JAKKS Pacific Inc. (JAKK), a multi-brand company that designs and markets a broad range of toys and consumer products, is slated to release its second-quarter 2010 results on Thursday, July 22. The current Zacks Consensus Estimate for the quarter is 5 cents per share, representing an annualized growth of 276.7%.
With respect to earnings surprises over the trailing four quarters, JAKKS has oscillated greatly, from approximately negative 4.4% to positive 25.0%. The average earnings surprise was a positive 11.9%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.
First Quarter Recap
JAKKS reported a first quarter loss of 19 cents per share, beating the Zacks Consensus Estimate by 4 cents per share. The company had incurred a loss of 40 cents per share in the year-ago quarter.
While the company experienced a decline in net sales, the results were helped by cost cuts and restructuring activities.
The company reported a 40.6% year-over-year decrease in revenue to $77.3 million. This was due to the loss of the WWE consumer license and lower demand for several product lines such as Hannah Montana and Pokemon.
JAKKS reported a gross margin of 32.6% compared with 34.0% in the prior-year period. The decrease was due to the company’s product mix, which included more of lower-margin sales. The company experienced lower-than-expected sales of its higher-margin products.
Selling, general and administrative expenses declined 40.7% year over year to $38.8 million attributable to the cost-cutting measures implemented by the company and lower overall sales.
JAKKS expects to report net sales in the range of $660.0 to $670.0 million in fiscal 2010, with earnings in the range of $1.10 to $1.20 per share.
Estimates Revisions Trend
Estimates have not budged in the last 30 days, implying that the analysts do not see any meaningful catalyst for the time being. The current Zacks Consensus Estimate is $1.19 for 2010 (reflecting a year-over-year growth of 15.6%) and $1.35 for 2011 (reflecting a year-over-year growth of 13.4%).
Agreement of Estimate Revisions
There has been no movement in estimates by the analysts regarding their outlook on JAKKS’ earnings over the last 30 days due to the lack of any meaningful catalyst to drive the estimates upward or downward.
Magnitude of Estimate Revisions
Following the first-quarter earnings release, earnings estimates for 2010 and 2011 improved to $1.19 and $1.35, respectively, from the previous estimates of $1.13 and $1.27. The analysts have based their upward revision on the view that the weak first quarter is behind the company and with new product launches, cost-cutting initiatives showing signs of margin improvement and reduced litigation costs from its WWE and THQ settlements, JAKKS should post sequentially improving results for the remainder of the year.
There has been no change in the last 60 days in the earnings estimate of 5 cents, $1.19 and $1.35 for the second quarter, fiscal 2010 and fiscal 2011, respectively, as seen from the magnitude of the Consensus Estimate trend. Therefore, the analysts expect the company to report in line.
Currently, we expect JAKKS to post second quarter results in line with estimates. Many of the company’s product launches in 2010 look much better than the products of previous years. Management remains optimistic about the Disney Princess and Fairy product lines, and sees substantial momentum for Phineas and Ferb, Club Penguin, and Toy Story products, which will likely drive growth for JAKKS through 2010. Additionally, the company’s restructuring plan and cost-saving initiatives are expected to improve profitability for 2010 and beyond.
We have a Neutral rating on JAKKS as we remain optimistic about its long-term growth potential with new product launches, possible acquisitions, improved earnings helped by cost-saving measures, resolution of litigation and a strong financial condition to facilitate growth. However, we remain cautious on the stock owing to escalation of labor cost and key raw materials as well as the adverse impact of a weak euro. Moreover, competition from private label toys and video game industry is increasing.
One of JAKKS’ primary competitors, Mattel Inc. (MAT) reported its second quarter 2010 earnings on July 16 at 14 cents, which missed the Zacks Consensus Estimate by a penny. JAKKS’ other peer Hasbro Inc. (HAS) reported its second quarter 2010 earnings on July 19 at 29 cents, which surpassed the Zacks Consensus Estimate of 24 cents.