U.S. Markets closed

Edited Transcript of JAKK earnings conference call or presentation 25-Oct-18 1:00pm GMT

Q3 2018 JAKKS Pacific Inc Earnings Call

MALIBU Nov 9, 2018 (Thomson StreetEvents) -- Edited Transcript of JAKKS Pacific Inc earnings conference call or presentation Thursday, October 25, 2018 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Brent T. Novak

JAKKS Pacific, Inc. - Executive VP & CFO

* Stephen G. Berman

JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President & Secretary

================================================================================

Conference Call Participants

================================================================================

* Gerrick Luke Johnson

BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst

* Linda Ann Bolton-Weiser

D.A. Davidson & Co., Research Division - Senior Research Analyst

* Stephanie Marie Schiller Wissink

Jefferies LLC, Research Division - Equity Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and welcome to the Third Quarter 2018 JAKKS Pacific, Inc. Earnings Conference Call. My name is Brandon, and I'll be your operator for today. On the call today are Stephen Berman, CEO; and Brent Novak, CFO. (Operator Instructions)

The company would like to point out that any comments made about JAKKS Pacific's future performance, events or circumstances, including 2018 estimates of sales and/or EBITDA growth, as well as any other forward-looking statements concerning 2018 and beyond are subject to safe harbor protection under federal securities laws.

These statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in forward-looking statements.

For details concerning these and other such risks and uncertainties, you should consult JAKKS' most recent 10-K and 10-Q filings with the SEC as well as the company's other reports subsequently filed with the SEC from time to time.

As a reminder, this conference is being recorded.

And I will now turn it over to Stephen Berman, CEO. You may begin, sir.

--------------------------------------------------------------------------------

Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President & Secretary [2]

--------------------------------------------------------------------------------

Good morning, everyone, and thank you for joining us today. This morning, we are going to review our performance during the third quarter 2018. I will talk about how our brands and products performed in the quarter compared to last year and to our expectations. In addition, I will talk about the steps we are taking to reduce our costs and improve our profit potential for the future.

After my comments, Brent will discuss our financial performance. After that, I will review some of the things that we are looking forward to over the course of the rest of 2018 and beyond, provide an update on the process JAKKS is going through with respects to the expression of interest received from Meisheng earlier this year, and then we will take questions.

Our net sales for the quarter declined approximately 10%, primarily due to the loss of sales to Toys"R"Us compared to last year. Although the liquidation of Toys"R"Us was completed before the third quarter began, it has continued to impact the industry. Not only did the industry lose a significant customer, but the actions taken by its competitors during the liquidation and since have led to some uncertainty. Obviously, the other major toy retailers such as Walmart, Target and Amazon are going to do their best to pick up the market share formerly held by Toys"R"Us, as are some other small retailers looking to capture some of the share as well such as Kohl's, JCPenney, Party City, T.J. Maxx and others.

While we believe the loss of Toys"R"Us share will eventually be picked up by other retailers, as we said previously, we were not expecting to see this happen in the third quarter. We currently expect the disruption in the fourth quarter to be less than in the third quarter, but we do not expect our sales or our industry sales to see anything like a full transfer of these sales until next year.

It is difficult to exaggerate the impact this retail disruption is having on the industry. Even as retailers are positioning themselves to capture as much of the Toys"R"Us business as possible, they are exercising caution in their ordering.

With the above said, we have executed relatively well and delivered net sales and adjusted EBITDA for the quarter that exceeded our internal forecast. Looking at our business, net revenues in the quarter declined to $237 million from $262 million in 2017 third quarter. The decline was primarily the result of the lost sales in the U.S. from Toys"R"Us. Looking more deeply, we saw a strong performance from several new products and growth with some retailers, helping to offset declines in sales of other products.

During the third quarter, we had strong sales of several new or recently launched products led by Incredibles 2, Fancy Nancy, Disney Princess Style Collection, Perfectly Cute, Harry Potter, MorfBoards, TP Blaster and Squish-Dee-Lish. Our Disguise division also delivered a nice quarter.

Incredibles 2 has been one of the strongest contributors since the movie launched in June and the momentum was solid through this summer. The movie became available for streaming earlier this week, and the DVD launches in the next 2 weeks. And we think this will allow the property to reach a much wider audience than when the film was released, which we believe should ignite sales through the holiday season and into 2019, similar to the pattern of other successful films such as Frozen and Moana.

