Does Jakks' Warning Mean Holiday Toy Sales Will Disappoint?

| About: JAKKS Pacific, (JAKK)

Shares of children's toy maker Jakks Pacific (JAKK) plunged 20% on Monday after the company warned that full year results would be much lower than originally expected. Here is the guidance provided.

  • Full year sales of approximately $660 million, down from the previous estimate of $770 to $775 million. Analysts were expecting $786.32 million.
  • Diluted earnings per share of $0.37 to $0.40, down from previous guidance of $1.32 to $1.35. Analysts were currently expecting $1.34.
  • One time charges of approximately 9 cents. This will bring GAAP diluted earnings down to a range of $0.28 to $0.31.

The company said sales of the following have been disappointing, and the reason for the revenue and earnings warning include:

  • A difficult retail sales environment for toys, especially during the important holiday season.
  • Poor sales have led to higher markdowns, which will negatively impact margins.
  • Higher royalty expenses relating to license guarantee shortfalls, also impacting net margins and lowering earnings.

The warning from Jakks is especially troubling as it shows that this holiday season may not be great for children's toys. Obviously, disappointing sales would have the biggest impact on Mattel (MAT), as it has the highest expected sales of the toy makers. Hasbro (HAS) would also be affected a bit. Jakks is not as large as those two, so it may not feel the full impact of a retail sales pinch. I might be more worried on a smaller name, like Leapfrog (LF).

This news about Jakks did come out of the blue-- we have seen analysts taking down their estimates on some of these names over the past few months. Analysts had actually raised their estimates on Jakks and Leapfrog over the past few months, so this news is especially troublesome. Hasbro numbers have come down a little for the quarter, while Mattel expectations were down just one penny. Here's how the estimates have changed for current quarter expectations.

90 days ago $0.35 $1.02 $1.25 $0.48
60 days ago $0.35 $1.01 $1.22 $0.48
30 days ago $0.40 $1.01 $1.22 $0.41
7 days ago $0.40 $1.01 $1.22 $0.42
Current $0.39 $1.01 $1.21 $0.42
Click to enlarge

Given that Jakks had earned $0.88 in the first three quarters of the year, that implies that the company will lose about 50 cents a share this quarter, 60 cents when including one-time items.

Here's how analyst expectations for the full year have fared over the past three months.

90 days ago $1.42 $2.15 $3.03 $0.21
60 days ago $1.42 $2.14 $2.97 $0.21
30 days ago $1.36 $2.14 $2.92 $0.22
7 days ago $1.36 $2.14 $2.91 $0.23
Current $1.34 $2.14 $2.90 $0.23
Click to enlarge

Obviously, this news was not good for the sector, and the new 52-week low in Jakks' shares reflect that. The rest of the industry saw some pain as well, with Mattel down 2.75%, Hasbro down 3.64%, and Leapfrog down 2.84%. Investors will have to weigh the two possibilities here: Was this a company specific issue, or are toy sales going to be weak this Christmas? After this announcement, I feel that it could be the latter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.