JAKKS Sits in a Corner

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It looks like the spandex-wearing goons at World Wrestling Entertainment (NYSE: WWE) put the smackdown on toy maker JAKKS Pacific (Nasdaq: JAKK) this quarter. While revenue fell far short of analyst expectations, profits took a larger spill than they otherwise would have because of litigation costs.

JAKKS has been involved in a long-term legal battle with the wrestling group, which could be why the WWE will be moving its ring to rival Mattel (NYSE: MAT) in 2009. JAKKS has the rights to sell action figures and the like through 2010. Still, the $2.6 million in pre-tax legal costs put a damper on profits in the quarter, which is typically a weak one anyway. Legal costs, product testing, and restructuring ate into the company's bottom line, as it posted earnings of $0.03 a share. This was well shy of the $0.19 that analysts were expecting and the $0.12-a-share result from last year.

In fact, as it seems to be playing out, Hasbro's (NYSE: HAS) recent report is all the more remarkable for the strength that it showed. Mattel, JAKKS, and RC2 (Nasdaq: RCRC) have all put out disappointing figures this week, showing how the weakening economy is influencing consumer decisions to delay buying toys.

Couple that with retailers like Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) being more cautious with their inventory, and you have a couple of factors dropping in a weak quarter that gets magnified as a result.

The back half of the year should show better results for JAKKS and probably the other toy makers, too. JAKKS continues to enjoy phenomenal success with its Hannah Montana licenses and its WWE properties, despite the legal considerations. Some analysts think perhaps the loss of the license -- even though JAKKS picked up the smaller TNA wrestling acts to replace the WWE -- will serve as a drain in the future. The boys in spandex still draw a crowd.

While the first quarter's results didn't live up to my expectations, I actually appreciate the drop in price the market has given us. Management does, too. While there's a buyback program in place, it hasn't been utilized because the share price has been at higher levels. On the conference call, management indicated now might be a more opportune time for them to tap into that authorization.

With a host of properties from Hannah to Pokemon, WWE to its Eye-Clops night-vision goggles, there's every reason to believe that JAKKS' current valuation makes it an attractive target for investors who also want to be opportune in their timing.