JAKKS Pacific, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. JAKKS designs, markets and distributes toys, consumer products and costumes. The company cautions that results are seasonal and interim results may not indicate full-year performance.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $90.1 million | $107.5 million |
| Gross profit / gross margin | $21.1 million / 23.4% | $31.4 million / 29.2% |
| Operating loss | $21.3 million | $4.4 million |
| Net loss | $14.2 million | $5.3 million |
| Net loss attributable to common stockholders / diluted loss per share | $13.2 million / $1.27 | $5.7 million / $0.58 |
| Cash used in operating activities | $12.9 million | $4.1 million |
At March 31, cash and cash equivalents were $35.3 million, restricted cash was $0.2 million, and working capital was $67.1 million. Total liabilities were $136.1 million. There was no borrowing outstanding under the $67.5 million JPMorgan revolving facility; reported excess availability was $57.8 million, with $9.4 million of letters of credit. The company reported compliance with facility financial covenants. Its former term loan had been repaid in 2023.
Investing activities used $3.6 million, principally for property and equipment and deferred-compensation trust investments. Financing activities used $20.0 million for the preferred-stock redemption. Cash, cash equivalents and restricted cash decreased by $37.1 million during the quarter, including the effect of foreign currency translation.
Changes versus the prior comparable period
- Sales fell 16.2% year over year. Toys/Consumer Products sales declined 15.3% to $82.9 million; Costumes sales declined 25.0% to $7.2 million.
- Management attributed lower toy sales primarily to weaker North American sales, lower Disney sales, and the absence of sales associated with the Super Mario Movie release in April 2023. Costume sales were affected by reduced orders for certain recurring costumes.
- Gross margin fell to 23.4% from 29.2%. Management cited a lower mix of higher-margin movie-related products and increased reserves on slower-moving movie-related inventory in Toys/Consumer Products. Costume cost of sales as a share of sales improved, reflecting lower inventory reserves.
- SG&A increased to $42.4 million from $35.8 million, or 47.1% of sales versus 33.3%. The company cited increased headcount and salaries, international expansion, marketing and travel, and IT, process and internal-control costs.
- Operating loss widened, while interest expense decreased to $0.1 million from $3.0 million, mainly because the 2021 term loan had been repaid in 2023.
Outlook, risks and unusual items
- The filing provides no specific quantitative revenue or earnings guidance. Management emphasizes seasonality: sales are generally highest in the third and fourth quarters, while working-capital needs are typically greatest in the second and third quarters. Orders are generally cancellable until shipment, making backlog a potentially unreliable sales indicator.
- On March 11, 2024, JAKKS redeemed all Series A preferred stock for $20.0 million cash and 571,295 common shares valued at $15.0 million. The redemption eliminated the preferred-stock derivative liability and accrued preferred dividends. Common-stockholder loss includes a $1.3 million redemption-related accounting amount.
- Inventory obsolescence reserves rose to $10.1 million from $7.7 million at year-end. Future minimum royalty guarantees were $60.2 million, excluding $7.0 million in advances already paid; $37.6 million was due within 12 months.
- Target and Walmart together represented 53.2% of Q1 sales. The company identifies customer concentration, product demand and forecasting, licensors and vendors, competition, and economic conditions as factors that could affect sales and liquidity.
- Ordinary-course litigation and indemnification matters are disclosed; the filing reports no material quantified exposure for these matters. Management stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales and margins recover as seasonal demand and product mix change, particularly following lower movie-related sales and increased inventory reserves.
- Cash generation and working-capital needs through the seasonal build, including the timing of receivables, inventory, royalty advances and the $37.6 million of minimum royalties due within 12 months.
- Customer concentration and exposure to key licensors and manufacturers, including related-party supplier Meisheng.
- The extent to which higher SG&A reflects continuing costs versus investment-related or temporary spending.
- The MD&A financing discussion appears to mislabel the period for the $20.0 million preferred-stock redemption as 2023; the cash-flow statement and preferred-stock note identify the redemption as occurring in Q1 2024. Verify the period reference against the underlying filing.