Shares of JAKKS Pacific (JAKK) have dropped about 20% since a Q1 loss of $1.09 per share reported by the toy maker on April 24 came in much higher than the 85-cent deficit expected by the Street. This underperformance is largely due to the weaker-than-expected demand for products related to the Thanksgiving 2023 film release Wish by Walt Disney Animation Studios, forcing it to support its retail partners in funding markdowns to move that stock as well as addressing cancelled reorders for which it had built inventory.
Unfortunately, that’s how things can go in the toy industry, as not every theatrical release will be a breakout hit that boosts demand for related toys. When a flop occurs, the best thing to do is shed this merchandise as quickly as possible and replace it with items that have better prospects to resonate with consumers, such as its core evergreen product lines, sales of which were up a solid 12.3% in the quarter. Given the fact that despite the prior-year quarter benefiting from the boost of not just one, but two blockbusters with the two popular children’s films The Super Mario Bros. Movie and The Little Mermaid, net sales for the period actually fell by a less-than-anticipated 16.2% year-over-year to $90.1 million (versus the much larger drop of 24.0% to $81.7 million analysts had been expecting), that’s exactly what JAKK did.
More importantly, with JAKK being quick to address this issue head-on, it entered the second quarter with its inventory down 28% from a year earlier. This much leaner position sets the company up well to fulfill demand with significantly reduced risk of having to slash prices as it heads into its primary selling periods in Q2 and Q3. And thanks to the upcoming releases of Universal Studios’ fourth Despicable Me film in July and the film version of the highly popular musical Wicked in November, along with Disney’s Moana 2 and Paramount’s Sonic the Hedgehog 3 during the holiday season, plus the launches of Disney’s Create Your World (a three-year Disney Princess themed brand campaign) and an extensive product line dedicated to The Simpsons cartoon show slated for the fall, I think a return to growth in the second half of the year remains very much in the cards.
What’s more, even after shelling out $20 million to satisfy the cash portion of its previously announced redemption of its Series A Senior Preferred Stock during the quarter and the large cash outflow JAKK tends to see in Q1 due to royalties paid and investments made in support of its new product lines for the year (in what is its seasonally weakest sales quarter), the company ended the period with a net cash position of $35.5 million, which is the most at the end of any first quarter since 2012. Moreover, the preferred redemption eliminates about $1.6 million in dividends it would have had to pay over the next 12 months. The absence of this recurring obligation largely makes up for the dilutive impact from the roughly $15 million in new common stock it also issued as part of the redemption. With the preferred shares gone, JAKK has removed the last remaining financial obligation it took on as part of its restructuring in 2019. As a result, future earnings will fully accrue to the common.
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JAKK also said that it has made great progress on sharing its new Simpsons line with retailers across its major markets, and that its Disney business continues to steadily build as well. When you combine this with the new long-term multi-brand worldwide partnership with Authentic Brands Group that JAKK signed last November, which the company says has already been extremely successful and calls for expansion into branded roller skates, inline skates, volleyballs, outdoor furniture (including chairs, umbrellas and canopies), beach accessories, inflatable pool floats, foldable wagons and an extensive line of dolls and doll accessories infused with fashion elements from Forever 21, Prince, Sports Illustrated, Roxy and Billabong in 2025, it’s not hard to see why it’s year-round offerings—which already accounted for over 70% of sales in Q1—should continue to become an increasingly bigger portion of its portfolio and drive sustained top and bottom-line growth with less volatility in the years ahead. Thus, with the stock of this debt-free company now trading at a ridiculously low less than 6 times even the downwardly revised consensus estimate of $3.27 per share (from $4.10 just four weeks earlier) for the current year, I think anyone taking advantage of the additional short-sighted slide following the release to buy the stock will ultimately be very happy that they did.
Julius Juenemann, CFA is the equity analyst and associate editor of the Forbes Special Situation Survey and Forbes Investor investment newsletters. JAKKS Pacific (JAKK) is a current recommendation in the Forbes Investor. To access this and the other stocks being recommended through the Forbes Investor, click here to subscribe.
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