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JAKKS Pacific Rides on Alliances & New Products, Fx Woes Stay

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Multi-brand toy and consumer products company, JAKKS Pacific, Inc. (JAKK - Free Report) , is likely to continue growing on the back of its long-term strategic goals. The objectives include expansion of its solid base of evergreen brands, entering into new categories, creating a strong portfolio of new and existing licenses, and developing owned IP and content.

However, the company faces challenges in the form of a difficult retail environment, rising costs, competition from alternative modes of entertainment and adverse forex translations.

Meanwhile, JAKKS Pacific continues to expect higher net income, earnings per share and adjusted EBITDA on lower net sales for 2017 compared with the previous year. Also, the company anticipates enhanced profitability in the second half of the current year owing to its efficient marketing undertakings and cost-cutting policies.

Key Growth Drivers

Going forward, we are particularly optimistic on the company’s innovative partnerships and joint ventures that should help JAKKS Pacific gain market share in a competitive industry. Additionally, the company’ strategic acquisitions is likely to aid in entering new categories.

Markedly, JAKKS Pacific’s collaborations with Disney, Skechers, Nickelodeon, Cabbage Patch Kids to manufacture toys and merchandise related to these brands is also likely to drive growth. Furthermore, the company’s licensing agreements with popular movie and television franchises are expected to boost sales as merchandise based on movies enjoys immense popularity.

In fact, since the beginning of the year, it has entered into multiple licensing agreements spanning across varied product lines that are all set to hit stores in the near term and add to the top line. Also, despite lower sales in the first-half 2017, the company expects sales decline in the second half to be more modest as it heads into peak selling season.

JAKKS Pacific also remains committed to diversifying its footprint outside the United States in various key markets and currently operates in 65 countries, worldwide. Notably, the expansion initiatives are likely to strengthen its international presence as well as customer base and thereby aid in growing sales, profit margins and the company’s access to attract licenses.

Furthermore, in order to cash in on the demand for smartphone gaming, the company has introduced a number of mobile gaming apps and digital games along with the physical toys, which would help the company. JAKKS Pacific’s investment in digital innovation is also expected to help in brand building, besides helping the company to capitalize on the increasingly lucrative technology-based gaming market.

Interestingly, JAKKS Pacific has realized the importance of online retailing and has shifted a great amount of focus to aggressively growing online sales. In fact, it continues to modify the company’s sales and logistics capabilities in order to capitalize on this shift. Markedly, sales to online customers and the e-commerce division of traditional retailers rose over 50% year over year in the second quarter.

Concerns

It is to be noted that a challenging retail environment for toys due to lower consumer confidence remains a major concern for JAKKS Pacific as well as other leading toy makers like Hasbro, Inc. (HAS - Free Report) and Mattel, Inc. (MAT - Free Report) . Currently, customers are reducing non-essential purchases, which in turn is hurting toy makers’ revenue.

Continuous competition from technology-based gaming companies like Electronic Arts, Inc. (EA - Free Report) and Activision Blizzard, Inc. (ATVI - Free Report) has also been posing a significant threat to the market position of toy makers like JAKKS Pacific.

Meanwhile, as the U.S. dollar continues to show strength against various other currencies, the negative currency impact is likely to hurt revenues, given the company’s considerable international presence. Moreover, the British Pound’s plunge in value since the Brexit vote is impacting JAKKS Pacific’s revenues. In fact, foreign exchange movements can be cited as one of the primary reasons behind the company’s expectations of lower revenues in 2017 than the last year.

Additionally, the company is experiencing increased costs related to international expansion, development of new IP and acquisitions. These initiatives are adding greatly to expenses without the offsetting benefit of having any material impact on revenue growth. Unless the trend reverses, the company’s margins will remain under pressure, despite several cost-containment efforts.

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