Debbie Hancock - VP of Investor Relations Brian Goldner - CEO Deb Thomas - CFO.

Michael Ng - Goldman Sachs Drew Crum - Stifel Nicolaus Felicia Hendrix - Barclays Stephanie Wissink - Jefferies Greg Badishkanian - Citigroup Eric Handler - MKM Partners Tim Conder - Wells Fargo Securities Arpiné Kocharyan - UBS Linda Bolton Weiser - D.A. Davidson Gerrick Johnson - BMO Capital Markets.

Good morning and welcome to the Hasbro Third Quarter 2017 Earnings Conference Call. At this time, all parties will be in listen-only mode. A brief question-and-answer session will follow the formal presentation. [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 Ms. Debbie Hancock, Vice President of Investor Relations. Please go ahead..

Thank you and good morning, everyone. Joining me this morning are Brian Goldner, Hasbro's Chairman and Chief Executive Officer; and Deb Thomas, Hasbro's Chief Financial Officer. Today, we will begin with Brian and Deb providing commentary on the company's performance and then we will take your questions.

Our third quarter earnings release was issued this morning and is available on our Web site. Additionally, presentation slides containing information covered in today's earnings release and call are also available on our site. The press release and presentation include information regarding non-GAAP financial measures.

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. Some of those factors are 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 Brian Goldner.

Brian?.

Infinity War slated for release in May. Disney Princess And Disney Descendants consumer takeaway increased behind strength in Moana and new Descendants 2 entertainment.

In addition, Hasbro's new line in support of Disney's new holiday featurette Olaf's Frozen Adventure is now at retail ahead of the limited theatrical release in front of Disney/Pixar's Coco on November 22.

Finally, from September 8 to 10, we hosted our first ever HASCON in Providence, three days of hands-on brand experiences, meet and greets, sneak peeks, and fan-centric events for families and fans of all ages.

This first of a kind event is emblematic of our journey from a toy and game company to a global play and entertainment leader, delivering immersive entertainment experiences around our brands. To conclude, I want to reassure you that our brands and global POS are strong through today.

Our growth plans for the holiday had been impacted by recent events at Toys "R" Us as well as the economic outlook in certain countries. As a result, we currently expect fourth quarter revenue growth in the range of 4% to 7% year-over-year. This is a shift from our prior expectation, but reflects our current shipment plans for the next 60 days.

Consumer momentum continues to drive our business and we are well positioned with a diverse in demand brand portfolio to deliver growth for 2017 and beyond. I’d now like to turn the call over to Deb.

Deb?.

The Last Knight movie product, which carry some external royalties. Our investment in product development was essentially flat year-over-year, but declined as a percentage of revenues due primarily to lower expenses at Backf1ip Studios. our Investment in innovation remains a point of differentiation and a high priority for our team.

Program production amortization declined slightly in the quarter, but will increase in the fourth quarter as we begin to amortize our investment in the MY LITTLE PONY movie. SG&A increased as a percentage of revenue to 17.4%. The percent increase over 2016 is the result of higher bad debt expense associated with Toys "R" Us.

SG&A declined as a percent of revenue absent this expense. We remain focused on the most efficient cost structure for our company. Given the current environment, changing revenue expectations may slightly impact our operating profit margin outlook for the year.

Turning to results below operating profit, other income was $14 million versus income of $8.5 million last year. Consistent with prior quarters, the biggest components of this line are higher interest income and our share of the earnings from the discovery family channel.

During the quarter, we refinance $350 million of 6.3% maturing debt by issuing $500 million of new 10-year 3.5% debt. We took advantage of the low interest rate environment to raise an additional $150 million to use for general corporate purposes.

We're pleased with this result and expect this transaction to provide a very low cost of capital over the next 10 years. Going forward, this will have a favorable impact of approximately $4 million per year to interest expense. The underlying tax rate was 23.5%, down from 26% last year and versus the 24.5% for the full year 2016.

The quarter included an approximate $0.04 benefit from our adoption of the new accounting standard governing stock compensation. This is consistent with our forecast from August and we continue to expect the fourth quarter's favorable impact to be in the range of $0.11 to $0.13.

