JAKKS Posts Mixed 2Q, View Upbeat

Toy maker JAKKS Pacific Inc.’s ( JAKK - Analyst Report ) adjusted earnings of 6 cents per share in the second quarter of 2012, were considerably lower than the Zacks Consensus Estimate of 12 cents as well as the year-ago earnings of 18 cents. An alteration in the payment mode of THQ settlement that took place in the quarter pushed back $2.0 million ($0.06 per share) dues from the second quarter to the second half of the year. This is one of the reasons JAKKS Pacific could not match up the consensus estimate.

On a GAAP basis, reported earnings of a penny per share were well below the year-ago level of 16 cents. Reported income takes into account financial and legal advisory fees. However, the company’s revenue grew 10.2% year over year to $145.4 million in the second quarter, beating the Zacks Consensus Estimate of $137.0 million.

Gross margin in the quarter was 32.3% versus 34.2% in the comparable quarter last year. The margin fell because of a shift in product mix that resulted in higher royalty expense as well as increased product cost and tooling amortization.

Selling, general and administrative expenses (including direct selling expenses and depreciation and amortization) rose to $46.8 million, or 32.2% of net sales from $43.1 million, or 32.7% of net sales, last year.

Financial Position

At quarter-end, JAKKS had cash and cash equivalents and marketable securities of $221.8 million versus $257.5 million at December 31, 2011.

The company completed a self-tender offer on July 5, 2012 to buyback 4.0 million shares of its common stock at $20 per share for a total of $80 million.

Guidance

For 2012, JAKKS raised its adjusted earnings per share guidance to the range of $1.04-$1.08 from $1.01-$1.07. The company reiterated its sales guidance in the range of $720–$728 million, implying a growth of 6.2% to 7.4%.

The company foresees a better retail sales environment for the rest of 2012 and remains upbeat regarding its strong product line-up. Management also remains optimistic on the spread of the Monsuno toy line in the U.S.

Our Take

We remain optimistic on JAKKS’ long-term growth potential with product launches and a strong financial condition. Several toy lines are doing quite well at retail levels. Increased earnings guidance underscores management’s optimism for 2012 activities. Additionally, the company is stepping into its third quarter of operation that is seasonally the strongest. However, cost inflation will likely hurt the company.

JAKKS Pacific currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

One of JAKKS’ primary competitors, Mattel Inc. ( MAT - Analyst Report ) reported both second quarter earnings and revenue ahead of the Zacks Consensus Estimates.