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Here's Why Investors Should Steer Clear of JAKKS Pacific

Zacks Equity Research

JAKKS Pacific, Inc. JAKK is one of the toy companies that have been grappling with declining demand and sales for quite some time now. A challenging retail environment for toys has been continuously hurting the stock.

Shares of JAKKS Pacific have lost 81% in the past year, underperforming the industry’s decline of 28.1%. The weak share price can be attributed to the company’s lower-than-expected earnings in three of the trailing four quarters. The average earnings miss in the past four quarters has come to 29.2%.

Let us find out why investors should consider selling this Zacks Rank #4 (Sell) company.



Challenging Sales Environment

JAKKS Pacific, like Mattel MAT and Hasbro HAS, has been facing declining sales trend for quite a while now. In the first quarter of 2019, its net sales totaled $70.8 million, which lagged the Zacks Consensus Estimate by 10%. The top line also fell 23.8% on a year-over-year basis.

The liquidation of Toys “R” Us, the largest retailer for traditional toys, has been weighing on the company’s sales and is likely to continue to do so in the quarters to come.

Soft Margins to Hurt Earnings

Toymakers are also facing higher manufacturing costs, which are detrimental to their margins. JAKKS Pacific’s gross margin in the first quarter of 2019 was 20.2%, down 450 basis points (bps) from the prior-year quarter. Adjusted EBITDA was a negative $17.1 million compared with a negative $14.6 million in the prior-year quarter. This is likely to weigh on its earnings. Subsequently, the Zacks Consensus Estimate for the company’s loss is pegged at 93 cents in 2019.

Competition Adds to Declining Demand

Toy manufacturers have to battle a broad array of alternative modes of entertainment — including video games, MP3 players, tablets, smartphones and other electronic devices. JAKKS Pacific’s revenues have been under some pressure over the past few quarters due to lower demand for games as children are opting for electronic versions of games on smartphones and tablets.

Another factor affecting demand for these brands is age compression. Kids are growing up and moving on much faster than they used to and are also getting bored easily. For instance, demand for some toys that were preferred by kids aged 3-9 years previously narrowed down to 3-6 years. This is tapering the demand for toys, thereby hurting this traditional toymaker’s revenues.

Recent Trade Spat Concerns

The U.S.-China trade debacle has escalated since U.S. President Donald Trump has raised tariffs from 10% to 25% on $200 billion worth of China imports. China struck back with tariff hikes on $60 billion worth of U.S. goods.

While the toy industry has so far been guarded against trade hostilities, the days ahead may not be as unchallenging, believes the Toy Association. This is because about 3 billion toys are sold in the United States each year, with 85% of those coming from China. In fact, per the U.S. International Trade Commission, toys, puzzles and more were among the major commodities imported from China in 2018.

JAKKS Pacific’s profit margin may further get affected as the tariff war may lead to cost escalation. Also, since the 25% tariff covers a good range of consumer products, it is likely to impact discretionary spending and in turn affect demand for toys.

Stock to Consider

A better-ranked stock in the industry is Glu Mobile GLUU, which currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Glu Mobile’s long-term EPS is projected to grow 15%.

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