Our underlying tax rate is trending to the lower end of our estimated range. Based on our projected mix of revenue and earnings for the remainder of the year, we expect this trend to continue. Diluted earnings per share for the quarter were $2.09. Hasbro is in a strong financial position, including a healthy balance sheet and good cash generation.

We generated $823.6 million in operating cash flow over the trailing 12 month period ending the quarter with $1.2 billion in cash. During the quarter, we paid out $71.4 million in dividends and repurchase $92.9 million worth of common stock.

We continue to target approximately $150 million in share repurchase this year and had $216.5 million available in our authorization at quarter end. Receivables increased 14% and day sales outstanding increased 5 days to 83 days. The increase was due primarily to the mix of revenues as well as the timing of collections.

Our accounts receivable are in good condition and collections continue to be strong. However, we expect the timing impact of ultimate collection from our Toys "R" Us receivables could add an incremental two day's on our year-end receivables compared to the end of 2016.

Inventories are in good shape, increasing 4% versus revenue growth of 7% and essentially flat absent the impact of foreign exchange. Inventories both at Hasbro and at retail are well positioned and of good quality to support our growth expectations for the holiday season.

In closing, despite a dynamic environment which has impacted our initial estimates for the year, we now expect our fourth quarter revenues to grow year-over-year in the range of 4% to 7%.

Consumer trends remain positive through today, but there is higher near-term uncertainty with Toys "R" Us as we see how they'll begin to execute their plan to emerge from Chapter 11.

Our global teams are effectively executing our strategy with the industries best brands and strong commercial programs heading into the holiday season, while profitably driving our business both in the fourth quarter and beyond. Brian and I are now happy to take your questions..

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Michael Ng with Goldman Sachs. Please proceed with your questions..

Great. Thank you so much for the question. My first question is for Deb. Deb, I was just wondering if you could revisit some of the seasonality comments that you made with some of the revenue shift being more concentrated in the fourth quarter due to a retailer preference for just-in-time and a growing share for e-commerce.

Did the quarter come in as you expected despite some of the Toys "R" Us bad debt expense headwinds?.

Thank you. Good morning, Mike. The -- as far as the quarter, we did mention earlier that we did have some shipments that we stopped when we heard of Toys "R" Us declaring their bankruptcy, but just for a short period of time. So I would say absent that, the quarter did come in as we expected and absent the bad debt expense.

As far as the seasonality, we continue to see that. And with Toys "R" Us just having filed for bankruptcy so late in the third quarter, we've adjusted a bit our thoughts around the fourth quarter. However, we still expect to grow and wanted to just give context around that as well.

We found that moving to omni-channel retail strategy has certainly helped and moved a bit more to just-in-time. However, we are about close to 60 days out from year-end now, and we're starting to get more visibility into year-end every day as we get closer and closer..

Okay. And could you expand a little bit just on your assumptions around Toys "R" Us. I’m just trying to get a better sense of what you're assuming in terms of Toys "R" Us for the fourth quarter? Are you assuming that you ship less than to Toys "R" Us? Are you assuming that Toys "R" Us orders less? Any color around that would be very helpful..

Sure. Hi, Mike. So to be clear, I think first and foremost, we do expect to grow more than the industry in Q4 and the industry growth rate estimate now is between 3% and 4%. So we do expect to grow more than that. We've seen great, very strong sell-through up until this weekend. So, that Chapter 11 is just one month old.

We've come to agreement on receivables and we also now agreed to terms go forward just over the last few days on our -- over the last month our finance and the Toys "R" Us commercial teams have been working on and focused on getting an agreement which we signed just a few days ago.

So now our Toys "R" Us team and the merchants can focus and refocus on the holiday joint business plan with just two months to go. In fact, this wouldn't have been an issue had it happened earlier in the year and it's not an issue for us in 2018.

We do have a more expansive retail channel strategy that gives us great confidence that we can deliver industry-leading growth this year even in this environment. We just need to determine what Toys "R" Us can receive over the next few months. But meanwhile it's great to see that our POS is outstanding and very consistent with our expectations..

