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Malibu, Calif. based toy maker JAKKS Pacific Inc.'s (JAKK - Analyst Report) adjusted loss of 94 cents per share in the second quarter of 2013 was significantly wider than the Zacks Consensus Estimate as well as the comparable year-ago quarter’s earnings of 6 cents per share. A lower top line and margin contraction seem to be responsible for such lackluster results during the quarter.

On a reported basis, including legal and financial advisory fees and expenses, JAKKS Pacific suffered a loss of $2.14 per share versus year-ago quarter’s earnings of a penny per share.

JAKKS Pacific’s revenues decreased nearly 30% year over year to $106.2 million in the second quarter, missing the Zacks Consensus Estimate of $147.0 million by 27.6%.

Owing to the prevailing macroeconomic condition, the demand for the company’s toy products has declined substantially among the retailers which adversely affected the top line. In addition, an adverse weather condition and lower demand for the company’s Monsuno and the Winx Club segments also hurt sales during the quarter. Basically, traditional toy manufacturers like JAKKS Pacific, are also witnessing headwinds due to a shift in the children’s preference for electronic toy devices.

Reported gross margin in the quarter was 2.1%, down 30.2 percentage points year over year mainly due to weak sales. Gross margin in the quarter included charges of $14.1 million and $12.2 million for license minimum guarantee shortfalls and inventory impairment, respectively.

During the quarter, the company has also ceased its dividend payout program due to such poor financial condition.

Guidance

Following the dismal performance, JAKKS Pacific has lowered its guidance for 2013. The company now expects loss per share to be near $2.56 in 2013, down from the previous earnings per share estimates of 63 cents —68 cents. Net sales are expected to decrease nearly 7.0% to $620 million, lower than the previously provided range of about $694 million —$700 million. The company, however, expected to improve its margin in the second-half of the year.

JAKKS Pacific intends to implement a series of initiatives to recover its business. In the third quarter, the company will initiate its aggressive restructuring strategy which includes lowering of leased space, employee costs and other operating expenses. Management believes that through this program it will rebuild its business model and regain its financial position in 2014. The launch of the company’s DreamPlay product line in fall 2013 should boosts sales, going ahead.

Our Take

We continue to remain bearish on the stock owing to its wider-than-expected loss in the second quarter and weaker top-line. Incremental operating and marketing expenses pressurized the company’s margin. Suspension of the dividend program will also lower the investors’ confidence in the company. However, the upcoming third quarter is is expected to be seasonally stronger for this Zacks Rank #2 (Buy) company.

Some other toy companies that the investors might consider include Activision Blizzard, Inc. (ATVI - Snapshot Report), Mattel, Inc. (MAT - Analyst Report) and LeapFrog Enterprises Inc. (LF - Snapshot Report). All these carry a Zacks Rank #2 (Buy).

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