2023-09-19 04:44:01 ET
Summary
- Products from Nintendo’s Super Mario Bros and Disney’s Little Mermaid movies have shown to boost revenue greatly.
- JAKKS Pacific's licensing opportunities from upcoming movies like Inside Out 2 and Paw Patrol: The Mighty Movie will continue to drive sales.
- Debt has been reduced to zero, resulting in a much leaner and flexible capital structure.
- Valuation is also extremely cheap.
Overview:
JAKKS Pacific ( JAKK ) is a toy and costume manufacturer that sells licensed products from various major brands, such as Disney ( DIS ) and Nintendo ( NTDOY ). The company has been turning its business around by paying off expensive debt and bringing in more strategic licenses that have boosted revenue. We believe that JAKKS Pacific has great potential due to their upcoming licensing opportunities, zero debt, and dirt-cheap valuation.
Upcoming Licensing Opportunities:
JAKKS Pacific’s strategic focus on its toy and costume segments has yielded substantial achievements in the first half of the fiscal year. The pivotal role played by major film collaborations during this period cannot be understated. The global impact of the Super Mario Bros movie, amassing an impressive 1.3 billion in box office revenue, has translated into a surge in demand for both JAKKS Pacific’s timeless Nintendo product range and innovative offerings inspired by the themes of the movie. The standout success of the fire-breathing Bowser toy, with shipments exceeding 300K units , showcases the company’s ability to capture consumer interest and deliver standout products.
Statista
The resonating success story extends to Disney's Little Mermaid film, which has amassed more than $500M in global box office earnings. This achievement has triggered an enthusiastic response from consumers towards film-inspired merchandise, such as the Ariel dress, the undersea exploring Ariel feature doll complete with lights and music, and the enchanting singing seashell necklace. The thriving Evergreen Disney Princess business sector. We believe JAKKS Pacific showcases its ability to capitalize on enduring market trends, as evidenced by its surpassing last year's sales performance across the top three U.S. accounts. This consistent success is due to the great appeal of Disney Princess products and their unwavering popularity among consumers
With an amazing track record of translating film partnerships into concrete revenue growth, we believe JAKKS Pacific is strategically positioned to leverage its license agreements to unlock increased capital flow. The teamwork between captivating product innovation and strategic collaboration with blockbuster movies shows the potential for substantial gains in the foreseeable future.
The anticipation of upcoming cinematic releases, such as Inside Out 2 and PAW Patrol: The Mighty Movie, introduces a promising avenue for JAKKS Pacific to create additional licensing agreements, translating into increased revenue opportunities. These eagerly awaited films tap into not only the closeness of audiences for beloved franchises but also open doors for the company to create new, innovative products inspired by the themes and characters of these movies. The success of previous film partnerships, as evidenced by the Super Mario Bros. and Disney’s Little Mermaid collaborations, showcases JAKKS Pacific’s prowess in capitalizing on such opportunities. As the company continues to secure licensing agreements linked to these highly anticipated films, We believe the company stands poised to further diversify its product offerings, amplify its market presence, and generate enhanced returns in the foreseeable future.
Zero Debt
JAKKS Pacific has finally completed their debt reduction efforts , with net debt decreasing to zero from $84.9M from the previous year. In total, debt has fallen from $175M to $0 over the course of 3 years.
JAKKS Pacific
These actions have strengthened the company’s capital structure, allowing for greater flexibility when borrowing money in the future. Previously, their borrowings were very expensive: for example, in Q2, $30.2 million in expensive debt was retired 4 years prior to maturity, which would have come with approximately 11% in interest expense. With all of JAKKS Pacific’s prior expensive debt paid off, we believe that their balance sheet has become much stronger, allowing them to negotiate better, more strategic terms when borrowing money.
In addition, the impact on company assets has remained relatively minimal. When analyzing this debt reduction’s effect on the balance sheet, liabilities decreased 42% ($-149M), while assets only decreased 17% (-$75M), meaning that JAKKS Pacific’s deleveraging was beneficial, as the loss of assets was well offset by the reduction of debts. Overall, with the successful deleveraging over a period of 3 years, we are confident in management’s ability to control debt and negotiate better terms when borrowing in the future.
However, with such large expenditures on debt, a negative impact on revenues are inevitable. JAKKS Pacific’s business is divided into 2 main segments: toys and costumes. For Q2, revenues for both segments have fallen significantly. Costumes sales dropped 32% YoY to $49M, while toys sales fared better, falling 21% to $118M.
