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Last March, I took JAKKS Pacific (NASDAQ:JAKK) to “Strong Buy” saying that its long-term story was intact and that the stock had been thrown into the deep discount bargain bin. The stock is up over 85% since then. More recently in December, I wrote that investors continue to not give the company credit for the turnaround that CFO John Kimble has helped orchestrate and that the stock is undervalued. With the stock taking a big haircut following its Q4 results, let’s take a closer at the name.
Company Profile
As a reminder, JAKK is a toy company. It designs and produces branded, private label toys, and licensed toys from brands such as Disney (DIS) and Nickelodeon. Walmart (WMT) and Target (TGT) are JAKK’s two largest customers, with each representing more than 25% of its sales.
Q4 Earnings
For Q4 reported at the end of February, JAKK saw its revenue decline -3.4% to $127.4 million. That handily just missed analyst estimates calling for sales of $128.7 million.
By category, Dolls, Role-Play/Dress Up was up 6.3% to $73.3 million, while Outdoor/Seasonal Toys saw revenue rose 4.0% to $10.3 million. Action Play & Collectibles fell -9.2% to $35.3 million, while Costumes plunged -39.7% to $8.5 million.
North American revenue dropped -4.5% to $101.9 million while International sales edged up 0.8% to $26.4 million. Latin America was once again a standout, seeing sales soar over 68.8% to $4.4 million, while Asia was also strong, with sales up 26.0% to $2.1 million. Europe was weak, as sales fell -7.5% to $18.0 million, while Australia & New Zealand sales sank -18.4% to $1.5 million.
Gross margins jumped 480 basis point to 26.5%. Sequentially, gross margins were down -800 basis points.
G&A expenses, meanwhile, were 12% higher to $34.4 million.
Adjusted EPS came in at -$1.04, up from -$1.42 a year ago. Analysts were expecting adjusted EPS of -$1.14.
Adjusted EBITDA improved to -$10.9 million from -$12.1 million a year ago.
Inventory was down -35% year over year to $52.6 million. Inventory turnover fell to 52 days sales of inventory from 72 DSI a year ago.
The company ended the quarter with $72.4 million in cash and zero debt.
As is common practice, JAKK did not offer formal guidance.
Discussing the current environment of its Q4 earnings call, CEO Stephen Berman said:
“For the fifth consecutive Q1, we find ourselves wondering about the outlook for the economy and more specifically the implications for the average consumer. A new overlay this year is a bit of a new film and TV desert resulting from the various entertainment industry work stoppages of 2023, along with streaming providers taking a more thrifty view of their investment levels. Although that backdrop doesn’t make doing solid business easier for anyone this year, we do feel we are better set up for success more than most. Our focus on tried and true evergreen play patterns, brands and category serves us well in times like these. These are the businesses that often float to the top of the market’s priority list when there’s nothing being crowded out by some of the large one-off promotional events or activities. … With that view, we’re once again set up for a solid year. That’s not to suggest that we are immune to the larger dynamics. Over the past two springs, we have greatly benefited from high product lines driven by blockbuster April film releases, driving sales tied to the movie, as well as supporting and expanding our year-round business for those brands. Those are difficult numbers to replace and a business like our costume business is often led by the latest blockbuster films. And the relatively light volume this year tends to lead to a somewhat softer overall business.”
JAKK’s Q4 is much smaller than its Q3 quarter, when it ships its toys ahead of the holiday season, so the overall quarter itself was fine. Sales were down slightly, but it saw a nice year-over-year boost in gross margins. Meanwhile, the company continues to do a nice job on the inventory front.
What investors didn’t like was the company talking about 2024 being a bit tougher due to a weaker movie slate. In 2023, the company nicely benefited from the Super Mario Brothers movie, while the year before it was Encanto. At the same time, I think the company could be underselling the 2024 movie slate, which includes potential with the likes of Minions 4, Moana 2, a new Ghostbusters movie, Kung Fu Panda 4, and Sonic the Hedgehog 3, all of which the company has licenses with. Moana was a big hit for the company, so I’m not sure why the second movie would be different. Yes, Moana and Sonic are later in the year, but they could still be big holiday sellers.
Valuation
JAKK trades 3.4x the 2024 consensus EBITDA of $63.7 million and 2.4x the 2025 consensus of $89.9 million.
It trades at a forward PE of 6.5x the 2024 consensus of $3.96. Based on 2025 analyst estimates of $4.68, it trades at 5.5x.
JAKK is projected to see its revenue decline -6% in 2023. Revenue is projected to grow 11.7% in 2025.
Comparatively, fellow toy maker Hasbro (HAS) trades at 9.5x 2025 EBITDA consensus of $1.05B and a nearly 12x PE based on 2025 estimates. Mattel (MAT) trades at 7.7x 2025 EBITDA estimates of $1.07 billion and a PE of nearly 13x based on 2025 estimates.
I continue to see no reason that JAKK should trade at such a huge discount to HAS and MAT given the turnaround at the company.
At a 5-7x EV/EBITDA based on 2025 estimates multiple, JAKK would be a $48-67 stock.
Conclusion
The sell-off in JAKK looks very overdone in my view. The company turned in a solid 2023, but indicated 2024 could be tougher due to the movie slate. However, I think they could have been downplaying the movie slate a bit as it still has some nice potential licensed toy opportunities this year, especially with Moana 2, which comes out around Thanksgiving. The movie slate is more Q4 weighted, but so is the toy and costume selling season. Meanwhile, the company will start to see the benefits of its deal with Authentic Brands begin later in the year.
JAKK remains one of the cheapest stock around. If the stock price isn’t going to reflect this, the company should consider putting itself up for sale. I continue to rate the stock a “Strong Buy” with a $50 target, which I feel is at the low end of the range of its fair value. I would be a buyer on this weakness. It’s also worth remembering that the last time the stock had a big earnings related sell-off was nearly a year-ago when JAKK reported its 2022 Q4 results. Investors who bought the sell-off then did very well over the next year.
The biggest risks to the stock are a weak economy and lack of blockbuster kid movies hurting sales. Higher ocean freight costs hurting margins are another risk. The biggest catalyst for the stock is sales outperforming low expectations helped by Moana 2 and other kids movies, as well as contributions from its Authentic Brand partnership.
