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Toy maker JAKKS Pacific Inc.'s (JAKK - Analyst Report) adjusted loss of $1.23 per share in the first quarter of 2013 was substantially wider than the Zacks Consensus Estimate of a loss of 84 cents per share and the year-ago adjusted loss of 59 cents per share. Loss per share was also wider than the company's expected range of 83—85 cents loss per share. The unexpected delay of a tax benefit of 24 cents per share as well as margin contraction hurt the company’s results.

On a reported basis, including legal and financial advisory fees and expenses, JAKKS Pacific suffered a loss of $1.26 per share versus a loss of 62 cents per share in the year-ago quarter.

JAKKS Pacific’s revenues grew 6.4% year over year to $78.1 million in the first quarter, beating the Zacks Consensus Estimate of $70.0 million. Net sales surpassed the company’s guided range of $70 to $73 million.

Strong sales of core product lines helped drive revenues. JAKKS-owned Fly Wheels, Disney Princess dolls and dress-up, Fisher-Price ride-ons, outdoor and indoor preschool furniture, and outdoor activity items from the Maui division were the major contributor to sales. Management stated that the first quarter represents 10% of its guided sales for 2013.

Gross margin in the quarter was 29.9%, down 220 basis points (bps) year over year. The downside in margin was the result of higher customer allowances and close-out sales.

Guidance

Management reiterated its 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 the rest of 2013 and remains upbeat regarding the opportunities in China.  Aggressive retail promotion plans for the core line as well as the launch of its DreamPlay product line this fall are expected to trigger sales in the second half of the year.

Our Take

We are not quite optimistic about the stock at the current level. The company reported a wider-than-expected loss in the first quarter, despite its revenues growing year over year and beating the estimate.  JAKKS Pacific has been faltering for the last four quarters with its bottom line missing the estimate in each and every quarter. The company had to bear the brunt of higher costs.

JAKKS Pacific has become a victim of the change in children’s play pattern in recent years and hence needs novelty in its product launches to cope with the change. Several of its key products lack demand. Although the company is striving hard for some breakthrough launches, we are yet to see any improvement.

JAKKS Pacific currently carries a Zacks Rank #5 (Strong Sell). Two of the major toy companies Mattel Inc. (MAT - Analyst Report) and Hasbro Inc. (HAS - Analyst Report) beat estimates on both counts in first quarter 2013. Another toy company, LeapFrog Enterprises Inc. (LF - Snapshot Report) is slated to report its earnings on May 2.

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