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We have recently downgraded our recommendation on multi-brand toy company Jakks Pacific Inc. ((JAKK - Analyst Report)) from Neutral to Underperform following its lackluster first-quarter 2013 results.

Why the Downgrade?

Despite significant revenue growth, the company’s first quarter loss was wider than the Zacks Consensus Estimate and the year-ago level. In fact, the company’s bottom line has missed the Zacks Consensus Estimate for seven quarters in a row. Several of its key products lack demand. In the first quarter of 2013, business from Monsuno, one of Jakks Pacific’s major products, witnessed a significant decline in the U.S. Its other major product Winx Club, launched in the second half of 2012, also met with the same fate.

Basically, the Malibu, Calif-based company has become a victim of the change in children’s play pattern in recent years, battling a broad array of alternative devices including MP3 players, tablet, smartphones and other devices.  

Moreover, Jakks Pacific does not have any meaningful launch in the near term, apart from the DreamPlay product line slated for a fall 2013 launch in association with its joint venture partner NantWorks. The product is scheduled for an international launch next year. Although management remains optimistic on DreamPlay, there will be no material benefit before the fourth-quarter of 2013.

Incremental operating and marketing expenses associated with the launch of the DreamPlay product line are also taking a toll on Jakks Pacific’s margin. Moreover, Jakks Pacific’s restructuring activities, aimed to lower occupancy costs and increase efficiencies and profitability in the long term, are suppressing margins in the near term.

Faltering consumer confidence owing to the anemic economic situation in the US and Europe may restrain the company’s sales.

Other Stocks to Consider

Other players in the toy industry, which look attractive at current levels include Hasbro Inc. (HAS - Analyst Report) and LeapFrog Enterprises Inc. (LF - Snapshot Report) carrying a Zacks Rank #1 (Strong Buy).

Another company in the leisure and recreational products sector, Brunswick Corp. (BC - Snapshot Report), carrying a Zacks Rank #2 (Buy), is also worth a mention.
 

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