Q2 2024 Hasbro Inc Earnings Call
Participants
Kern Kapoor; Senior Vice President, Investor Relations; Hasbro Inc
Chris Cocks; Chief Executive Officer, Director; Hasbro Inc
Gina Goetter; Executive Vice President & Chief Financial Officer; Hasbro Inc
Eric Handler; Analyst; ROTH MKM Partners, LLC
Megan Alexander; Analyst; Morgan Stanley
Arpine Kocharyan; Analyst; UBS Investment Bank
Christopher Horvers; Analyst; JPMorgan Chase & Co.
Drew Crum; Analyst; Stifel, Nicolaus & Company, Incorporated
Alex Perry; Analyst; BofA Securities
Fred Wightman; Analyst; Wolfe Research, LLC
Presentation
Operator
Good morning and welcome to the Hasbro second quarter 2024 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 Kern Kapoor, Senior Vice President of Investor Relations. Please go ahead.
Kern Kapoor
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. Today, we will begin with Chris and Gina providing commentary on the company's performance. Then we will take your questions.
Our earnings release and presentation slides for today's call are posted on our investor website. The press release and presentation include information regarding non-GAAP adjustments and non-GAAP financial measures.
Our call today will discuss certain adjusted measures, which exclude these non-GAAP Adjustments. A reconciliation of GAAP to non-GAAP measures is included in the press release and presentation. Please note that whenever we discuss earnings per share or EPS, we are referring to earnings per diluted share.
Before we begin, I would like to remind you that during this call and the question-and-answer session that follows, members of Hasbro management may make forward-looking statements concerning management's expectations, goals, objectives, and similar matters.
There are many factors that could cause actual results or events to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. These factors include those set forth in our annual report on form 10-K, our most recent 10-Q, in today's press release, and in 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?
Chris Cocks
Thanks Kern, and good morning. Q2 was another good quarter. We saw strength in gaming and digital licensing and landed where we expected within consumer products, while increasing operating margin and maintaining healthy inventory. It's nice to come into calls like this and not only deliver what we said but to start making it a habit.
Across Games, IP and toys, Hasbro is emerging a more profitable, agile. and operationally excellent company, one dedicated to delighting fans of all ages through the magic play. Our licensing and IP business continues to be a differentiator for us.
In digital we're seeing mega-hits like Monopoly Go! demonstrate staying power, we have over 35 entertainment projects in development, and our team continues to drive our IP within consumer products through partners spanning the globe and multiple categories.
And as we look at the business of play, it's clear that digital is here to stay and a bigger factor than ever in how successful toy and game companies will grow and strengthen their brands. We're years ahead of our peers, having already spent hundreds of millions of dollars building out our own studio capacity and expanding our brands through digital partnerships.
Games like Baldur's Gate 3 show us what the future looks like. And while we're still in the middle of the ballgame on our turnaround efforts in toys, we're seeing signs our innovation is working, particularly where we already have a big head start versus the competition. Many companies in the toy and games industry are waking up to the power of fans and the importance of quote-unquote kidults.
Hasbro has long appreciated this audience, driving over 60% of our revenue from consumers 13 and older, and we'll continue to lean in here as we think about innovation across our product portfolio. Looking at the business with the first half of the year in the books, our team delivered, and we're raising our full year guidance as a result.
Gina will share more details shortly and I'll first offer some business highlights across gaming, licensing, and toys. We had another solid quarter from MAGIC: THE GATHERING on the back of this year's blockbuster set release Modern Horizons 3.
Facing a high bar with last year's Lord of the Rings, Universes Beyond set, Modern Horizons 3 has had a strong start, becoming the fastest selling set in MAGIC's history. While we expect a tougher comp in the back half for MAGIC following the strong first half and as we lap a greater number of releases last year, we're seeing good early interest in our first tentpole set, Bloomburrow, releasing next week.
And then in 2025 we anticipate a return to growth for MAGIC driven by two Universes Beyond sets for Final Fantasy and Marvel that fans are eagerly anticipating. Within D&D, we're seeing solid pre-orders of the 2024 Core Rules book for the revised and expanded fifth edition.
D&D also shows how we are increasing digitization across our portfolio. Digital revenue already accounts for over half of the mix due to the success of D&D Beyond. Next week at GenCon, fans can expect to see more of our 3D roleplaying sandbox experience built on Unreal engine 5, bringing players' favorite franchises to life across PC, console, and mobile.
We look forward to getting it in gamers' hands later this year. D&D Beyond already represents our largest direct-to-consumer platform with 18 million registered users. Along with Pulse, our destination for exclusive collectibles across fan-favorite brands like G.I. JOE and Star Wars, we see an opportunity to unlock more value across our Hasbro Direct business.
Licensing was another standout in the quarter. Momentum in Monopoly Go! from our partners at Scopely continued into Q2, accelerating our revenue recognition beyond the minimum guarantees and driving healthy upside to both revenue and operating profit.
Since launch, the game has grossed over $3 billion in revenue, making Hasbro the top licensor of video games over the past year according to Aldora. The team continues to have an active pipeline of licensing opportunities across PC, console, mobile, and casino, leveraging our rich IP.
