Hasbro Inc (HAS) — Q3 2025 Earnings Call Transcript

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 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. Hasbro delivered another strong quarter in Q3, extending our growth trajectory in 2025. Net revenue and operating profit both showed robust year-over-year gains, underscoring the power of our Playing to Win strategy, which positions Hasbro as a diversified digitally forward play company uniquely resilient in today's tariff-sensitive market. Key drivers were MAGIC, Marvel, MONOPOLY, PEPPA PIG, Beyblade and G.I. JOE. Brands exemplifying durable, diversified growth that differentiate Hasbro from traditional competitors. Year-to-date, revenue is up 7% and adjusted operating profit has increased 14%. We anticipate full year revenue growth in the high single digits and adjusted operating profit growth exceeding 20%. MAGIC continues to outperform expectations, posting 40% growth year-to-date. This success is fueled by unprecedented new player acquisition and standout collaborations with brands like Spider-Man and Final Fantasy. Our Universes Beyond strategy, leveraging MAGIC's depth with beloved IPs is generating extraordinary engagement. Looking ahead, we'll build on this momentum in 2026 with original MAGIC IP sets and blockbuster collaborations, including Teenage Mutant Ninja Turtles, The Hobbit, Star Trek and Marvel Superheroes. Interest indicators like event attendance, search metrics, MagicCon 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 Lair 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 SORRY! WORLD with Gameberry Labs continues to outperform with both games topping mobile player charts. In Digital Gaming, the game awards this December will showcase some new announcements from Hasbro, including updates on our upcoming sci-fi RPG EXODUS, further cementing our commitment to innovative digital play experiences. Consumer Products met our Q3 expectations, although retailer shifts pushed some revenue into Q4. We anticipate a solid bounce back in the fourth quarter, driven by innovation, entertainment tie-ins and strategic partnerships. Key highlights include momentum from PEPPA PIG and Marvel's blockbuster content lineup, steady growth from Beyblade, G.I. JOE's rebound post supplier transition and solid traction for new products like Nano-mals, DJ Furby, baby Evie, Star Wars Lightsaber Forge Kyber, Priorities and PLAY-DOH Barbie. Retail shelf resets since late August have led to a mid-single-digit POS increase entering the holiday season and share gains for Hasbro across our focus categories. We expect Consumer Products to finish the year down mid-single digits, primarily impacted by tariffs. However, because of our proactive supply chain diversification initiatives, we expect that by year-end 2026, no single country outside the U.S. will represent more than 1/3 of Hasbro's supply chain. Additionally, new vendor and manufacturing partnerships will unlock attractive pricing opportunities globally from Bodegas in Santiago to Dollar stores in Peoria, expanding our retail footprint and total addressable market significantly. After a long turnaround effort, we expect Q4 to be the start of a long-term growth period for our toys business, driven by innovation, a killer entertainment slate and new partnerships. Just this week, we announced an exciting collaboration tied to Netflix hit film, 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 Eternities as well as continued momentum across Secret Lair 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 days from retailers and lapped a difficult comparison last year in licensing. Revenue of $797 million was down 7% versus last year, with growth in Europe offsetting softer performance in North America. Adjusted operating profit was $89 million with an 11.2% margin compared to 15.1% last year. The margin change was driven primarily by tariff expense and unfavorable mix, offset in part by productivity improvements across our supply chain and expense management. The Entertainment segment delivered revenue of $19 million, up 8% and an adjusted operating margin of 61%, which is consistent with the asset-light model we're building in this segment. Year-to-date adjusted EBITDA stands at $989 million, up 11% 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've delivered approximately $150 million in realized gross savings, keeping us on track to achieve our full year target. Operational efficiencies, expense management and productivity gains across sourcing and logistics are driving strong margin performance even as we absorb higher royalty costs at Wizards and trade-related headwinds in Consumer Products. These savings are translating directly into margin resilience and giving us the flexibility to reinvest behind our highest return growth engines. We're executing our tariff remediation playbook decisively, mitigating risk and protecting profitability. Maintaining our assumption that the China tariff rate stays at 30% and Vietnam at 20%, we continue to expect $60 million of impact in our 2025 P&L. Owned inventory levels remain healthy and firmly aligned with our year-end targets. We believe we have appropriate inventory in our warehouses to fulfill the anticipated holiday build and replenishment orders. With a robust entertainment lineup scheduled for 2026, we remain laser-focused on exiting the year with clean company-owned and retail inventories. We are continuing with our diversification efforts to build resiliency across the supply chain and coupling those with the incredible growth in MAGIC. By 2026, we expect approximately 30% of our total Hasbro toy and game revenue will be sourced from China and 30% of our revenue will be based in the U.S. as we opportunistically lean into our U.S. manufacturing capacity. As we enter the final quarter, our momentum 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.

