JAKKS Pacific Downgraded On Toys 'R' Us Concerns

Toy maker JAKKS Pacific, Inc. JAKK shares plummeted nearly 8 percent Thursday after the stock rallied 11.5 percent Wednesday following a Toys R Us bankruptcy filing Tuesday. Ironically, Wednesday’s big move came after the company lowered its full-year earnings guidance in a press release.

For confused investors looking for answers about the stocks seemingly bazaar behavior, D.A. Davidson analyst Linda Weiser explained her take on the JAKKS situation in a new note Thursday. According to Weiser, the big Wednesday rally was a relief rally related to the fact that the company disclosed that Toys R Us represents only about 3 percent of its uninsured accounts receivable. Weiser said the bankruptcy documents revealed JAKK is owed about $14 million total. In addition, JAKK management said in the release that it “does not anticipate any long-term material adverse impact from the bankruptcy,” another good sign for investors.

Traders initially took the release as a positive sign for the stock, which is down more than 43 percent overall in 2017. On Thursday, the reality seemed to be sinking in for investors that just because JAKKS’ Toys R Us exposure isn’t as bad as some had feared, it doesn’t change the long-term story for the company.

“JAKK's EBITDA has declined from $53M in 2014 to $50M in 2015, $42M in 2016, and $30M in 2017E - this trend does not give us confidence in EBITDA growth in 2018, especially because TRU could close some stores in 2018 (TRU does have unprofitable stores, though the vast majority are profitable),” Weiser wrote.

D.A. Davidson has downgraded JAKKS stock to Underperform and lowered its five-year price target for the stock to $2.25.