Wal-Mart Could Put the Squeeze on JAKKS Pacific

One of the most important risks facing a company is that demand for its products will drop. That risk is lessened if the company has a wide assortment of products that it sells to a large number of customers. Conversely, if customers are highly concentrated, the company faces additional risk.

Consider JAKKS Pacific (JAKK), maker of toys and related products. While the company enjoyed over $900 million of sales last year, consider the concentrated sources of that revenue:


While none of these companies is in imminent danger, they must be constantly monitored to ensure things stay that way. For example, consider how Magna International's (MGA) sources of revenue went from a strength to a weakness in the course of a few years.

Of course, a customer's potential bankruptcy is not the only cause for concern when a company has a concentrated number of clients. The company under consideration is also subject to the whims of its wholesale customers, who can leverage the importance of the relationship to the company by pushing down profit margins. Wal-Mart (wMT), JAKK's largest customer, has a history of squeezing out every last penny from its suppliers, particularly those who are dependent on Wal-Mart for the bulk of their revenues.

By considering and understanding the sources of a company's revenue, investors can better shield themselves from being blindsided by downside risk.

Disclosure: None

Comments

[Deepv:]

I am not sure Walmart can squeeze Jakks as JAKKS is selling branded, not commodity goods. For example, JAKKs is going to come out with the UFC action figures. Kids are gonna want these and will be happy to go wherever they are. These are items w/pricing power for which there will be no substitute. Alsom How much of Walmarts rev's come from JAKKS? .0001%? Basically, your argument needs to be stronger. Plus it is not placed in any context: JAKK is a stock is on like a mid single digit earnings multiple and full of cash. Wouldn't the customer concentration,which has not *changed* already be discounted? What has changed in the JAKKS/Walmart relationship that would lead you to believe that it would be incrementally squeezed?

Jun 29 01:14 PM

[Saj Karsan:]

Hi Deepv,

As value investors, we look to identify downside risk. You are right that the stock appears cheap, but the point of the article (within the context of its original appearance on our blog) is that compared to an equally cheap looking stock, a company reliant on only a few customers is more of a risk than a company with several customers.

Jun 29 03:35 PM

[Deepv:]

Ok, point taken Saj. But you can't be a value investor and look at risk in such a myopic way. There are many many more risks to JAKK than customer concentraion. If you were suggesting that all of JAKKS rev's were at risk from that customer fine, but that's not what I hear you saying. You are saying margins might be squeezed, yet there is no evidence of that. JAKK has a 9% EBIT margin last year with the same customer concentration, again what has changed? Finally Jakks sells on 0.5x book, under 7x P/E and has $170m in cash about 50% of market cap sitting around. That sounds like a big margin of safety. Even more its key shareholders are luminary value investors like Templeton and Third avenue plus diminesional advisors which uses a quant screen. So far you haven't established you know much about the industry dynamics or earnings power of JAKKS, good or bad Frankly you just put out a remedial investment risk which you can find in the 10k as the centerpiece of your article. You need to execute some analysis if you want to call yourself a value investor and genuinely identify emerging risks.

Jun 29 04:16 PM

[Saj Karsan:]

You are right that if I was analyzing the company, this would be an incomplete assessment. But the point of the article is NOT to discuss JAKK, but rather to point out one specific risk. JAKK is simply used as an illustrative example.

Jun 29 10:44 PM