Jakks Pacific Inc Q1 FY2025 Earnings Call

Good afternoon, everyone. Welcome to the JAKKS Pacific First Quarter 2025 Earnings Conference Call with management, who will review financial results for the quarter ended March 31, 2025. JAKKS issued its earnings press release earlier today. The earnings release and presentation slides related to today's call are available on the company's recently remodeled website in the Investors section. On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer; and John Kimble, Chief Financial Officer. Stephen will first provide an overview of the quarter and full fiscal year, along with highlights of recent performance and current business trends. Then John will provide some additional comments around JAKKS Pacific's financial and operational results. Mr. Berman will then return with additional comments and some closing remarks prior to opening up the call for questions. Before we begin, the company would like to point out that any comments made about JAKKS Pacific's future performance, events or circumstances, including the estimates of sales, margins, earnings and/or adjusted EBITDA in 2025 as well as any other forward-looking statements concerning 2025 and beyond are subject to safe harbor protection under federal securities laws. These statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult JAKKS' most recent 10-K and 10-Q filings with the SEC as well as the company's other reports subsequently filed with the SEC from time to time. In addition, today's comments by management will refer to non-GAAP financial measures such as adjusted EBITDA and adjusted earnings per share. Unless stated otherwise, the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure within the company's earnings press release issued today or previously. As a reminder, this call is being recorded. With that, I would now like to turn the call over to Stephen Berman.

Good afternoon, and thank you for joining us. We are pleased to report another quarter of solid performance underpinned by the strength and stability of our operations, our financial discipline and the resiliency of our business model in an ever-evolving market environment. As reported, our sales were up 26% in the quarter, led by the success of toys from films like Sonic the Hedgehog 3, Disney Moana 2, and DreamWorks Animation Dog Man, as well as increases in many of our evergreen product lines. We saw growth in the Disney Princess Style Collection and Frozen as well as a number of new initiatives that were not in the Q1 portfolio last year. Globally, our Dolls, Role Play/Dress-Up business shipped $55.5 million, a 37% increase versus the prior year. Action Play & Collectibles shipped $42.9 million, an increase of 30%. North America in total was 25% ahead of the prior year with international sales up 29%. Our 34.4% gross margin is an excellent result for any quarter, but particularly Q1. Higher volumes associated with successful new releases as well as new product launches increased product margins significantly. We also benefited from higher-quality inventory at retail and in our warehouses. In addition, we continue to scrutinize where and how we are spending to offset unavoidable increases. In total, SG&A was up 1% for the quarter globally, an increase of less than $500,000. Those are the key drivers that contributed to an adjusted EBITDA number for the quarter which is just above breakeven at $400,000. Again, it's a small quarter, but as it's only the second positive first quarter EBITDA we have had in the past 15 years, we're extremely pleased with the performance. At JAKKS, we currently have a lot of strong opportunities for 2025 and beyond, but we'll be taking a very cautious view until the tariff issues are definitively resolved. We have been working with our factory network to selectively hold some goods that were developed to ship to the U.S. so they could be available should import costs reduce substantially. In the meantime, we are aggressively pushing forward to generate additional international shipment opportunities. Teams are engaging customers across the U.K., Western and Eastern Europe, Asia Pacific and Latin America. We know we have the right product portfolio to achieve higher sales and incremental margin. So we're looking to take advantage of any hesitancy that exists around the U.S. market to further accelerate our international growth plan. In addition, we currently have healthy domestic inventory positions, both in the U.S. and selectively internationally. I'll now pass it over to John for some more details on the financials, and then I'll come back to elaborate a bit more about the quarters ahead. John?