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 market was expecting. And from a profitability standpoint, it implies that your growth accelerates versus the third quarter. It does seem like 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 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 quarter based on MY LITTLE PONY trading cards, which has since settled into more of a run rate. We also expect Wizards is going to have a strong quarter as well. The early reads on Avatar: The Last Airbender look terrific. And then we have another bite at the Final Fantasy holiday set. So overall, we're expecting pretty good top line growth and some nice operating profit growth as well. I'll turn it over to Gina to kind of dig into point B C, D and E of your first question.

Megan, let's begin. You're correct that we're raising our guidance. This is largely due to the ongoing strength we've seen all year in MAGIC for Q3, along with a solid outlook for consumer products as we approach Q4. When we examine Wizards, the increase is entirely based on revenue, as we've witnessed continued momentum. Looking ahead to the set releases planned for Q4, we also have a holiday release this year that should generate significant revenue and provide leverage throughout our financials. One aspect we've mentioned frequently regarding Wizards this year is the royalty expense. From a modeling perspective, the royalty expense we observed in Q3 will largely mirror what we expect in Q4. Therefore, the increase in Wizards is driven by the revenue momentum we're experiencing and its positive impact on our financials. Regarding our consumer products business, as you pointed out, we see a relatively flat outlook. Depending on the range we consider, there could be potential for some growth within the quarter. We've noticed an acceleration in our point-of-sale momentum since Q3, which has continued into Q4. Additionally, many in the industry have mentioned the later retail shelf resets that negatively affected Q2. We've started seeing shipments increase in Q3, and this trend has persisted into Q4. As we navigate through the holiday period, we expect our shipments will outpace our point-of-sale, which should help create leverage in our financials from a margin perspective. Did I address all of your points?

Yes. 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 we'll be at 2.5x. We still think there are opportunities for us to bring that down even further to just create more optionality and flexibility for us as a business. So as we turn the corner into '26, we'll come back and see if any of those are changed. But for now, we're sticking with those.

What do you think is driving this acceleration in retail POS for you and for the industry? And what are some of the indicators that you look at to decide whether this holds up in the next 40 days 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.

Sure, Arpine. I think a couple of things. Each product is a little different. For instance, with G.I. 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, Nano-mals, 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 buoyed 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's Transformers One 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. Please continue.

My one add that I would have is on just as you think about the overall category and pricing as a dynamic, we really haven't seen overall huge increases in ASPs. We've seen some 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 legs well into the first half of next year, I would imagine. But this business is very much driven by the timing of set releases. Anything you could tell us to help think through how you left these very strong numbers from this year into 2026? And Gina, just a quick question for you. The licensing expense under MAGIC for the 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?

Are you referring to the Digital, specifically MAGIC Digital?

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

The royalty expense, I see. Yes, the just 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 falling in the back half of the year, whereas it was just Final Fantasy in the front half of the year. So that's why you see that weighting. It will be roughly, call it, $50 million, $60 million of royalty expense in the back half of the year. And then, of course, will be 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 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 backlist, 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 like the last one is Universes Beyond is just working. The whole theory of the business was it's going to increase our distribution. It's going to increase our number of active players. It's going to bring in new fans that were adjacent to MAGIC, and that has just worked. Like basically, every set we've done in Universes Beyond has set records in terms of new player engagement, in terms of search queries, in terms of number of people who are going into stores, in terms of sales in nontraditional outlets like mass and convenience for us. And we don't see that slowing down. If anything, I think there's potential to accelerate it just with the quality of partners we have next year and the early reads we're getting on those partners. 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.