Great. And the last one for me, I think DISNEY PRINCESS was down in the quarter.

I was just hoping if you could help parse out what happened there? How much of that was because of the Elena of Avalor rollout a year-ago, and how much was Toys "R" Us?.

Yes. So year-to-date DISNEY PRINCESS is up and it was also up in the quarter in international markets. Also very heartening to see that point -- the point-of-sale for DISNEY PRINCESS was up quite considerably. In fact, it's among our strongest point-of-sale gainers in the partner brand Arena.

So what we’ve really seen throughout the year is great growth around the entertainment initiatives. The entertainment has been a key driver, so Beauty and the Beast and Moana are key drivers of the growth that we've seen year-to-date.

And then there's a bit of timing, because you also now are getting into shipments of Frozen around the Q4 featurette, this Olaf's Frozen Adventure. And so, Frozen it was up in the quarter in the U.S. And so again Descendants was very strong in the quarter.

So I think it's a bit of timing overall, but we're seeing great robust sales for the brand and particularly strong sales this quarter -- shipments this quarter in international..

Great. Thank you very much..

Our next question comes from the line of Drew Crum with Stifel. Please proceed with your questions..

Hi, guys. Good morning..

Good morning..

Going back to Toys "R" Us, Brian, were you able to divert any of the product that you had previously earmarked for shipments for Toys "R" Us to other retailers? And as you think about the fourth quarter any uncertainty around shipments that may go to Toys "R" Us? Do you have the flexibility to move those other retailers and is that in any way embedded in that 4% to 7% sales guidance that you’ve provided?.

Yes, so clearly we are assessing what Toys "R" Us can receive, but our expanded retail channel strategy gives us great confidence that we can find home for our inventories, and given where our inventories are and that they’re in great shape and that fact that POS is growing at double digits both globally as well as in the U.S.

Both year-to-date and in the quarter we feel very good about where we are and obviously our teams are very focused on a very strong growth rate in the fourth quarter, and we do think we will end up ahead of the industry growth of course.

So I would say that, overall, we want -- we can find a home for all the inventory that we have, we don't see that as an issue. But we do need to assess what Toys "R" Us will represent of the total inventories in the quarter -- in the fourth quarter..

Okay, got it.

And then I didn't hear STAR WARS mentioned as being one of the partner brands were POS was up in the quarter, maybe I misheard that, but could you comment on consumer takeaway during the quarter and do you think Brian having just five months in between the two STAR WARS films in any way limit sales upside for The Last Jedi to the holiday period?.

A STAR WARS story. I think that will be great and I don't think it will cut off the tale of The Last Jedi. In fact, I think it really sets us up for a great 2018 for STAR WARS.

And then you add to that the fact that we just started to ship The Forces of Destiny product, and we're very excited about that initiative and the content that’s streaming online. And so, I think overall STAR WARS is in pretty good shape now.

Obviously, we've come through a couple of quarters where we work through some Rogue One product and feel very good about where we’re heading at this point..

Okay, great. Thanks, guys..

Our next question is from the line of Felicia Hendrix with Barclays. Please proceed with your question..

Hi. Good morning and thank you..

Good morning..

Good morning..

Hi. Brian, just something that you had -- starting on Toys "R" Us for a second and then I have another question just -- on Toys "R" Us.

I think reading between the lines of what you said about working on the receivables and stuff that you have received critical vendor status?.

Yes, we have. Yes, we have..

Okay.

And so does that just, I guess, accounting wise, does that mean that when all is said and done and everything settles, you could have a potential -- maybe not a whole, but some part of reversal of the bad debt expense?.

Our expectation would be as we see how things settle out, we would certainly look at the situation at the time and adjust whatever expense we needed to on the receivable..

Okay. And then the other thing is, you’ve said a couple of times that you’re currently assessing what Toys "R" Us can receive.

I’m just wondering, is there a chance -- once you go through that with your 4% to 7% shipment guidance for the fourth quarter, is there a chance that that you could end up shipping more than you're currently expecting to Toys "R" Us or would you have a hard and set number?.