Thank you, Stephen, and hello, everyone. A nice first quarter for us, as Stephen has highlighted. Results were pretty much in line with our expectations. We had a few million dollars' worth of sales that might have otherwise found their way into Q2. But generally speaking, we didn't see customers pivoting to try to forward-buy. And similarly, we were not stockpiling inventory. Our business model, and to some extent the industry broadly, wants to keep money tied up as product for as short a period of time as possible, starting with raw material purchasing. So it's not like someone can just turn a dial and make a conveyor belt go twice as fast or whatever one might imagine as it relates to some of these things. There are a lot of steps and activities designed around maximum asset utilization. The first quarter remains our smallest quarter, but we will run you through the highlights as we see them with that in mind. Gross margin dollars were up $18 million in the quarter versus the prior year's Q1. To provide some color and context there, our rough sense of the numbers would be around $6 million generated by higher sales in the quarter. Another $6 million is generated by a favorable comparison to last year's abysmal sell-through of fall '23 product launches. About $2 million is driven by better product margins from new product lines we shipped this year versus what we shipped last year. And the balance, about $3 million, is timing favorability. A little of that is sales-related, and the rest relates to when we flow certain expenses off the balance sheet related to the timing of our importing finished goods into destination markets. Think of it as money is on the balance sheet. It will make its way through the P&L soon enough. SG&A was pretty much aligned with our planning as we had a favorable comparison against some specific projects, which we're starting to wind down at this time last year. That probably helped us out for around a couple of million dollars in aggregate. As Stephen pointed out, adjusted EBITDA for the quarter was $354,000, a notable improvement over the loss of $17.2 million last year. Adjusted EPS was a loss of $0.03 per share, much improved from a loss of $1.09 last year. The share count for that calculation was 11.146 million shares. As mentioned in our release, the Board has approved a $0.25 per share dividend for the second quarter for shareholders of record as of May 30 to be paid on June 27. On the balance sheet side of things, we're happy to be debt-free and not spending time evaluating covenants and coverage ratios and things like that given the forecasting fog that has rolled out across the U.S. Our unrestricted cash balance at the end of the quarter was $59.2 million compared to $35.3 million at this time last year. A big driver of the difference was the $20 million we paid last year as part of our preferred share buyback. As you would imagine, we are carefully monitoring our working capital given the current disruption to the normal course of business. We've received some outreach asking our take on what long-term tariffs would mean for our business and the industry at large. Our perspective is that any lasting tariff on imported product is essentially a consumer tax. The cost will be passed along to the consumer in higher retail prices. There is no magic wallet that is going to pay for it. Our industry has already seen too many factories, wholesalers, and retailers go bankrupt over the past ten years without these additional burdens being in place. With all the players in the industry facing the same cost surge, the medium- to longer-term fallout would be less product innovation as the industry is always positioning itself favorably for impulse and widely accessible purchase occasions. And now I'll pass things back to Stephen.

Thank you, John. At JAKKS, the foundation of our strength has always been twofold: the depth of the experience within our world-class team and the enduring partnerships we've cultivated with our key stakeholders. These relationships have not only stood the test of time but have fueled our collective success. John and I recently traveled to Hong Kong to reinforce these relationships in person. Over several days, we met with our exceptional local team and the leadership from more than half a dozen of our most valued factory partners, many of whom have worked alongside JAKKS for decades. These meetings quickly evolved into dynamic forward-thinking collaborations focused not only on current challenges but on new opportunities to innovate and grow together. As a next step to continue this momentum, we are hosting a factory summit next month at our Santa Monica headquarters. This initiative will give our partners direct access to our marketing, design, and product development teams, fostering closer alignment and driving a shared vision of product-level innovation. Beyond that, it opens the doors to high-level strategic conversations, exploring new business models and long-range growth plans that will propel all parties forward. We have always had a degree of visibility to manufacturing some of our existing product lines outside of China. But historically, our customers have almost always preferred keeping the business in China to secure the lowest possible pricing. Given recent events, we have accelerated and expanded our exploration of alternative sourcing opportunities. But to be clear, China will always be a key production hub for JAKKS given the specialized capabilities developed over decades. These two points are not in conflict as it's often the case that it is our current Chinese vendor base which has begun to diversify their manufacturing footprint into other markets in Southeast Asia and beyond. Our improvement in product margin post-recapitalization has in part been driven by our increased selectivity around product lines we bring to the market and efforts to limit SKU counts. Our focus on opening price points with 50% of our current volume coming from SKUs that historically retailed for $29.99 or less serves us well in this environment. We have been active in developing products for the value trade given the emergence of that channel in the U.S. and Europe, as we discussed on earlier calls. Our rapidly expanding business in Latin America has provided a steady flow of information that is funneling back into our development process to ensure that we are designing the right products with the specific pricing and margin requirements of those customers in mind. With that as a base, we are reviewing our entire product portfolio and ensuring that we are getting maximum leverage out of all the work done to date as we anticipate the higher-priced items will not have the same level of market demand with substantially higher cost of import. This is a prime example of our unwavering focus on controlling what we can and doing so with purpose, precision and partnership. While external forces like tariffs remain outside of our control, we continue to advocate strongly alongside our industry peers for their removal. These tariffs are not only punitive; they stifle business potential and divert focus from our true objectives. In the meantime, we are adapting with resolve. Substantial U.S. domestic price adjustments are necessary to mitigate the impact, and we are making disciplined decisions about which products to import for the Halloween and holiday seasons. We are working closely with our FOB customers to navigate these changes and remain firmly committed to our identity as an FOB-first company. And we are evaluating a range of cost mitigation efforts as it relates to our overhead without jeopardizing the plans we have in place outside of this fiscal year. We have a great lineup of new initiatives at various stages of readiness set to launch over the next 12 months across all of our divisions. And although we are maintaining a positive proactive approach to business development, we think it's somewhat pointless to talk about those product-level efforts until this tariff issue is definitively resolved. We remain extremely positive about the long-term prospects and possibilities for our business and know we will ultimately successfully navigate the current situation over time. Through it all, our path forward is clear with strong partnerships, a proactive approach, and a relentless commitment to excellence. We are well positioned to emerge stronger and remain ready to evaluate and when appropriate, seize new opportunities. Lastly, we would like to take the opportunity to congratulate Nintendo with an unprecedented Switch two presale launch, which speaks to the high quality of Nintendo's IP and Nintendo as a company. And with that, we'll take a couple of questions.