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?

Pricing in the category has been relatively stable so far. We began noticing this trend in July and August, and expect to see more in September and October. Our pricing strategy has been selective, primarily targeting brands with strong content and latent demand, aiming for price points where consumers are less sensitive, particularly below $15 and around $20. So far, we haven't observed significant elasticity based on preliminary data. Moving forward, we'll need to assess consumer behavior during the holiday season. Currently, there appears to be a split among consumers. The top 20% of households in the U.S. continue to spend confidently, with strong performance in our fan and trading card business. Meanwhile, other households are being more cautious and price-sensitive. About half of our products are priced under $20, and we anticipate that this range will increase in 2026 as we introduce new suppliers and products. Overall, things are looking positive so far.

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's 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 learn more in December, but anything or any frameworks you could provide at the moment to help set the frame of mind looking into next year?

Got it. 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 launch the units, that cost will depreciate alongside with units. It will flow through our cost of goods. So that's where you'll see it. It will impact our gross margins. That's 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 launch 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 timeline for when we're going to launch, that will impact it, but that's the good rule of thumb. In terms of how we're thinking about the overall expense standpoint, you've heard us talk about how AAA video games, some of them can be very, very expensive. We are not playing in that range. You've heard us talk in the 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 depreciation that you'll see come through the P&L. Now obviously, that's the P&L impact. As we launch the game, as we 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?

So 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 rate will play out, we're really putting all of our levers to work from how we think about pricing, how we're thinking about our product mix, how we're thinking about our supply chain and how we're managing all of our operating expenses to mitigate and offset the impact.

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

It will be less overall for the year, as the tariff cost will be higher due to having a full year. However, we are still analyzing the net impact as we implement various strategies. The actual tariff cost, which will be based on four quarters, did not significantly affect our profit and loss statement until the third quarter.

Yes, Chris, as you consider the midterm outlook for CP and the overall company, we are very confident in our operating profit guidance. Our games business is performing exceptionally well, exceeding our expectations. Our licensing business is also doing well and aligns with or surpasses our plans. In terms of toys, we believe we are just beginning to see the growth phase of our turnaround, which is encouraging. From a revenue perspective, we feel good about the guidance provided in February. Regarding the margin for the CP business, if tariffs remain in the 20% to 30% range, we anticipate a reduction of a couple of margin points from our expectations. This would mean low double digits could shift to high single digits, provided there are no changes in tariffs or business dynamics. It’s a bit early to make definitive statements about CP. We are optimistic about the partnerships we are forming, with KPop Demon Hunters being one of the hottest new entertainment properties this year. We are excited about what's developing with Star Wars and Marvel as their content and brands make a strong comeback. We expect to provide a more comprehensive update in February regarding 2026 and the midterm outlook.

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 Universes Beyond 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 we think could rival or beat Final Fantasy, but we definitely see at least one that we think can do that. 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 backlist 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.

So in response to your last question, Chris, I won't ask which sets you think could be Final Fantasy. However, I am interested in the KPop Demon Hunters' press release that mentioned Wizards of the Coast. I would like to hear your thoughts on how those two could integrate. Additionally, regarding Wizards' margins, we initially expected them to decrease significantly this year, but that hasn't been the case. What are your thoughts on how to view Wizards' margins for next year? Any insights on the royalty aspect would also be appreciated.

