Share price of JAKKS Pacific Inc. (JAKK) slumped almost 14% in the trading session on Jul 23, after the company reported wider second-quarter losses than the Zacks Consensus Estimate. Also, as the surge in the Frozen line of toys came at the expense of some of the company’s other product lines, it did little to boost investors’ confidence on the stock.
The California-based toy maker’s loss of 43 cents per share (including pre-tax restructuring charges) was wider than the Zacks Consensus Estimate of a loss of 38 cents. However, losses were narrower than the year-ago loss of $2.14 backed by top-line growth.
Higher than anticipated product testing and development costs and incremental interest expense associated with the recently completed convertible note issuance led to a soft bottom-line performance in the quarter.
JAKKS Pacific’s revenues increased approximately 16.9% year over year to $124.2 million. Further, revenues beat the Zacks Consensus Estimate of $112.0 million by 10%. Higher sales in the quarter were driven by the dolls segment; dress-up and role play in the company’s Frozen line, Disney Pirate Fairies dolls and dress-up, seasonal outdoor toys, foot-to-floor ride-ons and ball pits, and Disguise Halloween costumes.
Behind the Headline Numbers
Gross margin in the quarter was 30.5%, up substantially year over year, mainly due to increased sales. Selling, general and administrative (SG&A) expense ratio declined 940 basis points (bps) to 34.4% due to restructuring and cost savings initiatives undertaken in the second half of 2013.
Guidance for 2014
JAKKS Pacific expects the full year impact of the 15 cents per share related to the recent convertible note issuance and stock buyback, to result in earnings in the range of 20 cents to 30 cents per share, which is down from the previous earnings guidance, which was in the range of 30 cents to 40 cents per share.
Given the aggressive retail efforts, JAAKS Pacific expects sales to gain momentum in 2014 and beyond. The company expects 2014 revenues in the range of $660 to $670 million, up from $633.0 to $640.0 million expected earlier. Additionally, EBITDA is expected in the range of $42 to $44 million, up from the previously expected range of $41.0 to $43.0 million
Other Events in the Quarter
The company recently completed the issuance of $115.0 million principal amount of 4.875% Convertible Senior Notes due in 2020. The notes, which will mature on June 1, 2020, are initially convertible at $9.64 per share.
The company received net proceeds of approximately $110.4 million from the offering, of which $24.0 million was used to repurchase 3.1 million shares of the company’s common stock pursuant to a prepaid forward purchase contract. Additionally, $39.0 million will be used to retire the company’s convertible notes maturing on Nov 1, 2014. The remainder will be used as working capital and for general corporate purposes.
Performance of Other Toymakers
Among other toymakers, both Hasbro Inc. (HAS) and Mattel Inc. (MAT) reported second-quarter 2014 results with earnings and revenue missing the Zacks Consensus Estimate. Weak consumer spending amid sluggish economic growth in the U.S. took a toll on their results.
Our Take
Despite posting a loss in the quarter, the company performed better than the prior year quarter on the back of improved top-line performance and cost saving initiatives. 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 #3 (Hold). A better-ranked stock in the same sector is Electronic Arts Inc. (EA), which carries a Zacks Rank #1 (Strong Buy).
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