JAKKS Pacific, Inc.’s (JAKK - Free Report) solid international footprint, focus on innovation and collaborations with popular brands and movie franchisees bode well. The company is also focusing on digital innovation to drive growth. However, the coronavirus pandemic, high debt and rising interest expenses remain concerns. In the past six months, the company’s shares have declined 38.9%, against the industry’s rally of 27.4%. Let’s delve deeper.
Factors Driving Growth
JAKKS Pacific is committed toward diversifying its footprint outside the United States. Consistent with its endeavors, the company has opened sales offices and expanded distribution agreements for its products. Its partnership with Meisheng is expected to result in robust growth in Asia. Meanwhile, after launching Tsum Tsum in the key international markets like Latin America and Asia, the company plans to expand its distribution in new territories in the days ahead. The expansion initiatives are likely to strengthen its international presence and customer base. The initiatives are also expected to bolster sales and profit margin, and enable it to attract licenses.
The company has been consistently innovating its products to cope with the changing play pattern of children and boost demand. The demand for physical toys has been declining of late owing to younger children’s preference for digital games and other electronic learning tools. Consistent with this trend, the company has introduced a number of mobile gaming apps and digital games along with the physical toys, which would help the company cash in on the demand for smartphone gaming. JAKKS Pacific is also connecting with customers through digital videos, display banners and social ads, which are likely to enhance customer experience. Such investment in digital innovation will help in brand building apart from helping the company to capitalize on the increasingly lucrative technology-based gaming market.
The company realizes the importance of online retailing and shifted focus to boosting online sales. Over the past few quarters, JAKKS Pacific has been focused on creating digital experiences for online shoppers such as videos, 360-degree product images and enhanced web pages. It continues to modify sales and logistics capabilities in order to capitalize on this continued shift to online. During first-quarter 2020, the company implemented a multi-tier development program focusing on design and developing products specific to the retail channels. This includes the likes of Walmart, Target, Amazon, Tesco, Etica and Aldi, TJ Maxx, Ross and Gamestop. During second-quarter 2020, online sales through Amazon, target.com and walmart.com have witnessed solid growth.
The coronavirus outbreak has become a global crisis. The Toys - Games – Hobbies industry is currently grappling with the scenario and JAKKS Pacific isn’t immune either. Management at the company is actively monitoring the global situation and the resulting impact on its financial condition, liquidity, operations, suppliers, industry, and workforce. Although the company cannot estimate the impact of the COVID-19 outbreak at this time, it is likely that the pandemic will have an adverse material effect on the company’s sales expectations for fiscal year 2020.
JAKKS Pacific has been grappling with escalating interest expenses. In second-quarter 2020, the company’s interest expenses increased to $5.5 million from $2.9 million in the prior-year quarter. During the three months ended Jun 30, 2020, it booked interest expenses of $0.6 million related to its convertible senior notes, $4.6 million related to its term loan, and $0.3 million in relation to its revolving credit facility.
A strong balance sheet helps a company tide over crisis. At the end of Jun 30, 2020, the company’s long-term debt was $174.2 million compared with $192.5 million as of Mar 31, 2020. However, the company’s debt-to-capitalization rose to 112.1% in the second quarter compared with 104.7% as of March-end. Moreover, the company ended second-quarter fiscal 2020 with cash and cash equivalent of $52.7 million, which may not be enough to manage the high debt level.
JAKKS Pacific, which shares space with Hasbro, Inc. (HAS - Free Report) , currently has a Zacks Rank #3 (Hold).
Some better-ranked stocks worth considering in the same space include Activision Blizzard, Inc. (ATVI - Free Report) and Mattel, Inc. (MAT - Free Report) . Both the stocks has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Activision Blizzard has an impressive long-term earnings growth rate of 17.3%.
Shares of Mattel have increased 9.3% in the past three months.
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