We're also driving a positive sales trend on Disney Princess with new product innovations which has given this evergreen brand a boost. Our style collection segment is a fresh, contemporary take on Role Play that is resonating with customers and retailers, and we continue to chase inventory on several key items.

Harry Potter wands are doing very well, showing the enduring popularity of this property and the innovation of a great product.

Fancy Nancy is doing quite well across several of its product lines and through all major retailers. Morf is still not in full distribution, but it remains a solid seller at Target and other major accounts. A few other categories and items that have done very well for us in the quarter has been our TP Blaster, Squish-Dee-Lish and Perfectly Cute.

Offsetting the positive sales contribution of the products we just mentioned, there were several entertainment properties that contributed significant sales in the third quarter of 2017, which declined this year in the absence of new content such as Frozen, Moana, Beauty and the Beast and Elena of Avalor.

We also saw some declines in our promotional products that are nearing the end of their life cycles, and we had a big blitz program last year in the ball pits that did not repeat this year. Brent will provide more details later in the call.

Our total sales through online retailers were down approximately 8%. Excluding Toys"R"Us, sales to online retailers were actually up about 6%. Online sales in the third quarter continued the trend of online sales comprising a growing portion of our total sales.

Over the past several years, through the offerings of various products and new development structures, we have been focusing on the alternative channels to increase our business worldwide. The alternative channel is having a great year and is benefiting from Toys"R"Us being out of the marketplace. Retailers such as GameStop, Party City, Barnes & Noble, BJ's have expanded their toy space to help fill the void. Additionally, we have increased our presence across multiple retail channels including value, drug, craft, sporting goods and other specialty retailers.

Internationally, we have increased our presence year-over-year with online retailers such as Argos and Shop Direct.

Next, I would like to discuss the actions we are taking to rightsize our operations and return to profitability on an annualized basis.

Earlier this month, we began to take a series of steps to significantly reduce our costs. The retail landscape continues to evolve and the direct and indirect impact of the Toys"R"Us liquidation requires us to make changes to size and structure our organization. One of the steps we are taking is the reduction in workforce, affecting between 12% and 15% of our global headcount, including existing positions as well as open positions, which we will no longer try to fill.

In addition to personnel reductions, the steps also include consolidating certain facilities, reorganizing certain functions and reducing spend on outside temporary contractors. Based on the steps taken thus far, we expect these steps to generate $10 million to $15 million per year in savings, with approximately 2/3 of that coming from headcount reductions in the U.S., with the balance coming from headcount reductions at Asia and the other sources previously noted.

It is important to note that we have been careful not to target positions that would significantly impact our revenues or growth potential, which will allow us to capture greater profits from our existing revenue base and from future sales. We remain well positioned to be the best-in-class for kids and family entertainment and expect these moves to result in greater profitability next year and beyond.

We have a high expectation for a number of the product initiatives in 2019, and we want to be able to capitalize on them from a cash flow and profit standpoint. We do expect these moves to result in some restructuring charges of approximately $2 million, much of which will be taken in the fourth quarter of this year.

With that, I will turn the call over to Brent Novak. Brent?

--------------------------------------------------------------------------------

Brent T. Novak, JAKKS Pacific, Inc. - Executive VP & CFO [3]

--------------------------------------------------------------------------------

Thank you, Stephen, and good morning, everyone. Net sales for the 2018 third quarter were $236.7 million compared to $262.4 million last year. As was the case in the second quarter, the decline was essentially due to a decrease in sales to Toys"R"Us. Reported net income for the quarter was $15.7 million or $0.38 per diluted share compared to a net loss of $17.6 million or $0.77 per diluted share in the third quarter of last year.

Adjusted EBITDA for the 2018 third quarter was $27 million compared to $38.6 million in the third quarter of 2017. The sales drivers in the third quarter by category were as follows: sales of dolls, Role Play and Dress Up, Plush and activity products in our girls' category, amounted to $102.3 million for the 2018 third quarter compared to $132.8 million in the comparable quarter last year. We saw positive contributions from girls' toys with Incredibles 2, Fancy Nancy and Squish-Dee-Lish as well as from Perfectly Cute, a private label brand we produce for a specific customer.