In Q2 we announced a new arcade-style game for Power Rangers with our partners at Digital Eclipse. And just this month, we kicked off a Transformers Overwatch 2 crossover. As we continue to invest in our digital gaming efforts, both through partnerships and self-publishing through our own studios, I'm excited that John Hight, former SVP and GM of the Warcraft franchise for Blizzard Entertainment, is joining Hasbro as President of Wizards of the Coast.
John is a lifelong MAGIC and D&D fan and embodies Hasbro's mission to bring people together through play. Within Consumer Products licensing, we saw growth in the quarter helped by our new partnership with Kayou collectible trading cards, building on the resurgence of My Little Pony in China.
And Littlest Pet Shop's international appeal continues to grow, ranked as the number two growth property in playsets, dolls, and collectibles across the G10 according to Circana. We also launched several partner-led, Hasbro-branded properties, including a new Peppa Pig theme park in Germany, as well as The Gameroom and Planet Playskool in New Jersey, combining for 60,000 square foot of games and STEM-based play experiences.
Finally, turning to toys. As a reminder we began the year expecting the first half for consumer products to look similar to last year's second half. Through Q2, we landed where we thought we would, and I'm encouraged by several early reads, notably Beyblade.
After a strong launch in Japan, we've begun rolling out Beyblade X globally. We've seen positive early demand with fans liking the streamlined brand assembly and new X-celerator Rail stadium that creates epic collisions.
And in this year of lighter entertainment content, Hasbro is well-positioned with the biggest movie for toys coming to theaters this September, Transformers One with our partners at Paramount. We have strong retail alignment and healthy early demand for our fan SKUs to celebrate the brand's 40th anniversary.
You can expect renewed innovation in some of our core toy properties as we head into back-to-school. Play-Doh has shown strength all year, and we've gained valuable insights from our digital marketing efforts in the spring that we'll be applying to the fall.
We're expanding play styles with new launches like the first ride-on Pizza Delivery Scooter, and ageing up with Play-Doh Marvel action figures, in partnership with the Walt Disney Company. This fall we'll also be ramping our latest N-Series for NERF, which features a proprietary NERF dart. Retailer support has been strong since last month's launch.
Our people and culture are critical to the successes I've highlighted during this call, and so before I wrap up, I want to also welcome back Holly Barbacovi, an HR powerhouse who is bringing her pragmatic approach to HR back to Hasbro as our new Chief People Officer.
To recap, it was a good quarter, with solid performance in profitability led by our strength in games and licensing. Toys came in as expected and we see a path to growth in Q4, driven by innovation and strong alignment with our retail partners.
We still have most of the year left to go, and we'll be watching back-to-school closely, but our team's work is starting to make a real difference, and we feel confident in taking our guidance up for the full year. I'd like to now turn over the call to Gina to share more about our detailed results and updated outlook. Gina?
Gina Goetter
Thanks, Chris, and good morning, everyone. In Q2 we made further progress building a healthier foundation for Hasbro as we delivered better profits, moderated the pace of our revenue decline, and continued to up-level our internal processes and systems. I'm pleased with our team's execution in the first half as we continue to drive operational rigor across the company.
Similar to Q1, we once again saw outperformance in digital licensing, led by a material step-up in contribution from Monopoly Go! as the game's momentum allowed us to exceed the minimum guarantee sooner than expected.
This, along with healthy growth in consumer product licensing, growth in MAGIC and another strong quarter from our supply chain team, drove significant operating margin expansion. And while we still have more than half of the year left from a revenue contribution standpoint, we're doing a lot of the right things and are confident from where we sit today to take up our full year guidance.
Our turnaround in toys is well underway. Q2 declined similar to Q1 as we had anticipated. And while Q3 and the back-to-school selling season will be an important gauge, we're entering the second half with clean retail inventory and are seeing encouraging demand signals for our planned innovation.
And by putting the right underlying demand and supply planning processes and systems in place, we've been able to bring aged inventory down to historic lows, while ensuring we have suitable inventory levels to support sell through for the holidays.
We've also improved our end-to-end planning capabilities to better align where we source inventory with customer demand. In the first half of this year, we've already had some major wins from our supply chain team, and with that I'd like to acknowledge Stephanie Beal who has been instrumental to this transformation and congratulate her on becoming our new Chief Supply Chain Officer.
Integrated business planning plays an important role as we transform Hasbro into a more profitable and operationally agile company. After the first couple of quarters of implementation, we're seeing greater information flow and faster decision making, which is starting to show up in our results.
And just like we're focused on digitization across play patterns, we're also enhancing our digital operations to ensure we're running as efficiently as possible and is why I'm excited to welcome Dan Shull as our new Chief Digital Information Officer. Dan brings a wealth of Fortune 500 experience and will steer our digital and IT strategy using cutting-edge technology to enhance collaboration, accelerate data analytics, and modernize our infrastructure.