And our first question comes from Eric Beder of SCC Research. Your line is open.

Good afternoon. Congratulations on a strong start to the year.

Thank you, Eric.

Thanks, Eric.

I understand that we are facing very uncertain times, and you may be experiencing this more acutely than we are. When I consider the situation, if the tariff levels remain unchanged, what can we expect for the holiday season regarding product availability? Can you share your predictions on how the holiday season will unfold for different segments, including lower-end, high-end, and mid-range products?

If the China tariff of approximately 144% remains in place throughout the year, we would observe a situation where a lot of lower-priced products are sold at higher overall prices in the United States. In other regions outside the U.S., we would also see lower-priced products available at increased prices across major retail chains, impacting the value chains that would show higher prices concurrently. Ultimately, consumers will bear the brunt of these tariffs, leading to price increases from both our sales and retailers. Therefore, consumers will be the most affected. On a positive note for JAKKS, over 50% of our products are priced under $29.99 at retail, with many even lower than that. We have a strong line of value products that we offer to the value market in the U.S. When expanding into markets like Mexico, Latin America, or China, we encounter different tiers of consumers and plan to use our value products to provide lower price points for them. However, I don't think anyone anticipates that these tariffs will maintain such high percentages in the future. To manage this situation, we are holding inventory while waiting for resolution on tariff issues. Additionally, we have consistently collaborated with manufacturing partners in Vietnam, Cambodia, and Indonesia. It's important to note that in many cases, it's a Chinese manufacturer or vendor that is establishing operations in these countries, rather than local manufacturers who have been there all along. Those who have relocated to these areas typically have experience in our industry.

Got it. Looking internationally, I know that historically international sales have accounted for over 20 percent of our total sales. How does this impact our strategy, especially considering it was a priority for the previous team before the tariffs were implemented? Where do we see the long-term distribution between U.S. and international sales evolving?

We are actively expanding our international efforts, and our business in Latin America has seen remarkable growth. Similarly, our operations in EMEA have also performed well. Currently, our strategy is to mitigate risks arising in the U.S. by directing our teams to concentrate on international markets, thereby increasing both market presence and profitability in those regions. In addition, we have domestic inventory that we had planned for, which we are using to help alleviate some of the financial pressure from tariffs. Thus, our approach is twofold: we continue selling in the U.S. while also strategically targeting international markets as a means to accelerate our growth and offset some effects of the U.S. tariffs.

Are you where you need to be in terms of the infrastructure for this material focus internationally?

Yes. Our team is set up. As we mentioned, a year and a half ago, we moved Jack McGrath, our COO, there to be Head of International. And he understands the company. He's been with me over 25 years. So the plan in place has been, I'd say, not seamless but amazingly strong and well. And his efforts with the team that we've built there and again in Latin America as well are really outperforming, I would say, some of our peers in the market. So we're happy with every way we're structured, our distribution centers that we just moved from Rotterdam to Germany and Italy and Spain. We're really set up well internationally for growth.

Our next question comes from Thomas Forte of Maxim Group. Your line is open.

Great. So first off, Stephen and John, congrats on the quarter and best of luck navigating a challenging environment. All right. So Stephen, feel free to punt on any of these. I'm going to ask questions in like four different categories. So the first category is at the industry level. How should we think about for the toy industry cost borne by the consumer, not the supplier, not the company? So in your prepared remarks, you suggested that it will all be borne by the consumer. And then second, how should we think about the relative demand curve for toys versus other discretionary items? You made some great comments in the past about children's birthdays, things of that nature. So I'd appreciate your thoughts on that group first.