These brands were more than offset by the expected declines in a number of girls' lines, including several entertainment, content-driven lines such as Frozen, Tsum Tsum, Moana, Elena of Avalor and others.

Sales of Action Figures, Vehicles, Role Play and Electronic products in our boys and other category for the third quarter were $40.6 million compared to $34.2 million last year, driven by Incredibles 2, Harry Potter, TP Blaster, and Stanley Black & Decker, which more than offset declines in Real Workin' Buddies, Star Wars, XPV and our line of pet products.

Sales of seasonal products, including licensed ride-ons, ball pits, kids' furniture, Maui outdoor activity products and MorfBoards were $24.9 million in the 2018 third quarter, down from $34.9 million in 2017 as solid sales from the launch of MorfBoard were more than offset by declines in other areas. The biggest factor in the decline is that we did not repeat a major blitz promotion that we ran in the third quarter of 2017 with a major customer in the ball pit category.

Sales in our Halloween category, which also is one of our business segments, increased to $65.3 million in the third quarter of 2018 compared to $58.2 million in 2017, due in part to contributions from the Incredibles 2 brand as well as an increase we had anticipated after some shipments shifted from the second quarter into the third as we had described last quarter.

Sales of baby doll accessories, figures, plush and games in our preschool and activity category were $3.6 million in the third quarter of 2018, up from $2.3 million in 2017. This segment also includes the Pull My Finger game, which did well; and Daniel Tiger, which was up over last year.

Looking at sales by business segment, U.S. and Canada net sales for the third quarter were $133.5 million compared to $154 million in the prior year quarter due to the drop in sales with Toys"R"Us as well as the same puts and takes described earlier in the product group narratives.

International sales for the 2018 third quarter were weaker than expected, coming in at $37.9 million compared to $50.1 million in 2017, with softness across EMEA and Latin America.

And last, we already mentioned Halloween sales in the category breakdown earlier.

Moving down the P&L. Reported gross margin in the 2018 third quarter was 27.2% compared to 23.5% in the 2017 third quarter. Gross margin was higher than a year ago due to nonrecurring items recorded in the prior year, related to minimum guarantee shortfalls and inventory charges.

While our gross margin improved on a sequential basis, gross margins were impacted by lower margins from the sales of certain older brands and higher sales reserves.

SG&A expenses, including direct selling expenses and depreciation and amortization, in the 2018 third quarter totaled $44.3 million or 18.7% of net sales compared to $56 million or 21.3% of net sales in 2017. The figure for the last year excludes a $13.5 million impairment charge for goodwill and other intangibles but includes $7.3 million in bad debt expenses mostly related to Toys"R"Us.

Excluding bad debt charges from 2017 and the $504,000 credit for the reversal of bad debt in 2018 related to Toys"R"Us, SG&A expenses were flat as a percent of net sales, reflecting a year-over-year decline in spend due in part to lower product development and compensation expenses.

Income tax expense for the third quarter of 2018 was $2 million compared to $918,000 in Q3 of last year. The variability of the tax provision is based on changes in taxable income levels in various tax jurisdictions in which we operate.

Net cash provided by operating activities was $11.3 million for the third quarter of 2018 compared to net cash used in our operating activities of $19.4 million in the third quarter of 2017 due to the timing of receipts and payments and extended payment terms of our payables.

Free cash flow was $8.3 million in 2018 third quarter and negative $22.3 million in the 2017 third quarter. As of September 30, 2018, our cash and cash equivalents, including restricted cash, totaled $57.1 million compared to $48.8 million at the end of the third quarter of 2017 and $65 million as of December 31, 2017.

We continue to focus on improving the company's liquidity position while also balancing the need to invest in the business and secure new licenses.

Shortly after our last call, we retired the remaining $13.2 million of 2018 convertible notes, which were due on August 1. As of September 30, the company's debt includes principal of $113 million of convertible notes due June 2020 and principal of $29.5 million of previously exchanged convertible notes due November 2020.

Accounts receivable as of September 30, 2018, was $205.4 million, down from $224.1 million at the end of the third quarter of 2017 due to lower shipments during the quarter. DSOs for the 2018 third quarter were 80 days compared to 79 days a year ago.