Now moving on to Q2 financial results. Total Hasbro revenue was $995 million, down 18% versus Q2 of last year. If you exclude the impact of the eOne divestiture, total revenue was down 6%. Growth of 20% in our Wizards of the Coast segment, led by MAGIC and licensed digital games, was more than offset by the 20% decline in consumer products driven by lower closeout volume, reduced entertainment slate, and exited brands.
The entertainment segment declined 90% due to the sale of eOne Film and TV business. Absent this impact, entertainment revenue decreased 30%, driven by timing. Adjusted operating profit was $249 million for an adjusted operating margin of 25.0%, up nearly 14 points year on year.
This substantial improvement was driven by favorable business mix, lower royalty expense, supply chain productivity savings, the eOne divestiture, and about a 2.5 point benefit from lapping the D&D movie impairment.
Q2 adjusted net earnings were $170 million, with diluted earnings per share of $1.22, up from $0.49 in the year ago period, driven by the items noted, as well as reduced net interest expense and favorable timing within tax.
We returned $97 million to shareholders through the dividend and ended the period with $1.1 billion of cash and short-term investments following May's completion of a $500 million debt offering of notes. The proceeds from the issuance are expected to be used to repay our November 2024 bond maturity.
Year-to-date total Hasbro revenue was $1.75 billion, down 21% versus the same period last year. If you exclude the impact of the eOne divestiture, total revenue was down 7% versus a year ago. Growth of 15% in our Wizards of the Coast segment was more than offset by the 20% decline in consumer products and the 87% decline in the entertainment segment due to the sale of eOne Film and TV business. Absent film and TV, the entertainment segment is relatively flat.
Year-to-date adjusted operating profit was $397 million for an adjusted operating margin of 22.7%, up over 14 points year over year, mostly driven by cost savings from our Operational Excellence program, as well as favorable business mix and the eOne divestiture. In aggregate, we were able to deliver significant margin improvement despite the ongoing volume deleverage across our toy business.
Year-to-date adjusted net earnings were $255 million, with diluted earnings per share of $1.83, driven by the improvement in operating profit, as well as favorability from a stock compensation adjustment and net interest expense reduction.
Operating cash flow was $365 million year to date, a $246 million improvement year over year driven by the profitability improvement, timing of digital licensing collections, as well as the shift in timing of a transition tax payment to Q3.
Now let's look at our two major segments in more detail. Starting with Wizards of the Coast and digital gaming. Q2 revenue grew 20% year over year largely behind strength in digital licensing led by Monopoly Go! and to a lesser extent continued contribution from Baldur's Gate 3.
Last quarter we discussed there could be the ability to book above the minimum guarantee sooner than originally planned. Due to the game's momentum, we were able to earn approximately $35 million above the minimum guarantee of $5 million in the quarter.
Segment revenue also benefitted from growth in MAGIC tabletop behind the successful release of Modern Horizons 3, as well as early shipments for next week's tentpole set Bloomburrow, both of which more than offset last year's Q2 contribution from Lord of the Rings.
Digital gaming revenue also saw a roughly $20 million non-cash benefit from a publishing contract with an international partner. Operating margin for Wizards finished at 54.7%, up nearly 17 points versus last year, mainly driven by a richer digital mix, supply chain productivity gains, and lower royalty expenses as we lapped last year's MAGIC Lord of the Rings set.
Turning to consumer products. Q2 revenue declined 20% year over year driven by reduced closeout volume, exited brands, and lapping a busier entertainment slate including last year's Transformers Rise of the Beasts.
Consumer product licensing was a bright spot, driven by our partnership with My Little Pony and Kayou trading cards. FURBY and the continued momentum in FURBLETS, G.I. JOE, and Play-Doh also performed well within toys, while NERF continued to see softness ahead of the back-half innovation launch.
Adjusted operating margin for consumer products came in roughly breakeven, down about 3.5 points compared to last year. Cost savings and the benefit from lower unprofitable closeouts were offset by product mix and volume deleverage.
As anticipated, there was also approximately $10 million of operating income attributed to the segment as we reallocated cost savings captured within the corporate segment back to CP. On a year-to-date basis, despite a revenue decline of 20%, segment operating margin declined by only 3 points year on year, as we were able to significantly mitigate the deleverage impact by reducing our cost footprint across supply chain and within operating expenses.
Now turning to our updated guidance for 2024. Given the strong performance in the first half, we are raising our guidance for the full year. And we now expect Total Wizards revenue to be down 1% to 3%, up from our prior guidance of down 3% to 5% driven by the first half outperformance in digital licensing.
For the full year, Monopoly Go! will generate roughly $105 million in revenue. This outlook assumes a modest monthly gross revenue decay rate for the game and consistent marketing support. For Baldur's Gate 3, we now anticipate roughly $30 million for the full year, with the bulk of that revenue having been recorded in the first half. With all of these puts and takes, digital licensing will be down in Q3 as we lap the launch of Baldur's Gate 3, and we anticipate Q4 to be relatively flat versus last year.
For MAGIC, we expect some contraction in the second half due to the timing of set releases. While Modern Horizons 3 successfully lapped the initial release of Lord of the Rings, it will not have a comparison launch for last year's holiday bundle.
