tariffs, and we continue to stay on our trajectory to deliver that $1 billion of cost savings in 2027. So as we get -- obviously, the next time you talk with us in February, we'll give a lot more detail on where the kind of outlook will be for '26.

I mean, I think, a couple of bread crumbs that are public certainly, we are 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 got for sale with MONOPOLY deal. And hopefully, we'll have a couple of preorders 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 Toy Story 5, which always helps to drive Mr. Potato head sales in a big way. You have a new Star Wars movie with 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 forming a tailwind for us next year.

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

Yes. So hobby store growth continues to pace. I don't 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 Wizards' Play Network and leaning in the magic. And what we tend to find is when a hobby store really adopts MAGIC, it becomes a big section of a 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 2 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 the Tescos of the world and the Carrefours of the world with some pretty meaningful and enduring results.

Our next question is from Kylie Cohu with Jefferies.

You 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've rather seen.

Yes. Yes. So we've been pretty choiceful with our pricing through this year. And so 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 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 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 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 promotions start playing through. So obviously, everyone, from a retail standpoint, they were really concentrating and all that's sitting within Q4.

Got you. 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 and like steady states as well.

Yes. Good question. Overall, you should expect more of the same on Entertainment. It's going to be roughly that same revenue base at roughly that, call it, 50% to 60% 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 through this year and the balance of next year.

Yes. I think we think of entertainment as a long-term brand development pipeline. There's some revenue associated with it. It kind of -- 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 Bros, Netflix, Universal, Disney, you name it, Lionsgate. .

So 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 those are starting to kind of go through. And probably in 2026, there will 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.

Our next question is from Jamie Katz with Morningstar Research.

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 had about content and innovation coming on, can we think about this saying sort of structurally higher than it maybe has been in the past?

Yes. I mean, you hit on it. The inks or the step up that you're seeing is largely driven by Wizards and digital. There's some this year within toys 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 and kind of we're probably at that right watermark level, like 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 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?

Yes. 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 of 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 5 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.

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.