Inventory as of September 30, 2018, was $64.5 million versus $80.1 million at the end of the third quarter of 2017. DSIs in the 2018 third quarter were 44 days compared to 50 days in the 2017 third quarter.

Capital expenditures during the quarter were $3 million compared to $2.9 million in the third quarter of 2017. The diluted earnings per share calculation in the 2018 third quarter includes an average of 23.1 million common shares outstanding during the quarter, 21.3 million of weighted shares underlying the convertible senior notes, and the dilutive impact of our outstanding restricted stock units and restricted stock.

And with that, I will turn the call back over to Stephen. Stephen?

--------------------------------------------------------------------------------

Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President & Secretary [4]

--------------------------------------------------------------------------------

Thank you, Brent. Before we get to Q&A, I will share some thoughts on how we see the rest of this year playing out, starting with a few properties that will be important.

Our Disguise division had a great third quarter and will continue into fourth, led by key licenses from hugely popular video games such as Overwatch and Halo; followed by entertainment properties including Disney Pixar, Incredibles 2, Lego and LOL Surprise!, with Queen Bee leading the way and Diva in close second.

Incredibles 2 has been a nice contributor this year, and we expect a big spike in demand with the digital and DVD releases in the coming weeks as we've seen with other animated films. And we will be prepared for this increased demand through the first half of 2019. Fancy Nancy is benefiting from strong viewership of the TV content, and we expect the line to perform well in fourth quarter and beyond.

Our new Playdate segment is further product innovation that has been key to our growth in Disney Princess, and we expect strong sales through fourth quarter. In addition, our 2019 extensions of this segment have been very well received by buyers globally.

We have confidence in our boys' entertainment business as well, as we have a strong and growing core business in our evergreen master toy licenses led by Nintendo and Black & Decker, supplemented by new and exciting innovative product lines for Harry Potter, out now; Mega Man Fully Charged, set to launch in Spring 2019; and a multiple soon-to-be announced new master toy licenses starting next year.

JAKKS' own intellectual properties, to name a few, including Squish-Dee-Lish and TP Blasters, continue to be strong sellers and hit this holiday season.

Finally, our seasonal category, driven by MorfBoard and new Fly Wheels, will continue to do well and should benefit from expanded distribution, innovative new features and electronics.

Additionally, our play structures, which includes ball pits and highly anticipated play tents along with furniture will do well, leveraging key licenses and theatrical releases into 2019, inclusive of Toy Story 4, Frozen 2, along with many other properties.

JAKKS Studio JP announced on October 9 that Paramount Pictures Corporation has officially acquired the feature film rights to Creepy Crawlers, the iconic toy brand owned by JAKKS Pacific, which Neal Moritz will produce.

WEE WHIMSIES, which is short-form content and has an app, will be launching this fall, and physical product line coming out in spring 2019.

Lastly, Studio JP and Meisheng, the teams in the U.S. and in China, continue to work on new franchises with innovative and exciting new toy lines in multiple categories.

We are quite optimistic about 2019 and beyond for a number of reasons. First, we expect more of the Toys "R" Us business to be picked up by other retailers, and we expect the big winners to be the customers we have strong relationships with.

Second, the toy industry as a whole will benefit from an almost unprecedented lineup of entertainment content, which includes blockbuster film releases from multiple studios. Disney has new content for Star Wars, Marvel, Toy Story, Lion King, Dumbo, Aladdin, and of course Frozen 2 at the end of the year.

DC Comics has sequels for Wonder Woman; and Bumblebee is the latest in the Transformer series. There will be a new Lego movie, a new Minecraft movie and a new installation of How to Train Your Dragon. We do not have products tied to all of these, but we do have products tied to many of them, including Frozen 2, which should carry into 2020 very well.

We think that all of this incredible content, coupled with the fact that the industry will no longer be up against Toys"R"Us's losses, sets the industry up for a very strong 2019, and we intend to participate.

Before we go to Q&A, let me address the expression of interest from Meisheng. Meisheng recently reiterated its proposal to purchase sufficient newly issued shares of the company's common stock, such that it would own 51% of the company's outstanding shares at a price per share of $2.95, subject to certain conditions.