We now forecast Wizards operating margin to be approximately 42%, up from our prior guidance of 38% to 40%, driven by the increased mix of digital licensing revenue. For consumer products, keeping in mind that a big part of the year is ahead of us, we expect revenue will be down 7% to 11%, up slightly from our prior guidance range of down 7% to 12%.
This narrowing is driven by encouraging early demand signals and retailer support for our back half product innovation, specifically Beyblade, Play-Doh, and Transformers ahead of the major animated film Transformers One in September.
We are forecasting a low single digit decline in Q3 before flipping to growth in Q4, with the impact from our divested brands continuing to be a headwind. We maintain our adjusted operating margin guidance of 4% to 6% for consumer products.
Margins in Q3 will be relatively flat versus last year followed by significant expansion in Q4 as we lap the impact of the inventory clean-up. For entertainment, adjusting for the impact of the eOne divestiture, we continue to expect revenue to be down approximately $15 million versus last year and adjusted operating margin of roughly 60%.
We remain on track towards our target of $750 million of gross cost savings by 2025 and continue to expect $200 million to $250 million of net cost savings in 2024. Through the first half of the year, we have delivered $150 million of gross cost savings and $90 million of net savings. With the increased revenue outlook and greater profitability in Wizards, we now expect total Hasbro adjusted EBITDA in the range of $975 million to $1.025 billion, up from our prior guidance of $925 million to $1 billion.
Given the improvement in our cash flow, we now expect 2024 ending cash to be at roughly similar levels versus 2023. And from a capital allocation standpoint, our priorities remain to first invest behind the core business. Second is to return cash to shareholders via the dividend and third to continue progressing towards our long-term leverage targets and pay down debt. And with that, we can open the line for questions.
Question and Answer Session
Operator
(Operator Instructions) Eric Handler, ROTH Capital.
Eric Handler
Good morning. Thanks for the question. Chris, what if you could talk a little bit big picture for Wizards of your recent hiring of John Hight to take over from Cynthia. Obviously, a huge videogames background for him at Blizzard, you now have four people on your Board with video games background, can you talk about how you're thinking about internal development of video games and what you're willing to commit to capital for that business?
Chris Cocks
Sure thing. And good morning, Eric, thanks for the question. Yeah, John, I think is a luminary higher. He's had a major hand in a bunch of my favorite game franchises, whether it's Warcraft, Hearthstone, God of War and even going way back to Command & Conquer, he's worked on some great stuff, which I think is perfectly on point with what Wizards of the Coast is all about and what our digital gaming strategy is all about, which is extending a bunch of great mid-core and hardcore brands and an expertise in designing for those kinds of audiences and helping us digitize what those brands can do.
I think between our Board moves and between talent that we brought on Board most recently with John, but even before that studio leaders, we have like [Ames Christian] who was in charge of the Batman Arkham series of Warner Brothers. James Ohlen, who was the Head of Creative and Design at BioWare, responsible for the first Baldur's Gate, Neverwinter Nights, Mass Effect.
We're going to all in on becoming a digital play company. I think Gina has talked a lot about the kind of the capital that we've invested. I think our cap are roughly our capital envelope is about $250 million a year. About half of that is going into digital games, we think that's roughly around a steady state for us.
Our goal is to be shipping one to two new games per year, starting as early as late 2025, but potentially early 2026. And I think we have a balanced approach to that. When you look at our game -- when you look at our portfolio of investments in games, whether they're partnerships or JVs that we're doing or just fully internal investments. And then you look at our whole lineup of licensed games.
We have 150 projects that are either active in the market or in development. I think it's important for us to have a hand as a publisher to guide our franchises and to work on the areas of the audiences that we think are hyper important.
But I also think it's important for us to work with the best partners in the business and extend those franchises in areas where either we don't have the expertise or we don't have the platform. And I think we've been doing a good job of that. It's no accident why I think we're the number one licensor in the space. And I think we're going to be a top publisher eventually in the space, and we're going to take our time and do it right.
Gina Goetter
Hey, Eric, this is Gina. Eric, I just have one point of clarification just so that folks grab it as we talk about the capital. So that $250 million number that Chris quoted is for the entire company. And as you said, it's about half of that is going against these games that is probably the right run rate as we take it forward here. So I just don't want people to go in mind with the $250 million. That's representative of the whole company.
Eric Handler
Okay, that's helpful. And then just follow up, 3Q in your consumer products business and toys tends to be a very strong quarter for direct imports. Can you talk about what's happening there and how the supply chain is working for shipping?
Gina Goetter
Yeah, great question. I would say as we move through Q2, we saw a very smooth shipments with our DI. We didn't really see any sort of volatility or bumps in kind of movement of goods with DI. We're not anticipating a significant impact as we move through Q3 and Q4. Obviously, we're watching the tightening that we're seeing in some of the spot market. But again, we're contracted out. We feel really good about our ability to access inventory, and we're feeling confident of our ability to get it on shelves in time for the holidays.
Eric Handler
Thank you.
