2023-05-19 06:19:05 ET
Summary
- JAKKS Pacific did what it needed to do in Q1, improving its inventory position and gross margins.
- The company has a number of tailwinds, despite a more difficult consumer environment.
- I continue to see an upside to $50 for JAKK stock.
With shares of JAKKS Pacific ( JAKK ) of over 60% since I upgraded the stock to "Strong Buy" back in March, let's take a closer look at the company's most recent earnings report. My initial write-up on the stock can be found here .
Q1 Earnings
For Q1, JAKK saw its revenue decline -11.1% to $107.5 million. The company edged past analyst estimates calling for sales of $106.0 million.
On its Q1 earnings call , CEO Stephen Berman said:
We had a massive revenue growth last year, led by the breakout success of our holiday 2021 film property. Although that business is still selling through very nicely at retail, it's an exceptionally challenging number to anniversary as the performance was a multiple of what we would normally see from a new film with new IP. That being said, this quarter's sales level in excess of $100 million marks the first time since 2008, 2009 that we posted $100 million plus first quarters and back-to-back years, which is a great result."
By category, Dolls, Role-Play/Dress Up was down -22.8% to $47.8 million, while Outdoor/Seasonal Toys saw revenue plunge -29.9% to $12.2 million. Action Play & Collectibles fell climbed 19.5% to $37.8 million, while Costumes slipped -1.7% to $9.6 million.
North American revenue dropped -15.9% to $84.5 million, while International sales jumped 12.4% to $23.0 million. Latin America was a standout, seeing sales soar over 285% to $9.2 million.
Gross margins rose 450 basis point to 29.2%. Sequentially, gross margins soared 750 basis points. The company said it saw drastically lower container and import costs, and that it has eliminated most of its temporary warehouse capacity, which hurt Q4 margins. Lower container costs helped margins by 700bps year over year, while product margins were a 150bps drag and higher royalty expenses were a 100bps headwind.
SG&A expenses, meanwhile, were 16.6% higher to $35.8 million.
Adjusted EPS came in at loss of -40 cents. Analysts were expecting a loss of -$1.05. JAKK posted a -28 cent EPS loss a year ago.
Adjusted EBITDA came in at a loss of -$1.1 million versus $1.9 million a year ago.
Inventory was down -25% year over year to $64.0 million, and -21% lower sequentially. Inventory turnover fell to 76 days sales of inventory from 84 DSI a year ago.
The most important thing this quarter, which is a traditionally small quarter for JAKK, was the company taking down excess inventory. This also plays a part on the nice sequential margin improvement the company saw. So overall, the company did what it needed to do in Q1 to set itself up for the rest of the year.
Outlook
As is common practice, JAKK did not offer formal guidance. For their part, the three covering analyst are expecting the company to generate full-year revenue of $798 million, representing growth of 1%.
The analyst consensus is for adjusted EPS of $4.66, up from $4.28 a year ago.
Looking forward, management was very upbeat about its opportunity with Nintendo off the strong showing of the Super Mario Brothers movie. On the call, Berman said:
A related piece of exciting news is the reaction to the new Super Mario Brothers movie. As you likely have read, the film had the biggest box office opening of any animated film in history with a worldwide gross now exceeding $0.5 billion in just a 3-week period, which is simply amazing results. We have had a decade-long relationship with Nintendo, and it's a cornerstone of our action play and collectible business. That division reported sales up 19% this quarter, totaling $37.8 million globally. Films-specific product was on shelf at the end of February and March sell-through has been very, very impressive, both the product as well as our evergreen year-round Nintendo business. We have planned a total Nintendo business Movie and Classic to be extremely strong this year. We are working extremely close with our customers around the globe to ensure that they prioritize this opportunity in the second half in light of the film's off-the-chart performance as well as preparing for the streaming launch. Lastly, we are chasing additional opportunities in the Hollywood costume business for the Nintendo line as well. … Nintendo has always been a meaningful part of our international business. So, some of the enthusiasm which we have been sharing as it relates to our international growth potential has been mindful that this film has been in the works and will further raise the visibility of our overall business. ….
Lastly on the product. As I mentioned previously, we are seeing extremely strong momentum globally for both the Nintendo movie products and the classic Nintendo product lines. We have been aggressively working directly with many factories to increase overall production with increased tooling capacities as well as increased labor force at the factory levels, thus, to increase the global supply demand. Even with the exceptional strength and momentum of our Nintendo product lines, we are continuing to see the Sonic business remaining strong with continuous strong sell-in and sell-throughs."
In addition to Nintendo, JAKK also has Disney's ( DIS ) live-action Little Mermaid movie coming out, where it will have dress-up, role-play toys and large dolls in support of the movie. It also has the DIS animated-movie Wish coming out in the fall to look forward to, which it will support with toys as well. The company also said that its core Disney Princess and private label business are doing well.
The gross margin story will continue to be important, and on that front the company thinks gross margins can continue improve, but at a slower pace. It said it should see improving freight costs, while the product margin line will be more of a fight. It will then come down to how it manages inventory and how well its products are selling through at retail.
On the balance sheet front, the company will have an opportunity to take out its $30.2 million term later this year. The prepayment of the loan will drop from 3% to 1% in June, and given that this is a high-interest variable loan, it would make sense for the company to pay it off given that it currently has net cash on the balance sheet. That will save the company over $3 million in year interest payments, which is over 30 cents in EPS.
Overall, JAKK will face tough comps from a year, as well as a slowing consumer. However, a solid inventory position, lower freight costs, and lower interest expense are all positives. If what looks like pretty good movie slate this year can power toy sales, the company should be in good shape.
Valuation
JAKK trades at 3.2x the 2023 consensus EBITDA of $75.3 million and the 2024 consensus of $75.9 million.
It trades at a forward PE of under 5x the 2023 consensus of $4.66. Based on 2024 analyst estimates of $4.73, it trades at 4.8x.
Since my initial write-up, JAKK's EPS estimates for 2023 and 2024 have risen, as has its 2023 EBITDA estimate. The 2024 EBITDA consensus is down slightly.
Conclusion
JAKK did a nice job of quickly straightening out its margin issues and getting its inventory to where it needed to be as we enter a more difficult consumer-spending environment. With a strong balance sheet, the company is in a much better position than it has been in many years. Meanwhile, it still has some tailwinds, as referenced above, as well as opportunities given its relationship with Nintendo and the upcoming Little Mermaid movie.
JAKK still isn't getting the credit it deserves following the improvements the company has made under CFO John Kimble, in my view. There is absolutely no reason the stock should be trading at the valuation it is currently at, which is what a severely stressed company might trade near.
I still think the company should trade around $50. That said, I'm not big "Strong Buy" rating type of person, saving that for only a few opportunities that pop up, like following JAKK's Q4 earnings sell-off. As such, with the stock up over 60% since then, I'm going to take my rating back to "Buy."
For further details see:
JAKKS Pacific: The Stock Remains Grossly Undervalued