JAKKS Pacific: Earnings Preview

| About: JAKKS Pacific, (JAKK)

JAKKS Pacific Inc. (JAKK), a multi-brand company that designs and markets a broad range of toys and consumer products, is slated to release its third quarter 2010 results on Tuesday, October 26. The current Zacks Consensus Estimate for the quarter is $1.06 per share, representing an annualized growth of negative 6.10%.

With respect to earnings surprises over the trailing four quarters, JAKKS has oscillated greatly from approximately negative 4.4% to positive 240.0%. The average earnings surprise was a positive 65.7%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Second Quarter Recap
JAKKS reported adjusted second quarter earnings of 11 cents per share, beating the Zacks Consensus Estimate of 5 cents. The company incurred a loss of 3 cents in the year-ago quarter.

Though the company experienced a year-over-year decline in net sales, the results were aided by cost cuts, restructuring activities and a strong demand for its products.

In the reported quarter, revenues decreased 15.2% year over year to $123.3 million, but out performed the Zacks Consensus Estimate of $110.0 million.

Outlook
JAKKS reaffirmed its earnings guidance in the range of $1.10 to $1.20 per share and net sales in the range of $660.0 million to $670.0 million for fiscal 2010.

Estimates Revisions Trend
Estimates have moved up in the last 30 days, implying that the analysts do see meaningful catalyst for the time being. The current Zacks Consensus Estimate is $1.22 for 2010 (reflecting a year-over-year growth of 18.3%) and $1.43 for 2011 (reflecting a year-over-year growth of 17.1%).

Agreement of Estimate Revisions
In the last 30 days, 2 out of 9 analysts have raised their estimates for the third quarter of 2010 and 2 out of 8 analysts have increased their estimates for fiscal 2011. Only, 1 analyst has slashed the estimates for both the third quarter and 2011. For 2010, 1 out of 8 analysts upped the estimate, while 2 decreased their estimates, thus estimate revisions trend, though mixed, drifted to the negative side.

The analysts have upped their estimates as top line is expected to improve, driven by a strong product line in the second half of 2010 and the company also remains confident about the progress in its product line for 2011. The early outlook for holiday season is also encouraging as JAKKS is experiencing stronger bookings for its products compared with the last year. Moreover, the company should benefit from its Halloween business, which is expected to do well. Additionally, the company’s restructuring plan and cost saving initiatives are expected to improve profitability for 2010 and beyond.

The analysts have reduced their estimates as year-over-year comparison is expected to be tough in the second half of 2010 due to the loss of World Wrestling Entertainment Inc. (WWE) consumer license to Mattel Inc. (MAT). Management also remains concerned about production and shipment in the second half of 2010, mainly due to labor issues and possible container shortages, which have resulted in shipping delays and increased costs for many manufacturers doing business in Asia.

There has been no movement in estimates by the analysts in the last 7 days, implying that the analysts expect the company to report in line.

Magnitude of Estimate Revisions
In the last 30 days, estimates for third quarter 2010, fiscal 2010 and 2011 remained unchanged. However, in the last 7 days, earnings estimates for third quarter 2010 increased by one cent to $1.06. Fiscal 2010 estimate also inched up by one cent to $1.22 and fiscal 2011 estimate jumped by 4 cents to $1.43.

The analysts have based their upward revision on new product launches, cost-cutting initiatives showing signs of margin improvement and reduced litigation costs from its WWE and THQ settlements, and believe that JAKKS will post sequentially improving results for the remainder of the year.

Our Take
Currently, we expect JAKKS to post third quarter results above the Zacks Estimate. Many of the company’s product launches in 2010 and in early 2011 look much better than the products of previous years. Management remains optimistic about the Disney Princess and Fairy product lines, and sees substantial momentum for Phineas and Ferb, Club Penguin and Toy Story products, which will likely drive further growth for JAKKS through 2010. We expect bigger Halloween business due to an expanded product line. Additionally, the company’s restructuring plan and cost-saving initiatives are expected to improve profitability for 2010 and beyond.

We remain optimistic about its long-term growth potential with new product launches, possible acquisitions, improved earnings helped by cost-saving measures, resolution of litigation and a strong financial condition to facilitate growth. However, underperformance in key brands such as Hannah Montana and Pokemon and loss of WWE consumer license will continue to be a haul on the company’s sales growth and will lead to a tough year-over-year comparison. Additionally, faltering consumer confidence, uncertainty regarding labor issues in Asia and possible container shortages causing shipping delays will add to the concern. Moreover, JAKKS may face foreign currency headwinds as the majority of the worldwide toys are produced in China.

Accordingly, the company has a Zacks #3 Rank (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.

Mattel. one of JAKKS’ primary competitors, reported its third quarter 2010 earnings of 77 cents, which surpassed the Zacks Consensus Estimate by a penny. JAKKS’ other peer Hasbro Inc. (HAS) reported its third quarter 2010 earnings of $1.09, which surpassed the Zacks Consensus Estimate of $1.04.