Operator
Megan Alexander, Morgan Stanley.
Megan Alexander
Hey, good morning. Thanks so much. I wanted to just dig into the guidance raise if I could. So maybe a ballpark question and happy to repeat anything if it doesn't make sense, but you raised, I think, by call it $35 million at the midpoint, give or take. I think that's also what you said you exceeded from the Monopoly Go! minimum guarantee relative to your expectations.
So I guess just to clarify and was the guidance raise just for the fact that monopoly go came in better in 2Q? And then the second part is it does seem related to that, like MAGIC is perhaps doing better than you expected. You did call out some benefit from an international publishing deal in the second quarter. So if there's any way to quantify that and how that flows through to the guidance that would be helpful as well. Thank you.
Gina Goetter
Sure, absolutely. Good morning, Megan. So as we think about the overall guide, I think you've got the simple way in terms of the upside from Monopoly Go! really just translating all the way down to our EBITDA update. That's the primary driver of the raise. I mean, obviously, the margin is richer. We're feeling a little bit more bullish on the consumer product side. But that's the main headline.
In terms of MAGIC performance specifically within the quarter, yes, it is doing better than we had expected really that not in Horizons 3 has proven to be a fair comp against Lord of the Rings within the quarter. That was a positive.
In terms of the contract, it was roughly $20 million of benefit that came in as we're calling it out because it was $20 million is the normal course of business. We have the same kind of puts and takes. You just heard Chris talk about all of the number of deals and partnerships that we have in the works. So over the course of the year, it will prove to be immaterial. But for this quarter, it was a big revenue gain.
Megan Alexander
Got it. Okay. That's helpful. And then maybe if I could just dig in on Monopoly Go! a bit, again, seems like $5 million minimum guarantee, you got $35 million. I think if I'm doing my math right there is maybe $65 million implied in the back half.
So a little bit of a step down on a quarterly basis, but I think is in line with the way you were thinking about it to start the year. So would be helpful if you could just talk about kind of what you're seeing -- what you saw over the quarter from a revenue perspective and Scopely's marketing investment, how you're thinking about the second half and whether that's changed at all?
Gina Goetter
Yeah, good question. Let's level set on the math there. For the first half of the year, we had $45 million of revenue booked into our P&L. So $5 million was just the minimum guarantee that came into Q1 and then we had $40 million in Q2. So $35 million was that over-delivery? And then $5 million was the minimum guarantee. What's modeled in our back half, then is $60 million.
And to your point, it is a step down from what we saw play through in Q2. So as we thought about our modeling, in the back half, you were thinking of the decay rate, that monthly decay rate of, call it 3% to 5% and consistent marketing is what I think I said in my prepared remarks. That consistent marketing can range anywhere from, call it 25% up to 35%. And to your point of what we've seen Scopely do as we move through the first half is kind of within that range.
Obviously, those two pieces, the decay rate and the marketing are variables that we don't control and we kind of understand where Scopely is headed with marketing, but ultimately it is their decision in terms of how much they spend in it, what end of that range.
But for us, as we thought about the modeling, we know that Monopoly Go! is going to be a material contributor to our P&L this year and for many years to come. So as we thought about it, we just didn't really want to get out over our skis in terms of the forecast.
All of you are looking at the same data that we are almost at the same time. And so as you were watching the Sensor Tower data play through in the last couple of months, it was a little bit bumpy when it came to the decay rate. So we absolutely kind of took that into consideration as we were modeling at the back half of the year.
So as we go, I mean, the thing that will remain committed on as being super transparent about the assumptions, both around decay rate and marketing so that we can kind of stay on the same page of what we're expecting for this year and as we head into 2025.
Chris Cocks
Yeah, I think the only thing I'd add Megan is the seasonality. We don't quite understand yet on the game. So if we're being -- if we're erring on the side of caution a little bit, it's because we don't quite get the seasonality yet. However, where I do think we have some bullishness is on the mid and long term for the game.
When you look at games that reach this hyperscale like Monopoly Go! has and you look at just like the Sensor Tower data for North America and Europe, 10 of the 20 best performing games have been out for five or more years. So this is a game that's going to be a really strong and positive annuity for us for a long time to come. We're still learning a little bit quarter to quarter what the contribution will be.
Megan Alexander
That's really helpful. Thanks so much.
Operator
Arpine Kocharyan, UBS.
Arpine Kocharyan
Hi, good morning, and congratulations. Has anything changed in your outlook -- and thank you for the answers to the initial question that answered a bunch of my questions. So I was just wondering, has anything changed in your outlook for MAGIC: THE GATHERING underlying business if we were to exclude obviously the digital aspect of puts and takes for the back half?
In terms of today's guidance revision, is there any change in the underlying outlook either towards better or slightly worse as it relates to the analog part of the business? And then I have a quick follow-up.
Chris Cocks
No, I mean, the analog part of the business is doing better than I think we would have expected. It was up around 5% for Wizards in the first half of the year. When you look at the toy category as a whole, it's really MAGIC and LEGO that I think are outperforming and really kind of driving the outperformance in the category, trading card games and building sets. And we don't see a reason for that to abate in the second half of the year.
