JAKKS Pacific Banks On Alliances, New Products, Risks Stay

On Jun 19, we issued an updated research report on the multi-brand toy and consumer products company, JAKKS Pacific, Inc. (NASDAQ:JAKK) .

Though the company has solid long-term growth potential but the risks from near-term headwinds might restrict its growth momentum.

Prospects

For 2017, JAKKS Pacific expects higher net income, earnings per share and adjusted EBITDA on lower net sales compared with 2016. Moreover, the company anticipates enhanced profitability in 2017, given continual focus on building its base of evergreen brands and categories as well as entering new categories, creating a strong portfolio of new and existing licenses, and developing owned IP and content.

We are particularly positive on the company’s innovative partnerships and joint ventures that should help JAKKS Pacific gain market share in a competitive industry. Additionally, the company’ strategic acquisitions is likely to aid in entering new categories.

JAKKS Pacific’s collaborations with Disney, Skechers, Nickelodeon, Cabbage Patch Kids to manufacture toys and merchandise related to these brands should drive growth. Furthermore, the company’s licensing agreements with popular movie and television franchises are expected to boost sales as merchandise based on movies enjoys immense popularity. Notably, since the beginning of the year, it has entered into multiple licensing agreements spanning across varied product lines, which are all set to hit stores in the near term and add to the top line.

JAKKS Pacific also remains committed to diversifying its footprint outside the U.S. in various key markets and currently operates in 65 countries, worldwide. Notably, the expansion initiatives are likely to strengthen its international presence as well as customer base and thereby aid in growing sales, profit margins and the company’s access to attract licenses.

Meanwhile, in order to cash in on the demand for smartphone gaming, the company has introduced a number of mobile gaming apps and digital games, along with the physical toys, which would help the company. Moreover, JAKKS Pacific’s investment in digital innovation will help in brand building apart from helping the company to capitalize on the increasingly lucrative technology-based gaming market. Additionally, the company has realized the importance of online retailing and has shifted a great amount of focus to aggressively growing online sales.

Challenges

However, shares of JAKKS Pacific have declined 49.5% in the last one year against the Zacks categorized Toys/Games/Hobby Products industry’s gain of 35.6%.



It is to be noted that a challenging retail environment for toys due to lower consumer confidence is a major concern for JAKKS Pacific as well as other leading toy makers like Hasbro, Inc. (NASDAQ:HAS) and Mattel, Inc. (NASDAQ:MAT) . Currently, customers are reducing non-essential purchases, which in turn is hurting toy makers’ revenue. Continuous competition from technology-based gaming companies like Electronic Arts, Inc. (NASDAQ:EA) and Activision Blizzard, Inc. (NASDAQ:ATVI) has also been posing a significant threat to the market position of toy makers like JAKKS Pacific.

Meanwhile, as the U.S. dollar continues to show strength against various other currencies, the negative currency impact is likely to hurt revenues, given the company’s considerable international presence. Moreover, the British Pound’s plunge in value since the Brexit vote is impacting JAKKS Pacific’s revenues. In fact, the company expects 2017 revenues to be lower than last year for foreign exchange movements can be cited to be the primary reason.

Additionally, the company is experiencing increased costs related to international expansion, development of new IP and acquisitions. In fact, JAKKS Pacific noted that in the first quarter of 2017, these initiatives added greatly to expenses without the offsetting benefit of having any material impact on revenue growth. We believe that unless the trend reverses, the company’s margins will remain under pressure, despite several cost-containment efforts.

JAKKS Pacific currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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