No, I think that it's a very fluid situation. So as you prepare for earnings which happened to be this Monday and you're working through month-old Chapter 11 situation. We signed an agreement literally very late last week on the go-forward position.

I think the teams can return to focusing on our joint business plans, which were in place going into the holidays and Toys "R" Us was performing for us quite well. Our overall business is performing really well. It's just now a matter of refocusing on the holiday.

And as I said, had this happened in any other time of the year, we would've had ample time before the holiday period to make a new plan together and do it in a more -- in a longer-term way, but the fact is we feel very good about our overall business. The POS gains that we're seeing across categories are very strong.

Our toy and game business POS was up in the high teens. That’s same as true for Franchise Brands, even partner brands were up more than 20%. Our Hasbro Gaming POS was up more than 20%.

So, again, we feel very good about the fourth quarter and that we can grow ahead of the industry, But out of an abundance of caution, we did want to highlight that it's a more fluid environment only because of the Toys "R" Us situation, and of course the U.K and Brazil situation.

But clearly the bulk of the difference in our point of view was about the Toys "R" Us situation. And just want to now get the teams focused again on a broader retail channel strategy, we go to more doors now than ever before.

We see the acceleration in growth in omni-channel and online retailing which is still two or three times stronger than our overall POS gains. So, again, we just provide a range that given the timing of earnings and our focus now on the holiday..

Just to understand the flipside of that is -- is there a risk that you could end up shipping less than you're anticipating to them?.

Well, even if we shipped less than we would expect, again that's what I was saying that we think there's an opportunity to put our inventory out in the marketplace in a number of places.

Obviously, Toys "R" Us has been a growth arena for us, a growth partner for us, and we want to continue to support their initiatives now that we have an agreement in place, we can do that. And so our teams are very focused on continuing the kind of strong growth that we've seen throughout the year, up 7% year-to-date.

And so we just give you a range because again as we formulated our look at the earnings picture as of today we felt that our range would be prudent..

And is there any way you will quantify the revenue impact of Toys "R" Us in the third quarter?.

No, but we did note that we had stopped shipping for a number of days as a result of the bankruptcy. We wanted to get clarity on the situation and we're now shipping Toys "R" Us in all the retail, and again the POS gains are quite considerable against shipments..

Okay. Final one, not about Toys "R" Us. Just wondering, I think you’ve talked about this, so I just you want to expand, you had the MY LITTLE PONY movie in the quarter, maybe the movie didn’t end being as successful as you may have expected.

Just wondering what that did for toy sales?.

Well, the movie as of this past weekend globally is just shy of about $40 million. The brand is up in the quarter across every region and across our entertainment and licensing business. We are really building this media digital mix model and our brand blueprint we think is really working. And the film will absolutely pay back its investment.

Remember, we made the film for modest budget. It is driving consumer products. It's driving toys and games. It's also driving our digital gaming business and MY LITTLE PONY is up year-to-date. So, again, that combination of storytelling between stream content, television content, and the film is a great formula for the brand.

So we feel very good about the brand heading into the holidays in 2018..

Great. Thank you so much..

The next question is from the line of Steph Wissink with Jefferies. Please proceed with your questions..

Thanks. Good morning, everyone..

Good morning..

I have three questions as well. Brian, just a bigger question for you. If you could just give us an insight into where we are in the investment cycle around the capabilities as you navigate around your blueprint? Do you see any big step ups in the next couple of years? And then, Deb, a question for you on operating margin.

I think that couple of years ago, I mean, 18 month ago, you detailed three headwinds, the Princess was one just as that business scale MAGIC digital investments and then emerging markets, particularly China.

I’m wondering if you can talk a little bit about where we are on that continuum of operating margin scaling in gaining against those initiatives? And final question for -- second, one more just on games. I need to compliment you on the strength of games, because it seems to continue beyond what we would have expected.

Maybe talk a little bit about the pipeline for Q4 and into 2018 for that segment in particular?.

You got it.