I think when we think about MAGIC, we think a little bit about what the release cadence looks like. It's going to be lighter this year than it was last year. And we look at the quality of the sets and we think those are very strong. If you just look at like preorders for Bloomburrow on amazon.com and look at like the new release charts, the top performers, it's one of the best performing sets we've seen for MAGIC in several years. So we're pretty bullish on that.
And I think the second half is going to be lighter this year than it was last year just because of the release cadence, but I think you're going to see a nice uptick in 2025 with a really stacked lineup that we have starting relatively early in the year with Final Fantasy and I think having a nice coating to that with our first Marvel release.
Arpine Kocharyan
That's very helpful. Thank you. And then, Chris, I have a bit of a bigger picture or rather a very long term question related to the nuanced shift to kind of has there been a games company that's making toys from toys and games company before?
If you think about the success of Monopoly Go! and upside from that franchise, that was primarily sort of due to lower our customer acquisition costs, right to do the strength of that franchise that really essentially stand from a traditional toy. How does longer term kind of departure from traditional toys position Hasbro to continue to win in digital? I'm not sure if my question makes sense, but it's a very sort of long term, big picture question.
Chris Cocks
Yeah, I think I get the crux of where you're going. And Gina might want to opine as well. When I talk about games, IP, and toys being the core of Hasbro, what I really mean is that's what I think a healthy great modern toy company is ultimately going to become. So it's about skating to where the puck is going, as opposed to where the puck has been.
I think physical products, kids will always be important. But when you look at what the megatrends are inside of the business of play, play is aging up, play is going more international, it's going more digital, it's going more direct, and partners are becoming more and more important to be able to extend brands into additional aisles, whether that's the toy category or outside of the toy category and additional experiences.
And I think our strategy is all in across each of those. You know, we still have a bit of turnaround work to do on our core toy business. We've been losing some volume on that for the last couple several quarters. But I feel good about how we're getting our arms wrapped around that, particularly the cost side.
I think you're going to see that core toy business start to get to growth in the later stages of Q3 and more decisively in Q4 in 2025. But when I look at the cards that Hasbro has and I look at where the megatrends are in terms of the business of play, I feel really good about how we're positioned and what the long-term prospects of the company is.
Gina Goetter
Just to build, I think there was an excellent setup. We all owe you have a broader conversation about where we're headed and the to come in the new year will be an Investor Day where we'll sit down and talk through all of this because our strategy is shifting, as you heard, Chris say and it is following the growth trends, which follow the profit in the business models too.
So I mean, you can see it play through in our results where we're headed is that much more profitable places. We're leaning into games and IPs. And then all of the effort that we're making on the toy turnaround, our focus there is really on getting back to profitability and getting back to growing share in the categories with where we're competing. So I think our IP businesses, our brands are set up very well for where we're headed.
Arpine Kocharyan
Thank you both. Very helpful. Thank you.
Operator
Christopher Horvers, JPMorgan Chase & Co.
Christopher Horvers
Thanks and good morning. So my first question is, can you talk about the headwind that the Transformers movie lab presented here in the second quarter and also the exit and business headwind as we try to tease out what the underlying business trend is in the consumer products business and then bridge that to your assumption for the inflection ahead in the third and fourth quarter and perhaps reconcile that back to what you're seeing on the POS side.
Chris Cocks
Yeah, Chris, I'll give the English major answer and then you'll get the client answer from Gina following. And good morning by the way. So the second quarter of last year, we had quite a number of releases both from our partners at Disney as well as the Transformers movie. Transformers POS was up something like 90% in Q2 of 2023. It's down a bit this year is down like 5% or 6% through the first half of the year, which is remarkable because we haven't had a lot of content since that movie.
So we see a surge in Transformers POS likely starting in the August, September timeframe going into Q4 around the release of Transformers One. Every indication we have from early screenings and tracking is that, that movie is going to be a real fan favorite with some nice legs into families.
We think it will sell a lot of toys as Transformers movies tend to have done and then we like also the back half of the year in terms of new content that we have for Beyblade, Deadpool & Wolverine is shaping up to be a nice big movie yet. I don't think we're going to be selling a lot of preschool product for that.
But certainly there's nice collectors business associated with it. And so when we think about Q3 and we think about growth, we see that entertainment window kind of popping up in the September timeframe and extending into Q4. And then a lot of the new resets that we did in Q2 for things like NERF and for things like Beyblade, you'll really start to see the impact of those in August and September as the Fed starts to rollout past some initial quantities of 100 or 200 stores, to several thousand stores.
Gina Goetter
Got it. [And now for the math and not the Englishman. Good morning]. So as we thinking specifically about what's happening within our shipments in the quarter besides Transformers, which absolutely was an impact, a close-out were down materially again. So we talked about close-outs in Q1. Q1, we were down about 50%. Q2, we were down 57%. So cart shipments helps margins that we're okay with that trade-off.
