Consumer spending remains strong; Struggles at LVMH; A 'first look' at Hasbro

1) While consumer sentiment is poor, consumer spending – which accounts for nearly 70% of our GDP – remains strong.

That's according to a couple measures...

The first is the government's retail sales report for March – just take a look at this chart from Creative Planning's Charlie Bilello in a post yesterday on social platform X:

The second is what large banks had to say when they reported earnings recently. The Wall Street Journal has more details in this article from this week: Big Banks Show Consumers Remained Resilient Heading Into Tariff Turmoil. Excerpt:

Bank of America (BAC) and Citigroup (C) said Tuesday consumer spending ticked higher in the first quarter when concerns about tariffs and the economy began to bubble up. JPMorgan Chase (JPM) said last week that credit- and debit-card spending rose.

Executives also said spending has largely held up in the weeks after the quarter ended, even after President Trump sharply escalated his tariff threats on "Liberation Day." JPMorgan noted some of that might have been people making purchases in advance of price increases from tariffs.

"This is consumers continuing to spend, and that is ultimately the basis of the U.S. economy," said Alastair Borthwick, Bank of America's chief financial officer, on a call with reporters Tuesday. "The signals at this point from the consumer are that the U.S. economy still remains in good shape."

I want to flag this sentence: "JPMorgan noted some of that might have been people making purchases in advance of price increases from tariffs."

That's the key question: Is consumer spending about to fall off a cliff?

I doubt it, but I'll be keeping a close eye on this...

2) The WSJ also had a quick update on French luxury-goods giant LVMH (MC.PA), which reported disappointing first-quarter sales on Monday: Louis Vuitton's Owner Looks Down-at-Heel Even Before Tariffs Hit. Excerpt:

LVMH's latest sales figures show Chinese and U.S. demand for luxury goods was wobbly – even before the trade war between the two countries kicked off in earnest.

The disappointing start to the year is a bad omen for the industry, and things are likely to get worse as the effects of tariffs ripple through markets and economies.

Shares in Louis Vuitton's owner sank Tuesday, after the company said sales fell 3% over the three months through March compared with a year earlier. The stock dropped 7.8% in Paris.

Regular readers will recall that I've written about LVMH five times in recent months:

• My first look at LVMH and Pernod Ricard (November 14, 2024)
• A deeper look at LVMH (part 1) (November 21, 2024)
• A deeper look at LVMH (part 2) (November 22, 2024)
• Updates on LVMH, Lululemon Athletica, and Five Below (January 17, 2025)
• Bad news for the luxury market in China (February 20, 2025)

I'm glad I didn't pound the table on it...

In the wake of the disappointing earnings report, the stock not only hit a 52-week low but nearly a five-year low yesterday. Take a look at this chart:

I would love to say it's now a great time to buy... but the stock still trades at 20 times this year's earnings estimates – and I think those estimates are at high risk due to a possible recession and trade war with China.

3) I had similar concerns about leading toy-maker Mattel (MAT), which I analyzed in yesterday's e-mail. Given that the company sources roughly 40% of what it sells from China, the stock wasn't even close to being cheap enough to be interesting.

Today, let's take a look at another leading toy-maker – Hasbro (HAS), which also sources a similar percentage of its products from China. It's known for the Dungeons & Dragons, Magic: The Gathering, Play-Doh, Nerf, and Star Wars licenses.

Hasbro's stock has done better than Mattel's over the past 20 years, though that's not saying much – and it's down by nearly 60% from its pre-COVID highs. You can see movement in the chart below:

Turning to revenue and net income over the past 20 years...

Hasbro had a positive trend over the first roughly dozen years and had recovered strongly after a pandemic-era dip. But revenue has declined significantly in the past three years (note that 2023 net income is an estimate, adjusted for noncash goodwill and sale-of-asset charges). Here's the chart:

While it hasn't shown much growth, Hasbro has generated consistent free cash flow ("FCF") over the past two decades – with a nice increase over the past two years. Take a look at this next chart of the company's operating cash flow, capital expenditures ("capex"), and FCF:

Hasbro has (wisely) scaled back its share repurchases but continues to pay a steady dividend – it currently yields about 5.4%, which costs the company just under $400 million annually. Hasbro easily covers this with its free cash flow, which has averaged about $626 million over the past five years.

So why did net debt surge suddenly surge a few years ago?

That's because Hasbro had completed a large acquisition of Entertainment One (eOne) at the end of 2019, a Canadian media and entertainment company:

It was a stinker of a deal, however... and in August 2023, Hasbro announced the sale of eOne's film and television business to Lionsgate for $500 million and took nearly $2 billion in write-offs.

Today, the company remains saddled with $2.8 billion of net debt. That isn't a dangerous amount in light of current cash flows... but it constrains Hasbro's ability to do things like buy back stock.

Lastly, valuation...

At yesterday's closing price of $51.88, the company has a nearly $7.3 billion market cap and, adding net debt, an enterprise value near $10.1 billion.

With expectations for Hasbro to earn $4.18 per share this year, the company is trading at about 12.4 times earnings – quite a premium to the ratio of roughly 8.7 times that Mattel is trading at (likely due mostly to Hasbro's high dividend).

But like Mattel and other stocks I've discussed this week – Apple (AAPL) on Monday and LVMH above – I'm skeptical of the earnings numbers for companies whose businesses have significant exposure China.

While both sides may back down from their 100%-plus tariff threats, even much lower tariffs would materially affect profits... as I don't think Hasbro and Mattel have much pricing power.

Like Mattel, I think Hasbro's stock should be down closer to 50% this year in light of the recession and tariff risks... but instead, it's only down 7% through yesterday's close. It has actually done better than the S&P 500 Index, which is down about 10% this year.

That makes no sense. As such, I would remain on the sidelines with Hasbro. I'm also interested in reviewing the company's first-quarter earnings report, which is scheduled for release next Thursday.

On a final note today, the markets and our offices are closed tomorrow in observance of Good Friday... so look for my next daily e-mail on Monday. Have a good weekend, and Happy Easter!

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.