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Is JAKKS Pacific Scripting a Turnaround?

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On Jun 6, 2014, we issued an updated research report on JAKKS Pacific, Inc. (JAKK - Free Report) .

We believe the toymaker is poised to grow after it announced narrower year-over-year losses for the first quarter on May 23. Losses of 74 cents per share were also narrower than the Zacks Consensus Estimate.

Additionally, the company’s revenues increased approximately 5.7% year over year and beat the Zacks Consensus Estimate by 10%. Higher sales in the quarter were driven by dolls section; dress-up and role play in the company’s Frozen product line-up, Disney Pirate Fairies dolls and dress-up, and pre-school foot-to-floor ride-ons and wagons.

We are encouraged by JAKKS Pacific’s string of acquisitions over the past several years. The acquisitions of Maui, Inc. in Jul 2012 and JKID, Ltd. in Sep 2012 have already added to the top line and are expected to boost it further in the upcoming quarters. Also, the company’s joint ventures with Pacific Animation Partners and NantWorks LLC (in Sep 2012) will further boost the top line.

In May 2014, the company inked a long-term licensing agreement with California-based leading lifestyle footwear manufacturer Skechers USA Inc. (SKX - Free Report) to manufacture a series of toys and products inspired by the Skechers brand, and its children’s footwear brand Twinkle Toes. In our view, such innovative partnerships will help JAKKS to gain market share in the competitive industry. Further, the company’s partnership with Disney, Nickelodeon, Cabbage Patch Kids and Saban Brands for the popular Power Rangers franchise is expected to boost the top line in the near term.

We are also positive on JAKKS Pacific’s efforts to cut costs and introduce innovative tech-based products. The company’s newly launched mobile gaming apps and Blu-ray DVDs as well as the Hero Portal gaming console (to be launched in Sep 2014) will help in brand building apart from capitalizing on the increasingly lucrative technology-based gaming market.

However, we are aware of the consumer spending uncertainty, which still lingers amid sluggish economic growth as U.S. customers curb their non-essential purchases. In addition, the toy manufacturers have to battle a broad array of alternative modes of entertainment including video games, MP3 players, tablets, smartphones and other electronic devices, which are gaining popularity among children and therefore cannibalizing their market share.

JAKKS Pacific currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry are Electronic Arts Inc. (EA - Free Report) and Activision Blizzard, Inc. (ATVI - Free Report) . While Electronic Arts sports a Zacks Rank #1 (Strong Buy), Activision Blizzard has a Zacks Rank #2 (Buy).

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