JAKKS Pacific Plunges Despite Narrower Loss - Analyst Blog

Share price of JAKKS Pacific Inc. JAKK slumped more than 9% in the trading session on Apr 23, 2014, despite the company posting narrower year-over-year loss in the first quarter of 2014. In our view, higher cost of sales, amid a tough operating environment for toymakers failed to garner investors' confidence in the stock. Also, despite beating expectations, the company reiterated its guidance for 2014, further dampening investors' sentiment in the stock.

The California-based toy maker's loss of 74 cents per share was narrower than the Zacks Consensus Estimate of a loss of 76 cents and the year-ago loss of $1.26. Further, the loss was narrower than the company's expected loss range of 77 to 81 cents. Better-than-expected top-line performance boosted the bottom line in the quarter.

JAKKS Pacific's revenues increased approximately 5.7% year over year to $82.5 million and were above management's expected range of $72.0 to $75.0 million. Further, revenues beat the Zacks Consensus Estimate of $75.0 million by 10%. Higher sales in the quarter were driven by dolls; dress-up and role play in the company's Frozen line, Disney Pirate Fairies dolls and dress-up, and pre-school foot-to-floor ride-ons and wagons.

Behind the Headline Numbers

Gross margin in the quarter was 28.5%, down 140 basis points (bps) year over year, mainly due to increased costs of sales, primarily driven by higher royalty expense. Selling, general and administrative (SG&A) expense ratio declined 1400 bps to 46.5% due to restructuring and cost savings initiatives undertaken in the second half of 2013, as well as a shift in media buys due to Easter falling later in the year.

Guidance for 2014

JAKKS Pacific affirmed its previous guidance for 2014. The company expects to return to profitability in 2014 and expects earnings per share in the range of 30 to 40 cents. The guidance is attributable to cost saving and other margin improvement initiatives undertaken in 2013.

Given the aggressive retail efforts, the company expects sales to gain momentum in 2014 and beyond. It expects 2014 revenues in the range of $633.0 to $640.0 million. Additionally, EBITDA is expected in the range of $41.0 to $43.0 million.

Other Events in the Quarter

JAKKS Pacific closed on a three-year senior secured credit facility with General Electric Capital Corporation — the financial service unit of General Electric Company GE — that will provide up to $75 million, subject to availability and certain financial covenants. The company intends to use the net proceeds for working capital needs, capital expenditures and general corporate purposes.

Performance of Other Toymakers

Among other toymakers, Mattel Inc. MAT reported first-quarter 2014 loss of 3 cents per share which compared unfavorably with the prior-year quarter earnings of 11 cents as well as the Zacks Consensus Estimate of earnings of 8 cents. The downside reflects weak sales.

However, Hasbro Inc. HAS posted mixed first-quarter 2014 results wherein earnings beat the Zacks Consensus Estimate but revenues missed the same.

Our Take

Despite posting a loss in the quarter, this Zacks Rank #3 (Hold) company performed better than expected on the back of improved top-line performance and cost saving initiatives undertaken during the second half of 2013. These initiatives include elimination of underperforming units and rightsizing of businesses.

Moreover, the company's international expansion efforts have started yielding benefits leading to improved margins. Going forward, we remain optimistic about the company's product launches and organic growth initiatives, which include securing new licenses.

JAKKS Pacific, currently, carries a Zacks Rank #2 (Buy).