Small Toy Maker Jakks Pacific Continues To Miss Earnings Estimates

 |  About: JAKKS Pacific, Inc. (JAKK), Includes: DIS, HAS, MAT
by: Chris Katje

Toy maker Jakks Pacific (NASDAQ:JAKK) reported its second quarter earnings today. The company saw net sales increase to $145.4 million, versus $131.9 million for second quarter 2011. Net income was $0.1 million, after $1.7 million in pre-tax charges. Earnings per share for the quarter were $0.01 after a $0.05 charge per share related to legal and financial fees from the activist interest in selling the company. Without one time charges, earnings per share would have come in at $0.06.

Analysts expected earnings per share of $0.11 for the quarter on net sales of $137.1 million. This now marks the fourth consecutive quarter that Jakks has missed analysts' EPS estimates. Estimates are calling for $1.07 in EPS this fiscal year. With two misses to start the year, the company will need strong releases in the third and fourth quarters to hit its targeted earnings.

There are some bright spots. Recently, Jakks had some success with a new line of toys related to Disney's (NYSE:DIS) new movie, Brave. Jakks saw huge demand, so much so that several of the products consistently sold out. Although it has been unable to keep the toys on shelves thus far, Jakks plans to double the amount of Brave memorabilia that will be available around the time of the DVD release.

Additionally, a newly announced interactive toy partnership with NantWorks may be able to help bolster sales in the second half of the year. Called DreamPlay Toys, the joint venture will see Jakks using NantWorks' image recognition technology. NantWorks founder Dr. Soon-Shiong said, "Toy experts and technology experts are combining to create a whole new world of possibilities for children, and indeed for consumers generally."

Jakks CEO Stephen Berman was equally positive about the announcement. "In my over 20-year career in the toy industry, I have never seen anything as transformative, ground-breaking or exciting as this partnership," he said. Hopefully, we will get a lot more information about this new initiative during the company's third quarter earnings call.

Despite the earnings miss, shares are trading up 1% at the time of this writing. Still, Jakks needs to turn up the heat to reward patient shareholders. Oaktree Capital offered $20 per share in a buyout attempt last year. Jakks' management ultimately turned down the deal because they believed it undervalued the company. Jakks bought back some shares this year for $20 each.

For the full fiscal year, analysts call for net sales of $734 million. Jakks is forecasting $720-$728 million, which looks like it could fall short on top and bottom line numbers for Wall Street. The company did, however, raise its estimated earnings per share for the fiscal year to $1.04 to $1.08, from a previous $1.01 to $1.07. The raise in guidance was due to its share buyback program.

Larger rivals Hasbro (NASDAQ:HAS) and Matttel (NASDAQ:MAT) are trading with cheaper or similar price to earnings ratios. Both larger rivals also yield 4% or better, compared to Jakks' lesser 2.5%. If you're shopping for a toy company to add to your portfolio before the holiday season, at these prices, you're better off passing on Jakks.

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