Yes. We're really excited about KPop. I remember the weekend it launched, I watched it and immediately texted Tim, who leads our toy division, asking why we hadn't connected with them yet because it's fantastic. If you check my Spotify playlist, it resembles that of a 12-year-old's, featuring Soda Pop, Golden, and other tracks. I'm enthusiastic about KPop. We're collaborating with Netflix, while Mattel is focusing on dolls and figurines. Our role encompasses various products including plush toys, games, trading cards like those for MAGIC, electronics, and role play items. This partnership shows great potential and has remarkable longevity. In fact, it's the first of many exciting collaborations in our toy division that we look forward to sharing details about in the next few quarters. I believe our toy business is just beginning a lengthy growth phase, fueled by entertainment collaborations, new partnerships, and licenses. Regarding your question about MAGIC, it has shown its capacity to accommodate a wide range of intellectual properties. One of the top-selling Secret Lair products ever was SpongeBob SquarePants. If we can successfully engage consumers with SpongeBob SquarePants collectible cards, I’m confident we can do the same with one of the biggest movies of all time.

If you examine our margins, we won't be discussing 2026 guidance today. However, we've consistently indicated that our Wizards segment will be in the high 30s to low 40s. A look at our recent history shows that we've been around those levels for several years. This is the performance we expect from that business, and we're challenging our teams to achieve this, understanding that this segment is key to our growth. We will continue to invest appropriately back into the business. Although I can't provide specific guidance, we've always mentioned a high 30s to low 40s expectation for the Wizards segment, and that's what you should anticipate from us over time.

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

Our retail inventories were down in the mid- to high teens in the U.S. as we entered the fourth quarter. Our order book has picked up speed compared to previous fourth quarters. The domestic market is performing quite well, although DI is lagging slightly. Overall, this points to strong replenishment from our retailers. We expect retail inventories to be down by the end of the year, using the mid-teens as a reference point. If current trends continue, we may significantly reduce that ratio. This supports our expectation that the fourth quarter will be a strong period 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.

I guess as a follow-up to the last line of questioning, but more consumer products focused. Could 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?

Thank you for your question, Alex. We aren’t going to discuss the specifics for 2026 just yet. However, we believe we have some favorable conditions as we wrap up the year that will positively influence our revenue. We’ve mentioned before how not having revenue can negatively impact our profit and loss statement. As that begins to improve next year, it will work in our favor. We are actively managing all our strategies to mitigate the impact on margins, and we remain on track to achieve $1 billion in cost savings by 2027. When we connect in February, we’ll provide more detailed insights into the consumer products outlook for 2026.

I mean I think a couple of breadcrumbs that are public. Certainly, we are bullish on the potential of KPop. 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 the 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 Doctor Doom. I couldn't imagine a much more stacked content lineup than what we have kind of forming a tailwind for us next year.

You kind of already touched on this, but I was curious what you're seeing specifically in terms of promotional cadence. One of your peers might have said that it's intensifying heading into the holidays. Just kind of curious what you guys are seeing.

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.

Yes. I think it's still early to determine the quality and timing of the intensity due to the shelf reset and its adjustments. We are just beginning to see the effects of promotions take shape. Retailers have focused on these aspects during the fourth quarter. Yes, that's a good question. In general, you can expect continuity in the Entertainment segment. We anticipate maintaining a similar revenue base with about a 50% to 60% margin as we move forward. This includes content we are creating for brands like PEPPA, as well as rights we are granting to other studios to develop our intellectual property. The timing of revenue delivery may vary slightly since it depends on when deals are signed. Overall, this is how you should view the mix for the rest of this year and into next year.

Yes, we view Entertainment as a long-term brand development pipeline. It generates some revenue, essentially functioning as self-sustaining advertising through excellent content partners. At our last count, we are developing around 45 to 50 shows, movies, and reality TV offerings with a variety of partners. We collaborate with top industry names such as Paramount, Warner Bros., Netflix, Universal, Disney, and Lionsgate. We will provide more updates as these deals progress. Typically, we prefer to announce a project only when it enters production. We anticipate having much more information to share by 2026.

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.

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

Yes. I mean you hit on it. The increase or the step-up that you're seeing is largely driven by Wizards and Digital. There's some this year within toy just as we've kind of revamped our innovation pipeline as we started going out. You heard us talk about KPop 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.

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 III 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 at TRPG.