Okay. As we've mentioned, this marks JAKKS' 30-year anniversary, which I co-founded with my partner. Before this, we had THQ, so we've been part of this industry as a public company for a long time. We're not immune to economic downturns. People often describe us as resilient, and that is true. However, with the current economic climate, including layoffs and rising prices, consumers seem a bit hesitant. Although they continue to spend on children, the amounts may be less. As we've pointed out before, spending for birthdays and holidays is still important, not just for a child from a parent, but for the many kids attending birthday parties who also bring gifts. They might spend about the same amount, but they'll get fewer products due to ongoing tariff issues. We're actively working to reduce product costs. I went to China with John to collaborate with our factories on cost-saving strategies, while also seeking concessions. We're in discussions with our retailers to minimize impact, but they are aware that improving profitability and margins is essential. Ultimately, consumers will bear the cost. As John noted in his prerecorded comments, this scenario can be viewed as a tax. The most expensive items are likely to be the hardest to sell. We're adjusting our approach to some high-priced items, like vanities and kitchens, knowing these might be too costly for consumers this year. Therefore, we are developing lower-priced versions that still provide kids with playability and enjoyment.

Okay. So for my next set, feel free to comment on these, either at the industry level or company-specific. So it's the ability to move manufacturing outside of China, the ability to source items from the U.S. and the ability to launch more products at lower price points.

Sourcing the majority of our items in the U.S. won't happen. We do have a strong partnership with Cra-Z-Art, who has significant manufacturing capability in the U.S. that we can use for certain products like tables, chairs, and large plastic items. However, most of our products will be sourced from Asia. We have historically worked with manufacturers in Vietnam, Cambodia, Indonesia, and Mexico, but the main expertise and capabilities remain in China. The Chinese manufacturers I mentioned earlier are establishing operations in Indonesia, and we will collaborate with them as their skills improve. Overall, our sourcing will primarily be from China and Asia, and to a lesser extent, Mexico, with minimal sourcing in the U.S. While we have some flexibility, the skills needed for toy manufacturing are crucial. Safety is a top priority, and China has a proven track record in this area. We will not compromise on safety simply to save on costs; ensuring the safety of children is our foremost concern.

Any quick comments on lower price points?

We are focusing on lower price points. Our teams have analyzed our various categories, and we are seeing growth in the boys' action figure segment, which includes brands like Sonic, Nintendo, and The Simpsons. For now, we are prioritizing selling lower-priced figures over higher-priced ones due to the pricing situation, which may offer less value for money. However, children will still enjoy playtime with these figures at a lower cost. We are also incorporating our value lines from Latin America and Asia here in the U.S. to support these lower price points as much as possible at major retailers. Typically, these value lines cater to the value-conscious consumer.

Excellent. So two more groups. So you've had an amazing run with licensed film and product tied to that, Sonic being a great example. Dog Man, crushed it. So how are tariffs impacting the visibility on licensing film IP? And is there any silver lining, meaning that maybe others are more nervous and you can take advantage of the opportunity?

That's a good question. We are actively engaged in our licensing partnerships and have expanded many of these agreements. I'm confident there will be updates this year regarding new licenses we've secured. We're observing that some companies are currently facing challenges due to tariffs. This environment can present new opportunities, and during these tougher times, positive developments can arise. One of our significant strengths is that we have no debt and substantial liquidity, along with a solid bank facility. This environment can be advantageous for JAKKS, allowing us to explore various licensing and product category opportunities while other companies struggle with their debts, which may complicate their situation further.

Excellent. And then last one. In a similar vein, is this changing the opportunities from a strategic M&A standpoint, maybe creating some new ones that weren't around a couple of months ago?

I would say, yes, we are getting quite a bit of reach from banks and individuals regarding opportunities. I think this time, it's scaring a lot of companies that have gone through the COVID issue and now they're going through the tariff issue. And some of these companies are having a more difficult time during this tariff than they did in COVID. So there are opportunities that are out there. And I think the longer this goes, the more opportunities there will be.

This concludes the question-and-answer session. I would now like to turn it back to Stephen Berman for closing remarks.

Ladies and gentlemen, thank you for the time today. We are very proud with our quarter. We're very proud of our company. And we are excited for this year to continue and move forward and resolve the tariff issues and go back to what we do best: building JAKKS around the world. Thank you very much.

This concludes today's conference call. Thank you for participating, and you may now disconnect.