BACK in March, I got the JAKKS Pacific (NASDAQ:jacket) to “Strong Buy” saying that its long-term history was intact and that the stock had been thrown into the deep bargain bin. I followed him in May saying that the stock was still very undervalued. With the stock nearly doubling since my upgrade to Strong Buy, let’s take a closer look at the name.
As a quick refresher, JAKK designs, manufactures and distributes its own and private label toys, as well as licensed toys from brands such as Disney (DIS) and Nickelodeon. The company sells its toys primarily through the retail channel, with Walmart (WMT) and Target (TGT) being its two largest customers with over 25% of sales each.
For the third quarter, JAKK saw its revenue decrease -4.1% to 309.7 million dollars. The first analyst easily evaluates the calls for sales of $283.3 million.
By category, Dolls, Role-Play/Dress Up fell -26.9% to $139.2 million, while Outdoor/Seasonal Toys saw revenue -2.2% to $13.1 million. Action Play & Collectibles grew 42.5% to $93.7 million, while Costumes increased 19.4% to $63.7 million.
North American revenue fell -3.9% to $256.4 million, while international sales fell -5.3% to $53.4 million. Latin America stood out again, seeing sales grow over 61.2% to $15.3 million.
Gross margins increased 600 basis points to 34.5%. Subsequently, gross margins increased by 380 basis points.
G&A expenses, meanwhile, were 15% higher at $33.8 million.
Adjusted EPS came in at $4.75, up from $3.80 a year ago. Analysts were expecting adjusted EPS of $3.38.
Adjusted EBITDA increased 13% to $67.1 million from $59.3 million a year ago.
Inventory fell -37% year over year to $68.8 million. Inventory turnover fell to 31 days inventory sales from 44 DSI a year ago.
The company ended the quarter with $96.3 million in cash and zero debt.
As is common practice, JAKK has not provided formal guidance.
Discussing his current environment Third quarter earnings callCEO Stephen Berman said:
“Now we’re moving on to talking about what we’re seeing in retail. On the toy side, it’s been that way all year and it continued this past quarter when we look at our data and the shared data. We see the toy portion of our business continuing to outperform the overall US industry. The same has been true with some of our European markets where we also see shared data. Of course, some great content from our studio partners is helping to drive people to sign up this year, just like last year. But overall, we’ve been pleased with how the overall portfolio is performing this year, as we said last quarter. That said, in the third quarter, we saw a slowdown in retail sales. Retail sales in our top three US accounts were down low single digits year-over-year and down high single digits quarter over quarter. Separately at the end of the quarter, same-account retail inventory fell over 20% year-over-year, meeting their goals to end the calendar year at lower inventory levels. As we work through this transitional year in retail, we have managed to stay in stock in all of our key product segments and are well positioned to meet demand in the fourth quarter.”
The company also announced a multi-year worldwide relationship with Authentic Brands Group, which owns brands such as Roxy, Quiksilver, Element, Forever 21, Juicy Couture and Sports Illustrated. JAKK will begin with an introduction of branded skateboards for Quicksilver and Elements in the fall of 2024. It will also look to release roller and inline skates and beach accessories, as well as a line of dolls “filled with fashion elements from Forever 21, Juicy Couture, Prince, Sports Illustrated and Roxy.” The company said the spring-summer nature of the business will help balance out traditional Halloween/holiday seasonality.
JAKK also announced that it will create a new line of toy products based on The Simpsons that will debut in the fall of 2024. In addition, it entered into a new deal with Sega to support its Sonic Hedgehog 3 feature film that will to be released in December 2024.
This was a good quarter from JAKK, highlighted by its strong margin expansion. The company benefited from lower freight costs like many companies, but gross margin improvement has been a big priority for the firm and its gross margins of 32.5% year-to-date are the best in more than a decade .
The company has also done a great job of building its suiting business, which really showed during the quarter. Her Action Play & Collectibles business has also caught fire and doubled as of 2021.
Now there has been a slowdown in retail given the pressure on the consumer, but both the channel inventory and its inventory are in really good shape, showing how well the company is being managed.
Looking ahead, the licensing deal with ABG looks to have the potential to be a strong deal for JAKK’s external business over time, while the Simpson deal should have a good impact next year and help continue of the momentum of her Action Play & Collectibles business.
JAKK trades at 2.5 times 2023 consensus EBITDA of $86.3 million and 2.8 times 2024 consensus of $76.3 million.
It trades at a forward PE of 5.2 times the 2023 consensus of $5.31. Based on 2024 analyst estimates of $4.78, it trades at 5.7x.
JAKK is projected to see its revenue decline -9% in 2023 after growing 23% in 2022. Revenue is projected to grow 3% in 2024.
By comparison, fellow toymaker Hasbro (THERE) trades at 8.9x 2024 EBITDA of $1.12 billion and an over 11x PE based on 2024 estimates. Mattel (matt) trades at 8.8x 2024 EBITDA of $1.03 billion and a PE of 13.2x based on 2024 estimates. Both are projected to generate low-to-mid single-digit earnings growth, similar to JAKK.
I see no reason for JAKK to trade at such a steep discount to HAS and MAT given the turnaround in the company. At a 6x EV/EBITDA multiple, JAKK is a $50 stock, which is still a significant discount to its peers.
Despite nearly doubling since I upgraded the stock to Strong Buy, JAKK still remains incredibly cheap, as investors continue to not credit the company for the turnaround that CFO John Kimble helped orchestrate. The company has greatly improved its margin profile and its inventory position is extremely well managed, both in what it carries and in the channel.
At the same time, the company has been growing its Action Play & Collectables and Costume segments nicely, while it just made a major licensing deal to help its struggling Outdoor segment. While the consumer and macro environment is a risk, overall, I really like what I’m seeing with JAKK. I continue to rate the stock a “Strong Buy” and think there is upside to above $50.