Yahoo Finance JAKKS Pacific (JAKK) Stock Plunges 48% in 6M: Hold or Fold?
Shares of JAKKS Pacific, Inc. JAKK have declined 48.4% in the past six months against the industry’s 1.1% growth. The company has been witnessing strong headwinds from seasonality, increased SG&A spending and shifting of market dynamics. Also, woes related to fluctuations in cash flows linger.
Let’s look at JAKK’s earnings estimate revisions to get a clear picture of what analysts are thinking about the company. Earnings estimates for the fiscal 2024 and 2025 have been revised downward by 21.8% and 11.5%, respectively, in the past 60 days.
Let’s delve deeper.
Key Concerns
Margin Pressures: JAKKS Pacific is increasing its spending on infrastructure and SG&A (Selling, General, and Administrative expenses), particularly in Europe and Mexico. While investments are aimed at long-term growth, they contribute to higher expenses in the short term. This can make the company’s financials look less appealing, especially in lighter quarters. The company acknowledges that the investments are not a straight line to success and that involves a degree of testing and learning. This further paves the path for risk and uncertainty. Investors should be wary of these elevated expenses and their impact on the bottom line. During the fiscal first quarter, SG&A expenses came in at $42.4 million compared with $35.8 million reported in the prior-year quarter.
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JAKKS' seasonal and costume divisions have faced significant challenges. High container costs, inventory backups and retailers’ critical views on allocating floor space have hindered the seasonal business. The costume business is struggling to find stability in a post-COVID scenario, adding to the company's woes.
Seasonality and Financial Volatility: JAKKS Pacific consistently operates on three different timelines simultaneously within the industry. They are shipping products to customers who are selling to consumers daily, previewing 2025 products to retailers and brainstorming new initiatives and opportunities. The operational reality often conflicts with quarterly financial reports, making it difficult for investors to gauge the company's true performance.
Operational Challenges: The bankruptcy of major customers like Toys R Us in recent years drastically changed the market dynamics for JAKKS Pacific. Despite efforts to tighten focus on core business and improve margins, the market shifts continue to pose challenges. The company’s reliance on new entertainment releases to drive sales adds another layer of risk. If the releases fail to meet expectations, JAKKS's financial performance could be adversely affected.
Cash Flow Concerns: JAKK initiated a strategic move with the redemption of the company’s preferred shares to clean up their balance sheet following a challenging recapitalization in 2019. While the move demonstrated a commitment to financial health, the company used over half of its cash on hand, heading into a tight liquidity season. This depletion of cash reserves raises concerns about their ability to navigate unanticipated market disruptions without jeopardizing overall liquidity. As of Mar 31, 2024, the company’s cash and cash equivalents (including restricted cash) were $35.5 million compared with $38.3 million as of Mar 31, 2023. With only $22 million in cash on hand as of Apr 22, 2024, the company’s financial flexibility is significantly constrained, which could be problematic if unexpected costs arise.
Our Take
Investors are advised to consider selling or postponing new purchases of JAKK stock, given the array of challenges and its substantial decline in stock price. The company's financial instability, exacerbated by margin pressures, seasonal fluctuations, operational hurdles and cash flow issues, categorizes it as a high-risk investment. The downward revision of earnings estimates underscores the company’s uncertain growth potential.
Although the company initiated efforts to improve its financial health and focus on long-term growth, the current challenges outweigh the positive steps. It might be prudent for investors to wait for a better entry before considering an investment in JAKKS Pacific.
Zacks Rank & Stocks to Consider
JAKKS Pacific has a Zacks Rank #5 (Strong Sell).
Some better-ranked stocks in the Zacks Consumer Discretionary sector include:
Royal Caribbean Cruises Ltd. RCL currently carries a Zacks Rank #2 (Buy). RCL has a trailing four-quarter earnings surprise of 18.3%, on average. RCL’s shares have surged 52.7% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for RCL’s 2024 sales and earnings per share (EPS) indicates a rise of 16.9% and 64%, respectively, from year-ago levels.
AMC Entertainment Holdings, Inc. AMC currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 38%, on average. The stock has gained 70.5% in the past three months.
The Zacks Consensus Estimate for AMC’s 2025 sales and EPS suggests an improvement of 12.9% and 42.3%, respectively, from the year-ago levels.
Strategic Education, Inc. STRA currently carries a Zacks Rank #2. STRA has a trailing four-quarter earnings surprise of 36.2%, on average. The stock has surged 69.6% in the past year.
The Zacks Consensus Estimate for STRA’s 2024 sales and EPS indicates an increase of 6.4% and 33.3%, respectively, from year-ago levels.
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Royal Caribbean Cruises Ltd. (RCL) : Free Stock Analysis Report
Strategic Education Inc. (STRA) : Free Stock Analysis Report
JAKKS Pacific, Inc. (JAKK) : Free Stock Analysis Report
AMC Entertainment Holdings, Inc. (AMC) : Free Stock Analysis Report