So, look, I think that the MY LITTLE PONY approach is very emblematic of what we're going to do as we go forward, meaning modest investments in film type content, using very strong partnerships and strong investment from a major studio that will pay for the best proportion of our films and distribute those films very effectively and market them globally.

So, again, our approach is the television model, stream content model, a digital first model and then modest investments where appropriate in the film model and we're adding capabilities and personnel, people who are professional storytellers in those spaces.

As you know we continue to add great capabilities around the blueprint and MY LITTLE PONY and TRANSFORMERS growth are absolutely all about the fact that we're really executing our model quite strongly.

You want to talk about the …?.

Arena will be -- it's in beta right now. And our investments are finishing on that, however, it's a constant investment in MAGIC, perhaps not to the same level that we’ve had in the past.

However, it's such an important brand for us that as one of our major Franchise Brands will continue investing in that, but perhaps not at the same level as we've seen in the past. So we're looking forward to Arena in being out in more distributed play in 2018. And as far as emerging markets go, we’ve had some hiccups in Brazil this year.

We've seen the economic conditions just haven't been as great as they could be, because of political situation and how people are really reacting to what's happening there.

However, our consumers -- our products are being well received by consumers and our emerging market profitability continues to improve, and as our business grows in China we expect that to grow as well..

Yes, China's POS growth in the quarter was quite substantial as well as Russia, and our new market in India was quite good as well. So, Brazil is really the one exception within emerging markets and overall emerging markets grew at 8% in the quarter. As we look at games, Steph, you’re absolutely right, the team has done a fantastic job.

The social trend games that are about social listening and social scraping and really understanding what's going on in the global market for stream content has really paying dividends, but also our classic games are up and growing through reinvention and reimagination.

So, whether it's MONOPOLY that's grown considerably, Fantastic Gymnastics, even Clue Life TWISTER operation, risk, and then of course some of the more -- the fun social games like SPEAK OUT. And then we have a number of new games that are launching in the fourth quarter, including Simon Optix. Hearing Things is off to a great start.

Something called Get a Grip, Coinhole, and then of course we just launched our Drop Mix Gaming System, which is very exciting. The reviews have been great and it's just early days, but we feel great about that new music mixing platform as we head into the holidays and into 2018.

So the team has done an outstanding job there and I think you will continue to see us use best-in-class digital capability and social media capability to build some fantastic product line up..

Thank you. very helpful..

The next question is from the line of Greg Badishkanian with Citi. Please proceed with your question..

Thanks. Just a follow-up on one of Brian's comment. So, I think you mentioned you were seeing great sell-through until the weekend.

So is that a continuation from the third quarter? Is it little bit slower, faster, pretty similar and any change in trend that you’ve been seeing since you did bring up fourth quarter trends and POS?.

Yes, look, I wanted to reassure people that our trends of double-digit growth have continued into the quarter. Obviously, we're -- on October 23 we are still seeing great fourth quarter trends through the -- through this past week some great trends and we are seeing it across our business and across regions.

And that gives us great confidence and the fact that we can grow beyond industry growth rate and we're at not for this Toys "R" Us situation to have happened in the fourth quarter. We would not be having to talk about the kind of ranges that we're talking about.

We just need to get our arms around now the Toys "R" Us situation and obviously, with a broader retail channel strategy with all the omni-channel and online retailing that’s going on and the great growth rates we're seeing there that are two or three times the overall growth rate that we’ve seen in the market. It's quite great.

So, for example, in the quarter we saw Franchise Brands grow by in the teens and online we saw Franchise Brands grow by 30%. And that's similar across our business where we’re just seeing this great acceleration both in brick and mortar, omni-channel, and online.

So, again, it portends good things for us in the fourth quarter as we're in the fourth quarter and as well into '18..

Yes, good additional color. Thanks, Brian. And then another, a quick one. So -- and I’m sure you’ve heard this a lot, but 2017 entertainment lineup has been just fantastic.

Comparing 2018, next year's, can you achieve similar revenue growth or even increase that when you think about the entertainment for next year versus 2017?.

