Share price of JAKKS Pacific Inc. (JAKK) slumped 12.7% in the trading session on Oct 23 despite the company’s third-quarter earnings and revenues beating the Zacks Consensus Estimate. The surge in cost of sales, due to increased royalty expenses did little to boost investors’ confidence on the stock. Further increased interest expenses added fuel to fire.
After posting loss consistently for the past three quarters, the California-based toy maker’s earnings of $1.03 beat the Zacks Consensus Estimate by 2.0% primarily due to better-than-expected revenues. However, earnings were lower than the year-ago figure of $1.11 by 7.2%, due to a rise in the cost of sales.
JAKKS Pacific’s revenues increased approximately 12.4% year over year to $349.4 million. Further, revenues beat the Zacks Consensus Estimate of $320.0 million by 9.2%. Higher sales in the quarter were driven by the dolls segment; dress-up and role play in the company’s Frozen line, Light Up Musical dresses, Nintendo plush and figure products, and licensed large scale figures such as Star Wars, and Disguise Halloween costumes.
Behind the Headline Numbers
Cost of sales jumped 16% year over year primarily driven by higher cost of goods and higher royalty expense.
Gross margin in the quarter was 27.1%, down 230 basis points (bps) year over year, due in part to license minimum guarantee shortfalls and product mix shift, including higher competitively priced Disguise sales in 2014. Selling, general and administrative expense ratio declined 200 bps to 14.6% due to restructuring and cost savings initiatives undertaken in the second half of 2013, partially offset by higher advertising and certain restructuring charges.
Guidance for 2014 Upped
JAKKS Pacific expects earnings per share in the range of 64 to 67 cents, significantly up from the previous guidance range of 20 to 30 cents.
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 $750 to $760 million, up from $660 to $670 million. Additionally, adjusted EBITDA is expected in the range of $51 to $53 million, up from previous expectation of $43 to $45 million.
Performance of Other Toymakers
Among other toymakers, both Hasbro Inc. (HAS) and Mattel Inc. (MAT) reported third-quarter 2014 results with both earnings and revenues missing the Zacks Consensus Estimate. Weak consumer spending amid sluggish economic growth in the U.S. took a toll on their results.
Our Take
JAKKS Pacific performed better than expectations 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 its product launches and organic growth initiatives, which include securing new licenses. However, we remain aware of the increased cost of sales.
JAKKS Pacific currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the same sector is Glu Mobile, Inc. (GLUU), which carries a Zacks Rank #2 (Buy).
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