And then the second piece that you asked about was the exited businesses. So that in the quarter represented about 3 to 4 points of the decline, and that's going to carry with us into the back half of the year. So in aggregate, the whole year, I think about 3 to 4 points still coming from those divested businesses or exited businesses.
Christopher Horvers
So my good segue. So I'm trying to think about the underlying gross margin rate as the businesses as it currently looks today. Obviously, mix going forward in MAGIC and digital games could be additive to this. But if we just simply back out the effect of the dose step-up, the $35 million it looks like you're running a [73-ish] kind of underlying gross margin rate and obviously there is more cost savings to come. So can you maybe share any thoughts about where that is now and is that right and how that grows over time?
Gina Goetter
Yeah, I think that's generally right and as we continue to see that mix shift towards digital, that's going to be a big driver of the continued growth. As we think about the back half of the year and kind of what's going to carry with us, we still have a fair amount of cost saves within our purchase expenses and our people cost savings.
So all of the actions that we put in place at the end of last year that will continue to increase in terms of magnitude as we move through the back half of the year. And then as we move into '25 and '26, we're going to have all of the benefit of kind of a refined mix plus a much, much healthier below the line cost structure.
Christopher Horvers
Got it. Thank you very much.
Operator
Drew Crum, Stifel.
Drew Crum
Okay, thanks. Hey, guys, good morning. Or maybe just sticking with margins up, can you remind us what the major margin headwinds are for the Wizards business in the second half? And it looks like the implied margin is in the mid-30%s range versus 48% for the first half. And I guess more broadly speaking, why would you not be able to reach a 20% EBIT margin before 2027? What are the kind of impediments to achieving that stated target earlier?
Gina Goetter
We were wondering who was going to ask that question. So Drew, you win, you win. You run away with the gold star. Okay, so for your question on the year to go on Wizards, it all comes down to Baldur's Gate. That's really the single biggest driver of what we're lapping.
Just think about the revenue contribution last year, it was very, very centralized in Q3. And while Monopoly Go! is going to be a good contributor for us in the back half, it's not going to completely offset the impact from Baldur's Gate or as modeled as what's in our guidance today. So that's what causes the drag on margin in the back half or for Wizards.
Chris Cocks
And the latter MAGIC schedule.
Gina Goetter
But the really big one is going to be Baldur's Gate. In terms of what I'm getting to the 20%, I mean we are we are within striking distance of getting there this year. I know that you can all do the math and see that there's really two things as we think about crossing that threshold. One is Monopoly Go!. So if that does contribute more than that $105 million, that would take us over.
The other thing is CP. So we still have a range in margin on the CP and the range on the revenue. If we are able to kind of finish on the better end of both of those ranges, that will also help to get us there. But we are making really good progress.
At this point, I'm not going to commit to any more cost savings. I feel like we've got the right cost savings number, net cost savings number for the year, that $200 million to $250 million. But if Monopoly Go! continues to be better than what we are modeling is in our guidance now and CP performs a bit better, yes, we could absolutely get there before 2027.
Drew Crum
Got it. Okay. Very helpful. And then maybe, Chris, you know, a competitor earlier this week suggested toy sales outperformed during the first half and raise their market forecast for the year. Do you share that view? And if so, where do you see toy sales shaking out for the industry in '24? Thanks.
Chris Cocks
Sure, and good morning. Two things, so yes toy sales are doing better in the first half of the year. That's really driven by building sets and trading card games. So I give a lot of credit to LEGO and MAGIC: THE GATHERING, frankly, for really understanding their consumers and driving upside with what I think is the fastest growing segment inside of the business supply, which is consumers 13-plus and really 18-plus when you think about MAGIC and what LEGO has been doing.
When you look at the balance of the industry, it's roughly performing what I think us and a lot of the industry prognosticators and our peers in the industry thought. And we see that roughly carrying into the back half. So when we think about our guidance for toys, call it down high single digits, when you kind of take the median of what we're saying, we're factoring in both the exited businesses, what we think will be a toy industry, which will be down kind of in that mid-single digits range, but starting to hopefully improve a bit in the back half.
And the category tailwinds we saw in building blocks and GCG, potentially growing a bit for more categories. A lot of our guidance, though, isn't really based on the industry. It's based on our execution and the retailer support we have.
Drew Crum
Got it. Thanks, guys.
Operator
Alex Perry, Bank of America.
Alex Perry
Thanks for taking my questions and congrats on a great quarter here. I wanted to drill down a little bit more on the MAGIC business. Can you just talk about the performance of Modern Horizons 3 and how big of a contribution that could be versus Lord of the Rings, given you said that it's the fastest selling set of all time so far, which would imply that it's sort of off to a quicker start then Lord of the Rings? And then maybe just remind us of the contribution of Lord of the Rings and sort of how you think Modern Horizons 3 could stack up against that? Thanks.
Chris Cocks
Yeah, sure. So Modern Horizons did get off the gates really fast. A lot of collector heavy sets like formats like Modern Horizons appeals to do, and we think it will have a very, very long tail. When you looked at Modern Horizons 2, we were continuing to sell cards for that 30 months into its run.