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We believe that this reduction was driven by a much smaller cash position driven by debt repayments and broader economic fears that reduced consumer spending.
We can see that cash and cash equivalents decreased $30.1M from previous year (-48%).
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Additionally, in their condensed cash flow data , a whopping $69M was used in debt repayment and other financing activities over two quarters. Therefore, we can infer that this has resulted in significantly less liquidity that could be allocated towards operating activities, such as inventory, SG&A, and marketing.
JAKKS Pacific
We believe that this lack of cash is most prevalent in JAKKS Pacific’s inventory, which has dropped 47% YoY, showing that the company did not fully stock inventory resulting in unfulfilled customer demand.
Even with the rapid decline in cash, JAKKS Pacific’s gross margins have remained stable, showing that the profitability of their operations has been unaffected by their deleveraging.
JAKKS Pacific
As JAKKS Pacific’s cash position recovers from a new set of borrowings in the future, we believe that sales will rebound as the company will have the liquidity capacity to create and sell more toys and costumes.
We think that the other primary reason behind declining sales was driven by a cyclical decline in consumer spending on toys and costumes. Broader economic fears of inflation, high-interest rates, and possible recession have been causing consumers to spend much more cautiously than in 2021 and 2022. As JAKKS Pacific’s business continues to cycle, we believe that sales will recover.
Valuation
We did not use our own valuation models due to the lack of sufficient analyst earnings estimates, which is what our valuation models are based on.
Instead, we looked at Seeking Alpha Quant Rating, which rates JAKKs Pacific at a resounding A+ in valuation. This is attributable to JAKKS Pacific’s rock-bottom P/E, PEG, EV/Sales, EV/EBITDA, P/S, P/B, and P/CF ratios.
Seeking Alpha
Despite JAKKS Pacific showing good progress in debt reduction and new licensing opportunities, the company is still sitting at a very low price. With these outrageously low valuation ratios in mind, we believe that JAKKS Pacific is undervalued from an independent standpoint.
Author
When comparing JAKKS Pacific to competitors, we found that the company’s performance was mixed. 2-year growth figures were slightly poor, with a forecasted 3% decline for both revenue and EPS. Although D/E of 0 and ROE of 48.23% were much better than competitors, gross and EBITDA margins of 29 and 8% were lower than competitors. Even though JAKKS growth and profitability is below competitors, their dirt-cheap valuation more than makes up for it, with P/E of 4.87 and EV/EBITDA of 2.88 being outstandingly low. With this in mind, we believe that JAKKS Pacific is truly a bargain at these prices.
Risks
A great risk factor associated with JAKKS Pacific’s business pertains to its substantial reliance on licensing agreements for trademarks, trade names, and brand identities owned by external entities, consuming a significant portion of its overall net sales. These license arrangements necessitate the company to uphold minimum royalty payments, irrespective of actual sales performance, a commitment that persists even during adverse market conditions or unexpected events like the COVID-19 pandemic. Furthermore, select license agreements to impose obligations concerning marketing expenditure and restrict deductions from the sales base utilized in calculating royalties. The inability to achieve specified sales targets could lead to nonrenewal or forfeiture of licenses, thereby exerting a detrimental impact on JAKKS Pacific’s business and financial well-being. The fixed and typically multi-year nature of minimum annual royalty payments introduces the risk of being burdened with fixed costs even in instances of sudden market disruptions.
JAKKS Pacific faces a notable risk due to its massive reliance on seasonal sales, primarily concentrated in the holiday shopping season from September to December. This concentrated demand cycle, combined with the growing impact of e-commerce and evolving retail inventory strategies. Raises the company’s exposure to fluctuations in consumer behavior. The company’s challenge lies in efficiently fulfilling orders during this intense period, which transfers a substantial portion of inventory-related risks and carrying costs to suppliers like JAKKS Pacific. The necessity for fast supply operations during these condensed timelines introduces operational risks such as shipping delays and potential lapses in quality control. Accurately forecasting consumer demand during the holiday season is crucial, as inaccuracies could lead to underproduction or overproduction of products impacting sales.
Conclusion
We are optimistic on JAKKS Pacific’s ability to continue acquiring licensing agreements and keeping its debt at cheaper and lower levels than before. With their valuation being so unusually low, we rate this JAKKS Pacific a strong buy.
For further details see:
JAKKS Pacific: Licensing Opportunities And A Relatively Cheap Valuation Make It A Strong Buy