STAR WARS story movie in the end of May. We have our very own Bumblebee movie that comes in December next year, you’ve got Toy Story 4. You’ve Ant-Man and the Wasp, and then you have Spider-Man animated movie that comes at the end of the year as well, at the end of '18. So the lineup is quite considerable from Marvel, from Lucasfilm, from Hasbro.

Of course, we have all kinds of television entertainment that's also going to support all those brands both from Disney as well as Hasbro's own Studios. And so we feel very good about the lineup in '18 and entertainment should continue to be a key driver of our business..

Okay. And then, just finally on Toys "R" Us.

Your -- did I hear you right there, you're not expecting an impact in 2018 or material impact from Toys "R" Us? This is limited to 2017?.

Yes, we will see how things emerge, as they begin to execute their plan and give more color around it to emerge from bankruptcy..

Yes..

As we sit and see how that goes, and if something changes in that, that could have an impact. But as we sit here today, we do not expect a significant impact from the situation as we know it today..

Okay. Thank you very much..

The next question is from the line of Eric Handler with MKM Partners. Please proceed with your question..

Yes. Thanks for taking my questions. Couple questions for you. First, I appreciate given some guidance on the fourth quarter revenue.

Just curious, is anything changing on the expense line relative to what you’ve previously discussed for the year, particularly, with regards to resin cost given how much they’ve been increasing? Secondly, with regards to MY LITTLE PONY and how you’re recognizing your revenue and operating income from the film.

One, are you allowed to recognize any revenue before Lionsgate recoups its marketing spending? And as you look at the film, how much -- did you do -- how much of the film internationally did you pre-sell and how much did that allow you to recover from your budget, and just looking at the film forget about the toys, forget about the other licensing opportunities, is the expectation for the film itself to be profitable?.

Yes, so let me start with MY LITTLE PONY and then Deb can talk about the resins for a second. The way Lionsgate works is they pre-sell the film in a substantial part of the global marketplace. They self distribute in the U.K., as well as virtually self distribute in Latin America..

Right..

The rest of the markets they are pre-selling, so you get that recoupment right up front around your production expense. The movie itself, if you take it through the waterfall should be a contributor to the company over time.

Obviously, it may not occur in the -- by the fourth quarter this year, because obviously our expenses for producing the movie will hit in the fourth quarter this year, but again, remember it's a modest budget. However, all the streams of income that it's creating, including consumer products are toys and games business.

The digital game that’s performing at a very high-level from Budge Studios and new games that are coming we think it's a great model for the brand.

And of course we continue with the 7th season of the television that's appearing globally on linear television services as well as in stream services, it's a very strong performer on Netflix and other services. We see this as a very good model for us go forward..

And as far as our resin prices, well, we have seen some increases in resin prices. As a reminder, we set our pricing 12 to 15 months in advance.

So when we do that, we're able to go out and hedge our expected cost, number one, to a large extent from an -- to try to take out some of the FX impact of that and in addition to that we adjust our pricing accordingly. So as far as fourth quarter goes there, we don't expect any impact from that..

But then as you think about '18, how does that resin price now sort of impact '18 potentially?.

Well, we would set our prices accordingly..

Okay. Thank you..

Our next question is from the line of Tim Conder with Wells Fargo Securities. Please proceed with your question. Q - Tim Conder Thank you. Deb, we will hit a couple of housekeeping items here, first.

The tax benefit of -- that you outlined here for Q4, is that more of a one-time due to some one-time option grants and then should we think about Q1 is the more reoccurring on the tax benefits under the new accounting standard?.

Yes, exactly. I think we have a grant that’s probably bigger than normal that's maturing in the fourth quarter this year.

And when we get to Toy Fair, we will try to lay out what we think our normal quarterly basis will be, but as we think about first quarter I’m thinking about it as the same -- around the same level as the first quarter of this year..

Okay. Okay. And then we will circle back to the topic of the day, the Toys "R" Us. Brian, you’ve alluded many times here that you’re further developing the omni-channel, the ability that this -- for consumers to also shift among retailers. So let’s take the draconian scenario here, hypothetical, the Toys "R" Us North America liquidates in 2018.

Again, draconian hypothetical at this point obviously.

