Zacks_Analysts' Blog : JAKKS Misses, Reaffirms Outlook - Analyst Blog

JAKKS Pacific Inc.(JAKK) reported third quarter 2011 adjusted earnings of $1.11 per share, below the Zacks Consensus Estimate of $1.24. Quarterly earnings improved considerably from $1.06 per share in the year-ago quarter. However, on a GAAP basis, reported earnings of $1.10 per share were below the year-ago quarter earnings of $1.23. The lower-than-expected results were due to negative top-line growth.

The company’s revenue dropped 4.7% year over year to $332.4 million and also missed the Zacks Consensus Estimate of $357.0 million.

Selling, general and administrative expenses slipped 1.6% year over year to $36.5 million mainly due to lower incentive compensation, partially offset by increased legal and other professional fees and expenses. Hence, operating margin enhanced 30 basis points to 15.1%.

Financial Position

At quarter end, JAKKS had cash and cash equivalents and marketable securities of $232.2 million versus $278.3 million at December 31, 2010. The company’s long-term debt was $91.5 million versus $89.5 million at December 31, 2010.

The company also continued to enhance shareholder value as during the quarter, the company repurchased 1.21 million shares for $19.3 million and announced its first-ever annual cash dividend of 40 cents per share.

Guidance

For 2011, JAKKS reaffirmed its adjusted earnings range of $1.32 and $1.35 per share, up 4% to 6% year over year. The company continues to expect sales in the range of $770–$775 million, implying a growth of 3% to 4%.

The company remains upbeat regarding the upcoming holiday season based on its strong product line up and expects growth across all units, including role play toys, action figures, Halloween costumes, electronics, kids’ furniture and dolls. Management also remains optimistic on its recent acquisition of Hong Kong-based Moose Mountain Toymakers Limited for an undisclosed amount. Moose Mountain is a 15-year old privately held company with a leadership position in the sale and manufacture of sports arcade products, foot to floor ride-ons, tents and safe soft play environments. However, JAKKS expects cost inflation to continue in the remainder of 2011.

JAKKS Pacific expects stable margins for the remainder of the year driven by an improved supply chain and introduction of higher-margin products.

Our Take

We remain optimistic on JAKKS’ long-term growth potential with product launches, and a strong financial condition. Moreover, the company is eagerly awaiting the holiday season as it generates a large proportion of its net revenues during this period based on the strong demand for toys. Hence, we expect the estimates to rise in the future. However, higher input and labor costs concern us.

JAKKS Pacific currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

One of JAKKS’ primary competitors, Mattel Inc. (MAT) reported third quarter 2011 earnings of 86 cents per share in line with the Zacks Consensus Estimate.