As part of its ongoing review of strategic alternatives, the special committee has authorized its advisers to engage in discussions and negotiations with Meisheng concerning its proposal, including matters relating to structure, timing, post-closing governance and matters relating to closing conditions, including optimizing of the post-transaction capital structure, the successful resolution of change in control provisions of key licensing agreements and change in control and extensions of maturities of the company's convertible senior notes and other [indemnatures].

Although there could be no assurance that the agreements will be reached with respect to these matters, the company and Meisheng have agreed to work together expeditiously to try to reach a mutual acceptable definitive agreement relating to the proposal.

In conclusion, as we expressed earlier this year, we see some disruption as we are still cycling through the Toys"R"Us sales from a year ago. But we are very encouraged by the performance of some of our new brands and some of the new opportunities that will allow us to be well positioned for the future; in addition to the cost reduction steps we have taken, and will take, should position us to return to profitability in 2019.

With that, we will now take questions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And from Jefferies, we have Steph Wissink.

--------------------------------------------------------------------------------

Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

Stephen, I have a two-part question for you, just given your long-term experience in the industry. What I would like to understand is the economics of some of these new retailers, alternative retail formats that are replacing the Toys"R"Us business, how should we think about the relative spreads, reserves, promotional commitments even into the DSOs? How are these new retailers structured to take inventory, manage inventory, and ultimately sell through inventory relative to Toys"R"Us?

And then the second question, because I think -- something you mentioned in the prepared remarks around retailer conservatism struck me, just given there's been a lot of public enthusiasm from several of your large retailers about how big the toy business could be for them. So maybe talk a little bit about the conservatism you're seeing on order flow versus some of the public enthusiasm. Is it a bit of talk but maybe delayed action? Or are they asking you to hold some of that opportunity inventory for them into the fourth quarter?

--------------------------------------------------------------------------------

Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President & Secretary [3]

--------------------------------------------------------------------------------

Thank you, Steph. Actually, both questions are very good. The first question regarding the other accounts, the alternative accounts, specialty accounts, drug accounts, they're all vastly different in how they operate in the toy industry. So we do a few different tiered way of development of our product.

So for the mass, it could be quite different in the actual margin criteria for both the mass retailers and for ourselves. And for the secondary accounts, call it the T.J. Maxx, the Kohl's, those type of accounts. They work on a different product margin. And we then also, at the same time, we develop products specifically for them that don't affect, call it, the mass -- big mass accounts. And then when you get to the -- call it the third level of the dollar chain, the drug chain, the product development is massively different due to their price points are primarily a much more lower price point. So we develop products specifically for them.

So it's the 3-tier different development process based off our different categories. So that in itself, we don't change our margin criteria for JAKKS, but we do change the development criteria for those retailers. So that's the way the world has worked over the last 3 years, with the ever-changing environment. And -- but it's actually worked out over the last 3 years for us because a big portion of our product is under $24.99, which really works well and bodes well for those retailers.

Does that answer the question on those accounts, Steph?

--------------------------------------------------------------------------------

Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [4]

--------------------------------------------------------------------------------

Yes, that's very helpful.

--------------------------------------------------------------------------------

Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President & Secretary [5]

--------------------------------------------------------------------------------

On the other retailers, call it -- not just in the U.S., call it, in EMEA, the enthusiasm with the Toys"R"Us liquidation is definitely there. The cautiousness is also there. There is extreme enthusiasm, but you see the major retailers developing large programs for the fall. But there's also other people that have jumped into the marketplace that were normally never there before or in a strong fashion, which, I'll call it, Toy City or from the Barnes & Nobles.

So I think the retailers are very, very enthusiastic. I mean, you can see that there's been a lot of promotional materials and advertising of how they're grabbing customers, not just in the toy business; but there needs to be a caution. And I think I said this in March as well, is that we believed TRU was going to impact the industry for the year, majority of it, and it's true. There does need to be a caution that these retailers are all getting excited and there's a lot of new retailers trying to get -- garnish market space. But at the end of the year, there could be additional retailers that weren't successful that have inventories. So we're managing the sell-ins for ourselves very methodically.

