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Malibu, Calif.-based toy maker JAKKS Pacific Inc.'s (JAKK - Analyst Report) earnings of $1.11 per share in the third quarter of 2013 beat the Zacks Consensus Estimate of $1.06 per share by 4.7% and the year-ago quarter earnings of $1.10  by 0.9%. A better-than-expected top line performance and operating margin expansion pulled up earnings in the quarter.

JAKKS Pacific’s revenues decreased nearly 1.2% year over year to $310.9 million in the third quarter, but beat the Zacks Consensus Estimate of $298.0 million by 4.3%. Higher sales from Role-playing, Novelty and Seasonal Toy segment may have contributed to the beat.  

Of late, traditional toy manufacturers like JAKKS Pacific have been encountering sluggish sales due to children’s preference for electronic toys and devices. Hence, management at JAKKS decided to shift focus to technology-driven toys.

Gross margin in the quarter was 29.4%, down 140 percentage points year over year, mainly due to weak sales and higher costs. However, operating margin grew about 90 bps, thanks to lower SG&A and direct selling expenses, which made up for lower gross margin.


Following the better-than-expected performance, JAKKS Pacific reiterated its guidance for 2013. The company expects loss per share to be near $2.56 in 2013. Net sales are expected to decrease nearly 7.0% to $620 million. However, the company expects margins to improve in the fourth quarter.

JAKKS Pacific intends to implement a series of initiatives to recover its business. In the third quarter, the company initiated an aggressive restructuring strategy, which included 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 strength in 2014.

Our Take

After missing the Zacks Consensus Estimate for bottom line for six consecutive quarters, JAKKS Pacific finally managed to beat the same.  The company is pinning its hopes on the DreamPlay product line. Although the company currently carries a Zacks Rank #5 (Strong Sell), meaningful impact of the DreamPlay line may set it back on the growth path.

Other toy companies that investors might consider include Nintendo Co. Ltd.  (NTDOY), carrying a Zacks Rank #1 (Strong Buy), as well as Mattel, Inc. (MAT - Analyst Report) and Take-Two Interactive Software Inc. (TTWO - Snapshot Report), both carrying a Zacks Rank #2 (Buy).

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