So we expect Modern Horizons 3, if not be our bestselling set of all time, which is currently held by Lord of the Rings, it'll certainly be a contender for it. I think the difference with it is going to be the timeline. You know, Lord of the Rings had a major set release in June and then kind of a minor photo to it in December, which allowed it to hit $200 million really fast.
Modern Horizons 3 has a big step release and then a bunch of reprints, which will span out over a couple of years. So I don't think we're going to get the same oomph that we did from Lord of the Rings in Q4 from Modern Horizons like we did last year, but I think we'll have a nice fatter tail going into 2025 and potentially 2026 from a product like that.
Gina Goetter
Yeah, Alex, my only add, as you look at the quarter, specifically within the quarter, Modern Horizons 3 actually outperformed Lord of the Rings. But to Chris's point, as you look over the full year because we won't have that holiday set, that's where the overall margin will be a little bit short.
Alex Perry
Incredibly helpful. Thanks for the clarity there. And then just digging in on consumer products. I just wanted to ask sort of what signs of green shoots are most encouraging in consumer products. I guess what toys and properties are you most excited for in the back half? And can you give us any early reads on Beyblade specifically, sort of any channel commentary you're getting there? Thank you.
Chris Cocks
Well, I think you stole my top green shoot with just mentioning Beyblade. Beyblade X is performing well in some early outs in select markets. It's probably the best performing paid late release we've ever had in the UK. It usually does really well in France. And again, it's doing well in France and in the select spots that it's available in the US, it's selling out and selling out very quickly.
Our belief is Beyblade X will be one of the top new toys or refresh toys of 2024 and could actually claim the top spot very similar to what we did with FURBY last year. FURBY continues to do well. We like how FURBLETS are really driving the right price point and extending that franchise.
We've seen a lot of nice momentum with Peppa Pig. I think after a couple of years of owning that franchise not only retain the right notes on the entertainment, but we're starting to hit the right notes on the toys, particularly the price points and kind of the wow moments that we have.
Transformers, I think, is shaping up to be a really nice Q3 and Q4, with Transformers One and then D&D, I also really like, I think you just asked maybe about consumer products, but I'm going to talk about the whole portfolio, the D&D Refresh to the Core Rules of Fifth Edition is going out the gate strong. Preorders are breaking any records that we have. It's exceeding our forecast. Now that will help a bit in Q3 and Q4 when some of the products release, but some of those products don't release until Q1 and Q2 of next year. So again, I think we have a nice kind of healthy midterm projection on the businesses as well.
Gina Goetter
The one that I'd have not brand in product related per se, but it is a positive that we continue to trend well in inventory, both our own owned inventory as well as retail inventories. So retail inventory was down again, about 18%, 20% within the quarter. So we're sitting at super healthy levels as we head into the holidays.
Alex Perry
Perfect. That's really helpful. Best of luck going forward.
Operator
Fred Wightman, Wolfe Research.
Fred Wightman
Hey, guys, good morning. Just to stick on the consumer products business, I know in the past you've sort of hinted that that could reach the 10% or double digit target that you've talked about in 4Q. I'm wondering if you could just give us an update on how realistic that is and maybe what the biggest swing factor is? Is it really POS, is it a matter of maybe cost saves hitting sooner, but what sort of gets you there or potentially get you there?
Gina Goetter
In Q4 specifically, Fred, is that your question?
Fred Wightman
Yeah, in 4Q this year.
Gina Goetter
Got it. No, we do anticipate it getting to that 10% level in Q4. It really comes down to deleveraging the volume, right, as we've talked about, that's been the single biggest drag on the margin as we move to the front half of the year.
So as you put all the revenue in Q3, Q4, both of those quarters tend to be at that 10%, 11% margin. That's what we're planning for. I think our goal is to have it that 10%, 11%, not just be in the back half of the year, but we're working towards having that be for the entire year, which would then say the front half of the year is around 10%, 11% or you have maybe a little less than that in the back half of the year, it's in the low-teens leveraging or kind of moving with moving with revenue.
So all of the work that we're doing this year to get that profitability, right. All of the work we're doing on pricing, on mix, and then getting the product design in the right way, all of that will contribute as we move into '25 and '26 and getting the entire year for CP to you have two digits.
Fred Wightman
Makes sense and then given the momentum in digital, given the momentum with some of the lower-cost price points you've talked about in consumer products, can you just give us an update on how you view some of the bigger licenses in the consumer space being a part of the Hasbro story going forward?
Do you think that you still need to have some of these master licenses? Or do you feel like there's enough that you can sort of do outside of those bigger tent poles to get the consumer products business where you need it to be?
Chris Cocks
Absolutely. We've been in business with Takara Tomy who's the licensor for Beyblade for decades. They're super important for us. And you know, we've been in business with the Walt Disney Company since 1954. And if anything, I think you're going to see us doubling down on our partnership with them and expanding where it could go, whether it's toys, games or trading cards, and Role Play, they're going to be a big part of our story for years to come.
Fred Wightman
Great. Thanks a lot.
Operator
Thank you. And we have reached the end of the question-and-answer session. And this also concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.