JAKKS Pacific Drops to 52-Week Low: What's Pulling it Down?

Shares of JAKKS Pacific, Inc. JAKK hit a 52-week low of $2.25 on Dec 27. The stock has declined a massive 54.4%, year to date in contrast to the industry’s gain of 42.4%.

Currently, JAKKS Pacific faces quite a few challenges. Let’s have a look at the factors that have resulted in the new low for the stock.

Challenging Retail Environment

The company is bearing the brunt of declining demand for traditional toys. The retail environment for toys is marked by lower consumer confidence, especially in Europe, where the economic/political conditions are anticipated to be more tough post Brexit.

In the United States, despite moderate improvement in economic growth, consumers are raising their discretionary spending only modestly as the surge in job growth is yet to translate into significantly higher wages.

Consumer spending uncertainty remains a lingering concern because of higher health care costs and reduced credit availability. Therefore, customers are reducing non-essential purchases, thereby hurting JAKKS Pacific’s revenues.

Lowered Guidance for the Full Year

JAKKS Pacific had to lower its 2017 guidance owing to a bankruptcy filing by its partner and retailer, Toys ‘R’ Us. The company now expects to incur a net loss and record negative earnings per share for the full year.

Also, though it continues to expect positive EBITDA for the year, the figure is anticipated to be lower year over year. Though the company expects Toys ‘R’ Us to be a healthier retailer 2018 onward, the near-term effects of the bankruptcy and consequent stalling of shipments will weigh on its performance.

Margins to Stay Under Pressure

The company is experiencing increased costs related to international expansion, development of new IP and acquisitions. These initiatives are adding to its expenses without any material impact on revenues. Unless the trend reverses, JAKKS Pacific’s margins will remain under pressure, despite several cost-containment efforts.

JAKKS Pacific, Inc. Gross Margin (TTM)

JAKKS Pacific, Inc. Gross Margin (TTM) | JAKKS Pacific, Inc. Quote

Analysts Pessimistic As Well

The company has incurred losses in eight of the trailing 11 quarters. Moreover, the Zacks Consensus Estimate for the bottom line has declined from earnings to loss for the current quarter as well as the current year in the past two months. Given the challenging retail environment for toys, which is hurting the company’s sales, we remain doubtful about notable improvement in the stock's performance.

Zacks Rank and Stocks to Consider

JAKKS Pacific has a Zacks Rank #4 (Sell).

Some better-ranked stocks in the Zacks Consumer Discretionary sector include Hilton Worldwide Holdings HLT, Choice Hotels International CHH and Intercontinental Hotels Group IHG, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings per share growth rate for Hilton Worldwide, Choice Hotels and Intercontinental Hotels is projected to be 5%, 9.5% and 9.3%, respectively.

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