Share price of JAKKS Pacific Inc. (JAKK) slumped almost 10% in the trading session on Feb 25 despite the company posting better than expected fourth quarter 2014 results. The surge in cost of sales, due to increased royalty expenses possibly did little to boost investors’ confidence.
The California-based toy maker’s earnings of 11 cents substantially beat the Zacks Consensus Estimate of 5 cents, primarily due to improvement in revenues and margins. Further, earnings improved significantly from the year-ago loss of 73 cents.
JAKKS Pacific’s revenues surged 84.4% year over year to $254.0 million. Also, revenues beat the Zacks Consensus Estimate of $198 million by 28.2%. Higher sales were driven by the Disney Frozen product line, Max Tow Truck, as well as Big Figures licensed Large Scale figures, Nintendo figures and plush, and Disguise Halloween costumes.
Behind the Headline Numbers
Cost of sales increased 16% year over year to $174.3 million primarily due to higher cost of goods and royalty expense.
Gross margin was 31.4%, up 200 basis points (bps) year over year, due in part to better product costing which includes cost reducing legacy products, better costing on new products and achieving more beneficial price points on a broad array of items in certain categories.
Selling, general and administrative expense ratio increased 1,190 bps to 28.5% backed by higher sales, with higher media and outbound freight and increased legal fees related to shareholder actions.
Full-year 2014 results
Earnings were 70 cents for 2014, as against a loss of $2.43 in 2013.
Net sales came in at $810.1 million, up 28% year over year.
Guidance for 2015
For 2015, the company currently expects earnings and EBITDA to increase, but revenues to decline. The improvement in earnings and EBITDA in 2015 reflects the impact of cost-saving and other margin improvement initiatives undertaken by the company.
Net sales are expected in the range of $730 to $740 million, earnings within 71 to 75 cents per share and EBITDA in the range of $56 to $58 million.
Gross margins are anticipated to be approximately 31% in 2015.
Guidance for First-Quarter of 2015
The company expects loss per share to range from 47 to 44 cents, as against a loss of 74 cents in the comparable year-ago period.
For the first quarter, the company expects net sales in the range of $101 to $103 million, up from $82.5 million recorded in first-quarter 2014.
EBITDA is expected in the range of $2.8 to $2.2 million loss.
Our Take
JAKKS Pacific performed better than expectations on the back of improved top-line performance and cost saving initiatives, such as eliminating underperforming units and rightsizing 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, like securing new licenses. However, the increased cost of sales cannot be ignored, in our view.
Stocks That Warrant a Look
JAKKS Pacific currently carries a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the same sector are Electronic Arts Inc. (EA) and Take-Two Interactive Software Inc. (TTWO) carrying a Zacks Rank #2 (Buy). In the broader consumer discretionary sector, Boyd Gaming Corporation (BYD), which also carries a Zacks Rank #2, is worth a look.
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