Zacks_Analysts' Blog : JAKKS Beats, Outlook Raised - Analyst Blog

JAKKS Pacific Inc. (JAKK) reported its adjusted third quarter 2010 earnings of $1.23 per share, beating the Zacks Consensus Estimate of $1.07 and $1.13 in the prior-year quarter. The third quarter earnings include a tax benefit of 17 cents per share.

While the company experienced a decline in net sales, the results were aided by cost cuts, restructuring activities and strong sales of traditional toys such as dolls and Halloween costumes.

GAAP net income was $40.4 million or $1.23 per share, compared with $33.7 million or $1.06 per share in the year-ago quarter.

The company reported a 0.8% year-over-year decrease in revenues to $348.7 million. However, the reported revenues outperformed the Zacks Consensus Estimate of $306.0 million.

Selling, general and administrative expenses fell 3.0% year over year to $37.1 million. This decrease is primarily due to the cost-cutting measures implemented by the company. Operating margin declined 10 basis points (bps) to 14.8% during the quarter.

JAKKS’ product line is strong for the holiday season, including a strong demand for new toys, electronics and Halloween costumes. The company also remains confident about the progress in its product line for 2011. The company is also interested in acquisition and is looking for possible target.

Financial Position

As of September 30, 2010, JAKKS had cash and cash equivalents and marketable securities of $218.8 million versus $255.0 million at the end of December 31, 2009. The company’s working capital and long-term debt at the end of the quarter came at $407.8 million and $88.8 million, respectively.

During the quarter, the company also announced a share repurchase program of $30.0 million.

Guidance for Fiscal 2010

JAKKS has raised its fiscal 2010 adjusted earnings guidance range to $1.19 to $1.25 per share versus its prior earnings guidance range of $1.10 to $1.20. The Zacks Estimate for fiscal 2010 is $1.22. The company also increased its sales guidance to $710–$720 million from $660.0– $670.0 million based on strong booking for the fourth quarter of 2010 and cost control initiatives.

Including tax benefits of $10.8 million, or $0.31 per diluted share, and the Friedman benefit payment of $2.8 million, or $0.06 per diluted share, the company expects fiscal 2010 earnings to be in a range of $1.44 to $1.50.

Our Take

JAKKS posted better-than-expected third quarter results and also raised its fiscal 2010 guidance. Thus, we expect estimates to increase in the coming days. The share price of the stock also closed 5.8% higher from the previous day price, at $19.70 on Tuesday. The holiday season is ahead and the company expects to post 2010 results above expectation.

We remain optimistic about its long-term growth potential with new product launches, possible acquisitions, resolution of litigation and a strong financial condition to facilitate growth. Additionally, the company’s restructuring plan and cost-saving initiatives are expected to improve profitability for 2010 and beyond.

However, loss of WWE consumer license will lead to a tough year-over-year comparison. Additionally, faltering consumer confidence, uncertainty regarding labor issues in Asia and possible container shortages causing shipping delays will add to the concern.

Accordingly, the company has a Zacks #3 Rank (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.

Mattel Inc. (MAT), one of JAKKS’ primary competitors, reported its third quarter 2010 earnings of 77 cents, which surpassed the Zacks Consensus Estimate by a penny. JAKKS’ other peer Hasbro Inc. (HAS) reported its third quarter 2010 earnings of $1.09, which surpassed the Zacks Consensus Estimate of $1.04.

The holiday season is ahead and demand for toys remains at its peak during this period. Therefore, we remain bullish on the toy industry.