Toy maker JAKKS Pacific Inc.’s ( JAKK - Analyst Report ) adjusted loss of $1.24 per share in the fourth quarter of 2012 was substantially wider than the Zacks Consensus loss estimate of 14 cents per share and the year-ago loss of 72 cents per share.

On a reported basis, including the impairment of deferred tax assets and advisory fees, loss per share was $5.45 per share versus loss of 77 cents per share in the year-ago quarter. The company’s revenues declined 5.4% year over year to $133.5 million in the fourth quarter, also missing the Zacks Consensus Estimate of $147.0 million.

Lower domestic product sales amid a difficult retail environment have led to the top-and bottom-line miss and year-over-year decline. Jakks Pacific has become a victim of the change in children’s play pattern in recent years. Toy manufacturers have to battle a broad array of alternative devices including video games, MP3 players, tablet, smartphones and other electronic devices. Hence, specialty toy retailers have lost market share to mass merchants in recent years due to this change.

Full-Year Update

In 2012, loss per share was 39 cents versus earnings of 41 cents in 2011. Total revenues were $666.8 million, down 1.6% year over year. Lack of demand for several of its key products led to the lackluster performance in 2012.

Guidance

For 2013, the company expects earnings per share to be in the range of 63—68 cents per share. Net sales are expected to increase 4.0% to 5.0% in the range of about $694—$700 million.

JAKKS foresees a better business environment for itself in 2013 and remains upbeat regarding the opportunities in China.

However, the company expects the first quarter to be slightly weaker. In the first quarter the company expects loss per share in the range of 83—85 cents, wider than the year-ago loss of 62 cents per share. Its net sales are expected to range between $70 and $73 million, which is also lower than year-ago sales of $73.4 million.

We believe, incremental operating and marketing expenses associated with the launch of the DreamPlay product line in the quarter, which sees seasonally low volumes, compelled Jakks Pacific to guide lower than the first quarter of 2011. Additionally, incremental operating expenses associated with the Maui Toys acquisition will also take a toll on the company’s first-quarter earnings.

Our Take

We have a bearish view on the stock based on its top- and bottom-line miss and year-over-year decline on both lines. The company also had to bear the brunt of higher costs, including marketing and advertising expenses as well as minimum license royalty guarantees. The company needs novelty in its product launches to cope with the change in the play pattern of children as several of its key products lack demand.

JAKKS Pacific currently carries a Zacks Rank #5 (Strong Sell). One of the major toy companies Mattel Inc. ( MAT - Analyst Report ) also missed on both the counts in its fourth quarter while another company Hasbro Inc.’s ( HAS - Analyst Report ) fourth-quarter 2012 adjusted earnings per share were in line with the Zacks Consensus Estimate. However, its revenues missed the same. In the current context, one toy and gaming company worth a look is Take-Two Interactive Software Inc. ( TTWO - Snapshot Report ) with a Zacks Rank #2 (Buy).