Is JAKKS Pacific Broken Beyond Repair?

Source: JAKKS Pacific

After JAKKS Pacific (NASDAQ: JAKK  )  on July 23 reported revenue that smashed forecasts because of the success of its products from Walt Disney (NYSE: DIS  )  and earnings that fell short of estimates for the second quarter of its 2014 fiscal year, shares plummeted 13%. In spite of this fall, however, the company's stock is still trading 63% above its 52-week low. Is this a sign that there's still plenty of room for the business to fall, making larger competitors like Mattel (NASDAQ: MAT  ) more attractive prospects? Or will JAKKS Pacific see a rebound in the long run?

Revenue soared but earnings missed... terribly!
For the quarter, JAKKS Pacific reported revenue of $124.2 million. In addition to coming in 17% above the $106.2 million management reported for the same quarter a year earlier, the company's top line blew past the $112.9 million analysts anticipated. According to the company's press release, this jump in sales was driven, for the most part, by the success of its Frozen product line.

  Last Year's Forecast Actual
Revenue $106.2 million $112.9 million $124.2 million
Earnings per Share -$2.14 -$0.29 -$0.43

Source: Yahoo! Finance and JAKKS Pacific

This was complemented by a general rise in Disney Princess dolls and dress up products, seasonal outdoor products, ride-ons, ball pits, and the business' Disguise Halloween costumes. Despite this success, the company's product sales did see some cannibalization by its Frozen line.

Although management reported blockbuster revenue growth for the quarter, it did suffer on the earnings front. For the quarter, JAKKS Pacific reported a loss per share of $0.43, easily missing the -$0.29 Mr. Market wanted to see. At first glance, this may seem terrible (and it is), but the company's bottom line managed to come in far better than the $2.14 loss per share reported for the second quarter of 2014.

Source: JAKKS Pacific

Even though revenue rose for the quarter, high costs negatively affected JAKKS Pacific's bottom line. Fortunately though, it does appear that costs are declining at a nice pace, with the company's cost of goods sold falling from 69.9% of sales to 55.9% and its royalty expenses dropping from 25.6% of sales to 12.1%.

Strong results are nothing new to Disney!
Over the past five years, Disney's consumer products segment has experienced a nice uptick in sales. Between 2009 and 2013, revenue stemming from the segment's licensing and publishing category (Disney doesn't separate these two activities) shot up 42% from $1.6 billion to $2.3 billion.

It should be noted, however, that not all of this growth has been organic. Although management has reported positive results in its Toy Story, Spider-Man, and Avengers product lines (to name a few), approximately $221 million of this rise in sales between 2009 and 2010 stemmed from Disney's acquisition of Marvel.

($in billions) 2013 2012 2011 2010 2009 Change
Consumer Goods Revenue $3.56 $3.25 $3.05 $2.68 $2.43 47%
Licensing and Publishing $2.25 $2.06 $1.93 $1.73 $1.58 42%
Segment Operating Income $1.11 $0.94 $0.82 $0.68 $0.61 83%

Source: Disney

Looking at profits, Disney's growth in sales has led to improved profits in its consumer products segment. Over the past five years, the company's operating income from this set of operations skyrocketed 83% from $609 million to $1.1 billion.

Unfortunately, these results also include the business' retail and other category, so it's impossible to know for sure exactly how much of the company's bottom-line growth can be attributed to licensing. But, the fact that management attributed its jump in operating income, in part, to its licensing category during four out of the past five years implies that its licensing business is seeing improved profitability.

Should investors ditch JAKKS Pacific in favor of Mattel?
For JAKKS Pacific, the past five years have been something of a disaster. Between 2009 and 2013, revenue at the toy and costume manufacturer dropped 21% from $803.7 million to $632.9 million. Although management attributed some of this decline to the business' role play, novelty, and seasonal toys operations, the biggest contributor to its declining revenue has been JAKKS Pacific's traditional toys and electronics category, which saw revenue free fall 27% from $439.4 million to $320.6 million.

JAKK Revenue (Annual) Chart

Jakks Pacific Revenue (Annual) data by YCharts

Over the same five-year period, larger rival Mattel saw sales shoot up 19% from $5.4 billion to $6.5 billion. According to the company's most recent annual report, this rise in revenue was driven largely by a 31% leap in revenue stemming from the company's Mattel girls and boys brands, which increased from $3.3 billion in 2009 to $4.3 billion by the end of the company's 2013 fiscal year.

JAKK Net Income (Annual) Chart

Jakks Pacific Net Income (Annual) data by YCharts

From a profit standpoint, the disparity between JAKKS Pacific and Mattel is even bigger. Between 2009 and 2013, JAKKS Pacific saw its net loss narrow from $385.5 million to $53.9 million. Although this may seem impressive, when you remove the $428.3 million worth of impairments the business booked in 2009, its net loss would have widened during this time frame. Mattel, on the other hand, reported strong performance over this five-year period, with net income soaring 71% from $528.7 million to $903.9 million, as rising revenue was accompanied by a decline in the company's cost of goods sold from 50% of sales to 46.4%.

Foolish takeaway
Right now, it makes sense that Mr. Market is none too pleased with JAKKS Pacific's quarterly performance, but it's possible that investors' reaction to the news is overblown. Yes, the business did see its bottom line come in worse than anticipated, but its results demonstrated a vast improvement over last year's metrics, and its revenue rose at a very strong clip. While it's possible that the company could make for a good long-term prospect, Mattel or Disney would likely provide the Foolish investor with a greater level of safety because of their size and diversification.

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