Given what we've seen in the past with Woolworth in the U.K and Target's withdrawal, not bankruptcy from Canada, how fast do you think under that hypothetical would we see the absorption reallocation of the channel? I mean, if you can an answer that in anyway?.

You know. I’m so heartened our financing commercial teams have really executed the current plan during the holidays with such excellence. Our belief, as we go forward is that the current situation would not be an issue for us in 2018. I don't know how to answer a hypothetical like the one you post.

However, I will tell you that we’ve increasingly found great homes for our great products. Our products sell quite well at a number of different new channels that we've expanded into including value and drug as well as other new retailers. Our mass partnerships as well have really expanded.

Our performance with Amazon, our performance with Walmart and Target have been very substantial and very strong.

So, again, long-term as you described, our business will be fine and our products will find homes and we will find the consumer, and increasingly we’ve talked about how online continues to dis-intermediate some of the toy departments, and the consumer continues to find our products and it's really heartening to see how online sell-through is even stronger than brick-and-mortar sell-through when there's no friction in the finding of our products.

It just says that our products really resonate with consumers..

Okay.

And then the agreement that you signed late last week, was that in preparation of tomorrow's [indiscernible] hearing for Toys "R" Us or could anything change coming out of that hearing tomorrow from what you know from last week?.

We are in a position that we want to make sure that Toys "R" Us has all the support they need to emerge from bankruptcy, so we entered into that agreement with them to go ahead and help them in that path forward.

As we see how their plans develop and we see how -- what comes out of whatever hearings there are, we will just have to wait and see, but our expectation is that that there would not be any change..

Okay.

And then as you talked about, Deb, the costs related to some of the investments in the trading card business in MAGIC and so forth, should we start to see that lever in the back half of '18 sort to see some good leverage benefits from that?.

That would be our expectation. As a matter of fact if you look at our SG&A expense, absent the bad debt charge, you're starting to see us get -- getting leverage from the higher revenue numbers now.

And as MAGIC Arena is out there, our expectation is that we would continue to see that leverage and when we get to Toy Fair, well, you know us, we will give more specific guidance about what we think the different category should look like at that point..

Okay, great. Thank you both for the color..

Thanks..

Our next question is from the line of Arpiné Kocharyan with UBS. Please go ahead with your question..

Hi. Thank you. Good morning..

Good morning, Arpiné..

THE GATHERING which is the high-margin business for you.

But could you perhaps go through the puts and takes on gross margin outside of mix? What drove that 160 basis point of decline for the quarter?.

So we said absent the charge which we did not say what it was that our operating profit would have been 100 basis points higher.

But if you move up to margin, gross margin and you think about the guidance that we've been giving all year is that we did say we expected our gross margin and our cost of sales actually to be higher than a year-ago, because of the mix of product and also some less favorable hedges that we had in place and it's not that were not hedging.

We are hedging to protect pricing and margins, but we've -- it has more buying euros at $1.40, it was a lot more favorable than a euro at what $1.20 today, I didn’t check this morning. But -- so we did say that we expected our cost of sales for the full-year to be a bit higher.

When you particularly look at the phasing and our product mix that can have a significant impact on gross margin, and as we had said we did not -- we expected Q3 to be down in MAGIC, and it was, and that did have an impact on our mix for the quarter..

Okay. And then on operating profit margin guidance, Deb, you mentioned in your prepared remarks that you expect impact, obviously, since last time we spoke, but you had previously indicated growth off of GAAP adjusted number of about 15.7%.

Now with the visibility you have -- as much visibility you have for Q4, could you update where that expectation is now for the year in terms of offering margin?.

Yes, I believe that our operating margin for the full-year can be very similar to the margin that was last year. We just talked about the fact that we would -- prior had expected or more confirmed that we would get some modest growth.

Now I would say it's probably more similar to a year-ago, and again we're just talking about 20 basis points of difference. That was -- we were talking about the 15.7% number. So again, I'd expect it to be similar to that this year..

Thank you very much..

The next question is from the line of Linda Bolton Weiser with Davidson. Please proceed with your question..

