JAKKS Pacific Misses Estimates

Toy maker JAKKS Pacific Inc. ( JAKK - Analyst Report ) posted adjusted earnings of $1.13 per share in the third quarter of 2012, lower than the Zacks Consensus Estimate of $1.15 but higher than the year-ago earnings of $1.11 per share.

On GAAP basis, reported earnings of $1.10 per share were in-line with the year-ago level. Reported income included financial and legal advisory fees. However, the company’s revenue declined 5.4% year over year to $314.5 million in the third quarter, missing the Zacks Consensus Estimate of $318.0 million.

Lower domestic product sales coupled with decline in product orders before the crucial holiday season led to the top- and bottom-line miss.

Gross margin in the quarter was 30.8% versus 31.8% in the comparable quarter last year. The decline in margin was a result of a shift in product mix leading to increased product costs and tooling amortization.

Selling, general and administrative expenses (including direct selling expenses and depreciation and amortization) climbed up to $59.4 million or 18.9% of net sales from $55.6 million, or 16.7% of net sales, last year.

Liquidity

At quarter-end, JAKKS had cash and cash equivalents and marketable securities of $140.8 million versus $257.3 million at December 31, 2011.

Guidance

Prior to the earnings release, JAKKS had lowered its outlook for fiscal 2012. The company cut its adjusted earnings per share guidance to the range of 68—74 cents from the earlier projection of $1.04—$1.08. The company also curtailed its sales guidance to the range of $690–$700 million from the previous range of $720—$728 million.

JAKKS foresees a better business environment for itself in 2013 and remains upbeat regarding its strong product line-up that includes the launch of DreamPlay products as well as core product lines.

Our Take

We have a bearish view on the stock based on its top- and bottom-line miss, lowered outlook for the full-year as well as decelerating margins. The company also had to bear the brunt of higher costs, including marketing and advertising expenses as well as minimum license royalty guarantees. Decreased guidance underscores management’s apprehension regarding a tough retail environment in 2012.

JAKKS Pacific, which competes with the likes of Mattel Inc. ( MAT - Analyst Report ) , currently carries a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating. We are maintaining our long-term Underperform recommendation on the stock.