--------------------------------------------------------------------------------

Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [6]

--------------------------------------------------------------------------------

Okay. That's extremely helpful. And then these are 2 really quick ones. You mentioned weaker-than-expected trends in EMEA and LATAM. Just curious if you can extrapolate a little bit: maybe specific markets within those regions, if you're seeing some distortion within the regions.

And then, Stephen, just remind us, too, on tariffs, because it's a topic that seems to be overhanging the industry. What percentage of your production is anchored in China?

--------------------------------------------------------------------------------

Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President & Secretary [7]

--------------------------------------------------------------------------------

Percentage of our -- I'll start with [this]. The percentage of our business in China is probably 90% in manufacturing. But the tariffs that we are reviewing to date so far have to do with aluminum and it has to do with our kids-only division, currently to date. So in that area, we're not really concerned at this point of the tariffs having a major impact. And at the same time, we're looking at if there's anything that we have to worry about, it would be whether we have to do temporary price increases at the same time that we're looking at resourcing or, call it, assembly in different territories from Mexico to Latin America.

And Brent can continue on that as well.

--------------------------------------------------------------------------------

Brent T. Novak, JAKKS Pacific, Inc. - Executive VP & CFO [8]

--------------------------------------------------------------------------------

Yes. So on the -- Steph, on the tariffs, so it impacts our kids' furniture sets, which is a small portion of our overall business. It's well below 5% of the total. So really, nominal impact in the third quarter. We're not expecting much in the fourth quarter. But longer term, we are looking at moving potentially our manufacturing if these tariffs will continue. And then near term, of course, just like others, I'm sure, we are discussing pricing with certain of our customers. So we are taking a proactive approach.

--------------------------------------------------------------------------------

Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President & Secretary [9]

--------------------------------------------------------------------------------

And Steph, regarding the first question. So we've had an impact in Europe just overall in certain areas, more so just certain products not being applicable in those territories. One of the major impacts we had was Mexico during the third quarter. But on a reverse side, our fourth quarter internally is a higher expectation than what we had fourth quarter last year. So it's kind of quarter-by-quarter.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

From D.A. Davidson, we have Linda Bolton-Weiser.

--------------------------------------------------------------------------------

Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [11]

--------------------------------------------------------------------------------

So Hasbro, on their call the other day, kind of talked about some of the challenges in supplying this broader kind of retailer base in the U.S., some supply chain issues or changes that they had to make, making a new distribution center. Are you seeing any of that? And how are you handling just the challenges in supplying this diverse -- more diverse group of retailers?

--------------------------------------------------------------------------------

Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President & Secretary [12]

--------------------------------------------------------------------------------

Linda, so it actually sets up some manufacturers for, I think, a broader risk. We're taking a much more conservative approach. So we manage our inventory levels and our end stock levels excessively well. And because of the vast distribution from our major retailers as Amazon, Walmart, Target, to the Dick's Sporting Goods to the Walgreens and dollar stores, it really just varies by the retail channel of how the inventory has been taken in and how they actually manage their set dates. So for us, we're just taking a cautious approach. There's a lot of people wanting to garnish a lot of percentage of the toy industry, but you got to be very careful that people aren't over-purchasing to make a first half a harder half for the industry.

--------------------------------------------------------------------------------

Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [13]

--------------------------------------------------------------------------------

Okay. And then in terms of the savings you mentioned, let's say, I think it was $10 million to $15 million. First of all, is that a pretax number? And then, what's the time frame for fuller realization of those savings?

--------------------------------------------------------------------------------

Brent T. Novak, JAKKS Pacific, Inc. - Executive VP & CFO [14]

--------------------------------------------------------------------------------

Yes. So I would say that's a pretax number. So $10 million to $15 million, and I would say the benefit that we're going to see in 2019 would be on kind of the lower end of that range. And then full realization closer to the high end in 2020. So it's $10 million to $15 million on an annualized basis.

--------------------------------------------------------------------------------

Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [15]

--------------------------------------------------------------------------------

And then the charges you expect in the fourth quarter would be predominantly cash charges, correct?

--------------------------------------------------------------------------------

Brent T. Novak, JAKKS Pacific, Inc. - Executive VP & CFO [16]

--------------------------------------------------------------------------------

Predominantly, yes.

