JAKKs Pacific’s Earnings Show It’s Not Playing Games
I recently covered JAKKS Pacific (NASDAQ:JAKK) in an article here at Wall St. Cheat Sheet. In that article I introduced readers to this little-known toy company that competes with the likes of Mattel (NASDAQ:MAT) and Hasbro (NASDAQ:HAS). JAKKS is a leading designer and marketer of toys and consumer products with a wide range that features popular brands and children’s toy licenses. Like other toy companies, it has been struggling despite its large number of offerings to customers.
I discussed in that article why I believed that JAKKS had finally turned the corner. Reasons included a successful partnering with Disney (NYSE:DIS) to make toys for the movie Frozen and a huge deal with the upcoming Warner Bros. film Godzilla. I told you that the third quarter started the turnaround, and despite huge disappointments from Mattel and Hasbro, I thought that JAKKS could surprise to the upside, leading to a large short squeeze. The purpose of this article is to assess that call, to discuss the fourth-quarter earnings of JAKKS, and to discuss the future of the company and the stock.
Big surprise from earnings triggered a short squeeze
Coming into earnings, JAKK was one of the most heavily shorted stocks I’ve seen in a while with more than 7.3 million shares sold short, representing 49 percent of the float. I said that good news could drive the stock higher and set a $7.25 price target in that recent article. After JAKKS reported its fourth-quarter earnings, the stock rocketed higher and surpassed my price target by a few cents. In essence, we nailed it. But just how strong was the quarter?
Well, JAKKS’s net sales for the quarter were $137.7 million, compared to $133.5 million reported in the comparable period in 2012. The reported net loss for the fourth quarter was $16.1 million, or 73 cents per diluted share, which included a restructuring charge of $5.0 million, or 23 cents per share. This crushed estimates. In fact, it was a huge improvement over the net loss of $119.5 million, or $5.45 per diluted share, reported in the comparable period in 2012. Net sales for the full year of 2013 were $632.9 million compared to $666.8 million in 2012.
The reported net loss for the full year was $53.9 million, or $2.43 per diluted share, which included charges for license minimum guarantee shortfalls of $14.4 million and inventory impairment of $14.9 million in addition to the restructuring charge of $5 million. This compares to net loss for the full year of 2012 of $104.8 million, or $4.37 per diluted share, which included $91.7 million, or $3.83 per diluted share, for the deferred tax asset impairment charge.
Stephen Berman, the company’s president and CEO, had much to say about the successful quarter: “Our sales results for the fourth quarter of 2013 contributed to our exceeding our revised sales and earnings guidance for the full year. Highlights of our fourth quarter sales include Disney Princess dolls and dress-up, including products from the blockbuster Disney animated feature film, Frozen, Sofia the First role play toys, Disney Fairies dolls and dress-up, Cabbage Patch Kids, Black & Decker boys role play, large scale figures, foot-to-floor ride-ons, and activity tables.
“We recently completed our Hong Kong Toy Fair and Nuremberg Toy Fair meetings to preview our 2014 product line-up and the response from our North American and International retailers were very positive. From a product standpoint, we have a broad and robust portfolio this year comprised of evergreen categories and licenses coupled with hot new licensed properties. In Boys, we are looking forward to launching our line of our large-scale figures based on Teenage Mutant Ninja Turtles, Star Wars, and the upcoming theatrical release of Godzilla and other top boys’ licenses, and our new Hero Portal TV Games platform.
“For Girls, we are adding even more Disney licensed products to our portfolio, including more dolls and dress-up items based on Frozen. We are expecting International growth in 2014 through more product offerings in our current territories and new territories for distribution. We continue to nurture our long-standing relationships with key licensors and retailers in 2014 and demonstrate our commitment to product innovation.
“We strive to keep a tight rein on operating costs, working capital and capital expenditures along with other margin improvements. We believe these strategies and more should position us well for profitability in 2014 and beyond. And lastly, with the traction of our turnaround and product flow coming out of 2013 and heading into 2014, we were able to obtain a credit facility commitment, completion of which will provide financial flexibility to our capital structure.”
Looking ahead to 2014
JAKKS is in good shape financially, and I expect that to improve over the next few quarters. Ar the end of the year, JAKKS’s working capital was $136.3 million including cash and equivalents and marketable securities of $117.3 million, compared to working capital of $186.6 million including cash and equivalents and marketable securities of $189.5 million at the end of 2012. On-hand inventory levels are being managed a bit more effectively, as they decreased to $46.8 million at year-end 2013 from $59.7 million at year-end 2012.
As the year progresses, JAKKS currently anticipates net sales for the full year of 2014 in the range of approximately $633 million to $640 million, with earnings in the range of 30 cents to 40 cents per diluted share and EBITDA in the range of $41 million to $43 million. For the next quarter, which ends March 31, it expects net sales in the range of $72 million to $75 million with a loss in the range of 77 cents to 81 cents per share compared to net sales of $78.1 million and a loss of $1.26 per share for the same period in 2013. The improvement in earnings in 2014 reflects the impact of cost-saving and other margin improvement initiatives undertaken in 2013 as well as the growth of deals.
In the last two years the company has faced fundamental issues of children having less desire to play with traditional toys. JAKKS has properly responded by shifting to technology-driven toys as well as apps. It also has a lucrative new deal in place with Warner Bros. for the Godzilla film, which I suspect will be a hit. 2013 clearly ended on a high note, as earnings were incredibly better than expected. Further, guidance was also strong.
The stock has now hit my initial price target of $7.25. Given that there is a short squeeze continuing, JAKKS needs to be on investors’ radars. I suspect the stock could pull back to the $7 level before heading higher, but given the expectation of a profitable year, I think shares are a bargain even at current prices. I set a reasonable price target of $8.50 by mid-year, if not higher if the company lands more deals and/or beats estimates in the upcoming quarter.