Yes, hi. So you’ve some very good performance with several of your Franchise Brands and PLAY-DOH was such a big success story, but yes, you’ve had some sales declines this year.

Can you talk about what’s going on with that brand and the outlook for rejuvenation of growth there? And secondly, with MY LITTLE PONY, do you think that the movie here in the second half that’s improving growth of the brand, can that have some carryover effect into 2018 to support the brands that you can expect growth next year as well in that brand? Thanks..

Yes, I think the model for MY LITTLE PONY has really worked and I think the team is beginning to think about what our next movie might look like. Meanwhile, we have ongoing television support. The brand, we believe, will halo quite strongly.

We're seeing a great reinvigoration of our core fans as well as families and inviting a lot of new fans into the brand around the world. So, we like the model combination of the horizontal of television, the verticals of film for brand like MY LITTLE PONY done well. On the PLAY-DOH side, we’ve seen very strong performance around the PLAY-DOH itself.

There have been a few play sets in the spring that have had a weaker performance. Having said that, as we come into the holidays we have some new play sets which are performing early days, very, very good level including our Rapunzel full play set.

We also have a number of play sets and something they call Kitchen Creations, which we would expect good performance on. So I think long-term PLAY-DOH has been one of our most global brands. It's one of the most heavily consumed, parents really enjoy and it's definitely a part of children helping to create or enjoy developmental milestones.

And so I think long-term I’m very confident in the PLAY-DOH and the PLAY-DOH's teams ability to grow that business over time..

Thank you..

The next question is from the line of Gerrick Johnson with BMO. Please proceed with your question..

Hey, good morning..

Good morning, Gerrick..

Good morning..

Hi. It seems three questions per, I’m going to ask three. First, can you just quantify your answer to Arpine's question about the operating margin being similar to the 15.7% [ph] last year. Does that include or exclude the bad debt charge, that’s one.

Number two, STAR WARS for the year $500 million, has kind of been the bogey that I everyone has been shooting for, how do you feel about $500 million of STAR WARS this year? And then, lastly a more open-ended, you talked about the shift in retail sales for movie based properties, sort of from movie released to more of DVD streaming.

Can you talk about that shift and is there any way to quantify how much revenue sort of shifted away from the movie debuts and towards the DVD and streaming? Thank you..

Sure. Let me talk to STAR WARS and the shift, and Deb you can do the first one. The -- on STAR WARS, clearly it's become a much bigger more consistently big brand year-after-year, and that's what we've really seen.

And again this year as we head into The Last Jedi, it's a brand that's up in the quarter and we expect very good things this holiday, but also Gerrick as you were describing, expect very strong spring around the brand. We saw it last time for The FORCE AWAKENS. We've seen it throughout this year for Moana and for Beauty and the Beast.

We are seeing it around TRANSFORMERS as the DVD dropped on September 28 and the performance has been quite strong. So I think people are enjoying motion pictures both in the theater as well as through electronic sell-through windows and then into DVD windows.

Overall, I think it again says good things about the ability to tell stories and have those stories enjoyed across a multitude of screens. It's really obviously one of the premises of our approach and strategy to be both digitally oriented as well as content oriented.

And so, I would expect that to continue and continue for our properties as well as Marvel, Lucasfilm and DISNEY PRINCESS and FROZEN properties..

And from an OP standpoint, if we exclude bad debt expense our year-to-date operating profit margin is just slightly behind last year. So we -- as you know as a company always remain very focused on the most efficient cost structure for our company.

So given the current environment in our changing revenue, expectations, it just may as Brian said slightly impact our expectations from the beginning of the year. But overall we remain focused on really creating the most cost efficient structure for our company as a whole..

Okay. Thank you..

Thank you. At this time, I will turn the floor back to Debbie Hancock for closing remarks..

Thank you, Rob, and thank you everyone for joining the call today. The replay will be available on our Web site in approximately two hours. Additionally, management's prepared remarks will be posted on our Web site following this call. Our fourth quarter and year-end earnings release is tentatively scheduled for Monday, February 12. Thank you..

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..