Disappointing 4Q for JAKKS Pacific

Zacks

Toy maker JAKKS Pacific Inc’s (JAKK) adjusted loss of 72 cents per share in the fourth quarter of 2011, was considerably wider than the Zacks Consensus Estimate of a loss of 61 cents a share.  The quarterly result also deteriorated considerably from the year-ago quarter earnings of 13 cents per share and was well below management’s earnings guidance of 37 cents to 40 cents.

On a GAAP basis, reported loss of 77 cents per share was well below the year-ago quarter earnings of 30 cents. The lower-than-expected results were due to negative top-line growth in the crucial holiday season.

The company’s revenue tumbled 28.7% year over year to $141.1 million in the fourth quarter due to weak retail sales environment amid the crucial holiday season. The company’s results were also unimpressive as it had to bear the brunt of increased markdown allowances and royalty expenses related to license guarantee shortfalls.

Selling, general and administrative expenses rose 16.5% year over year to $32.2 million in the fourth quarter and crept up 3.9% to $128.5 million in 2011. Owing to lower demand, the company offered higher discounts to attract customers, which in turn hurt margins. At the end of the fourth quarter, loss from operations was $36.0 million as against an operating income of $11.0 million in the year-ago quarter. In 2011, operating income was $1.3 million versus $50.2 million in 2010.

In full year 2011, the company reported adjusted earnings of $10.9 million or 41 cents per share versus $38.2 million or $1.27 per share in the prior year. Total revenue fell 9.3% to $784.5 million.

Financial Position

At the end of 2011, JAKKS had cash and cash equivalents and marketable securities of $257.3 million versus $278.3 million at December 31, 2010. The company’s long-term debt was $92.2 million versus $89.5 million at December 31, 2010.

The company also announced a quarterly cash dividend of 10 cents per share, payable on April 2, 2012 to the shareholders of record as of March 2012.

Guidance

For 2012, JAKKS forecasts adjusted earnings in the range of $1.01 to $1.07 per share. The company expects sales in the range of $720–$728 million, implying a growth of 6.2% to 7.4%.

In the first quarter of 2012, the company anticipates net sales in the range of $63 to $70 million, with loss per share in the range of 61 cents to 64 cents.

The company foresees a better retail sales environment in 2012 and remains upbeat regarding its strong product line up and growth opportunities across all units, including role play toys, action figures, Halloween costumes, electronics, kids’ furniture and dolls. Management also remains optimistic regarding the overseas property Monsuno, an animated Japanese television series, likely to come on air soon and the toy line launch scheduled in March. Additionally, the company is also looking forward to the recent deal with Warner Brothers Consumer Products.

Our Take

We remain optimistic on JAKKS’ long-term growth potential with product launches and strong financial condition. However, disappointing fourth quarter results and the expectation of a loss in the upcoming first quarter 2012 remain concerns. Moreover, higher input and labor costs are headwinds. Hence, we expect the estimates to move down in the future.

JAKKS Pacific currently retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating. We are also maintaining our long-term Underperform recommendation on the stock.

One of JAKKS’ primary competitors, Mattel Inc. (MAT) reported fourth quarter earnings of $1.07 per share, which was ahead of the Zacks Consensus Estimate. Another peer company, Hasbro Inc. (HAS) has reported fourth quarter 2011 earnings per share of $1.06, which was in line with the Zacks Consensus Estimate.

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Read the Full Research Report on HAS

Read the Full Research Report on MAT

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