--------------------------------------------------------------------------------

Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [17]

--------------------------------------------------------------------------------

Okay. And then just longer term here. I know you've kind of had a strategy to diversify into some other product areas for kids. And then I think the pet area was one area you were working on. And I think you mentioned that, that line was down year-over-year. So where does that stand in terms of the pet? And then just the broader strategy of diversifying into some of these other categories -- what are your thoughts currently there?

--------------------------------------------------------------------------------

Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President & Secretary [18]

--------------------------------------------------------------------------------

With regards to the pet, Linda, we actually discontinued that segment of our business approximately 3 years ago. That was because a lot of the retailers were doing direct to retail and making their own products. We were primarily into the pet toy business, with the toys that pets play with. But we discontinued that division about 3 years ago.

The other segmentations that have done very well that we are focusing on is, call it, in different categories, which has been the MorfBoard, which has been the wheel goods category; C'est Moi, which is, as you know, the skincare business. We have been developing and building very, very slowly. It's a long process to build, but we are pleased where we're at to date. And another area is the FAN HEADS, which are for football and sports enthusiasts that have really amazing distribution to liquor stores, the campuses. So we are still a kids' consumer product company but in just various different avenues.

--------------------------------------------------------------------------------

Brent T. Novak, JAKKS Pacific, Inc. - Executive VP & CFO [19]

--------------------------------------------------------------------------------

Yes. And just one comment on the pet. I mean, we did mention in the script in the prepared remarks that there is a year-over-year decline. That was just working through some of our inventory. But going forward, actually in the fourth quarter 2018 and beyond, I mean, very, very, very nominal, if any sales of our pet products.

--------------------------------------------------------------------------------

Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [20]

--------------------------------------------------------------------------------

Okay. And then finally, just on the Meisheng situation. Do you have a time line roughly for when you think the whole thing will be completed? Like do you think by calendar year-end or extending into 2019 before that's completed?

--------------------------------------------------------------------------------

Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President & Secretary [21]

--------------------------------------------------------------------------------

There's no time line. They're working diligently and expeditiously. The special committee, as we said, authorized our advisers as well as Meisheng's advisers to move forward. So at this time, there's no specific time frame.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

(Operator Instructions) And from BMO Capital Markets, we have Gerrick Johnson.

--------------------------------------------------------------------------------

Gerrick Luke Johnson, BMO Capital Markets Equity Research - Senior Toys and Leisure Analyst [23]

--------------------------------------------------------------------------------

So obviously, lot of talk about retailers expanding to take the TRU share. But now we're about 2 months into the selling season. Where are the shoppers going? How are they adjusting? Are they adjusting as we thought? Are they headed to where the extra inventory is flowing?

--------------------------------------------------------------------------------

Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President & Secretary [24]

--------------------------------------------------------------------------------

Gerrick, again, I said this in March, and I will continue to say it -- that it won't happen as quick as would I think other manufacturers believe; that it was very similar to what happened with Sports Authority and Under Armour, looking at the analytics. So the consumer is going to all the normal places, excluding the Toys"R"Us environment, but they're going to the same places that they went over the past years. Except there are -- over the last few years, prior to even Toys"R"Us becoming bankrupt and then liquidation, many other retailers have built their toy departments, like the Walgreens, the CVS, the Rite Aid, the dollar stores, have all built their toy departments further and further. GameStop has gotten into the toy industry. You saw Party City opened up Toy City.

So there's now just -- there's more doors, but there are smaller doors that have opened up. So remember, TRU had the footprint that was a very large footprint, but now you go into much smaller footprints but more retail outlets. And I just don't know if that's going to be absorbed by the consumer this year. That's why we are very cautious with our inventories; and making sure that, when we go into the first half of next year, if there's any slowdown in, call it, the alternative distribution channels that are trying to pick up the additional sales, that we're just very focused of not over-shipping those new distribution channels. And online is, again, addition is growing on a much faster percentage, but still a -- not as much material as the brick-and-mortar.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

And we have no further questions at this time. We'll now turn it back to our speakers for closing remarks.

--------------------------------------------------------------------------------

Stephen G. Berman, JAKKS Pacific, Inc. - Co-Founder, Chairman, CEO, President & Secretary [26]

--------------------------------------------------------------------------------

Everybody, we appreciate the call today and thank you very much for attending.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, this concludes today's conference.

Thank you for joining. You may now disconnect.