JAKKS Pacific Lowered to Underperform

We have lowered our recommendation on JAKKS Pacific Inc. (JAKK - Analyst Report) to Underperform from Neutral. The downgrade was mainly due to a reduced sales and earnings outlook for fiscal 2011, as well as cost inflation and various production and shipment related issues.

The company slashed its sales and earnings outlook for fiscal 2011, owing to the tough retail sales environment amidst the crucial holiday season. The company’s results were also unimpressive as it had to bear the brunt of increased markdown allowances and royalty expenses related to license guarantee shortfalls. 

For fiscal 2011, the company lowered its net sales forecast to $660 million from the previous range of $770–$775 million and adjusted earnings guidance to 37-40 cents per share from the earlier projection of $1.32 to $1.35 per share.

Management is also concerned about a host of factors that will likely affect production and shipment, including labor issues, increased pricing pressures, transportation costs and increased costs for many manufacturers operating in Asia.  Wage inflation in China also remains a headwind for the company. Moreover, general cost inflation continues to hurt the company.

Estimate Revision

After the reduction in guidance, analysts lowered the fourth-quarter 2011 estimate from 40 cents to a loss of 62 cents over the last 60 days. For full fiscal 2011, analysts’ estimates went down to 38 cents from $1.34.

It is quite disappointing for a retailer to record a loss in the fourth quarter, which is the holiday season. Most retail companies generate a large proportion of their business during this period. The retail business was not encouraging at all in this season, and retailers had to provide attractive discount to shoppers to drive traffic.  

JAKKS is not the only company that was impacted by poor holiday sales. One of its close competitors, Hasbro Inc. (HAS - Analyst Report), also issued disappointing preliminary result for the upcoming fourth quarter of 2011. Hasbro’s sales during the holiday season were below expectation as consumer spending continued to remain sluggish, resulting in lower demand in the United States and Canada.

Currently, JAKKS Pacific retains a Zacks #5 Rank, which translates into a short-term Strong Sell rating.

Read the full analyst report on JAKK

Read the full analyst report on HAS