When Mattel Inc. unveiled a line of action figures based on the pumped-up stars of World Wrestling Entertainment, some might have seen it as a smackdown for its smaller crosstown rival Jakks Pacific Inc., the previous WWE licensee.

But it turns out the Malibu company, which grew to be one of the top U.S. toymakers on the burly shoulders of its WWE action figures, wasn’t even in the ring.

Jakks has already launched lines based on two edgier, up-and-coming sports franchises: the mixed-martial arts UFC (Ultimate Fighting Championship) and pro wrestling TNA (Total Nonstop Action) – both of which are gaining in popularity as WWE’s TV ratings conversely fall.

And last week, the company announced a strategic partnership with Japanese animator Dentsu Inc. to produce an original animated TV series called “Monsuno,” for which Jakks can market action figures and other products. The toymaker’s creative staff developed the show’s concept.

“We did lose what was a crown jewel of our licensing portfolio, but we’ve been able take the skill set that we had accumulated to build new lines,” said Chief Financial Officer Joel Bennett.

Moreover, through acquisitions, the company has branched into new businesses such as children and adult Halloween and role-playing costumes, many based on Walt Disney Co. and other licensed brands. In addition, in recent years it has created in-house products not reliant on licensed characters, from night-vision binoculars to cupcake-making kits.

All in all, it’s a formula that generally has Wall Street analysts either bullish or at least comfortable recommending that investors hold the stock, which has lost about half its value since the financial crisis but has been on a holding pattern since March. Shares closed at $12.79 on Jan. 7.

The company’s adjusted third quarter profit fell 38 percent to $33.7 million as sales fell 2 percent to $351 million, but both figures beat Wall Street expectations. Still, no one doubts the company is in a competitive situation.

“Toys are a fashion business,” said BMO Capital market analyst Gerrick Johnson, who has the equivalent of a “buy” rating on Jakks. “You have to keep reinventing yourself, balancing taking chances with preserving your existing lines. That’s going to be the challenge for Jakks post-WWE.”

Sales slumps

The company was founded in 1995 by two toy industry executives, Jack Friedman and Stephen Berman, who continue to serve as co-chief executives. They started out by focusing on products tied to characters and brands created by others, with WWE (then called World Wrestling Federation) the first big hit. The company, which had more than $903 million in net sales in 2008, continues to be best known for its licensed products, such as dolls and accessories based on Disney’s popular “Hannah Montana” TV series, but also makes branded play furniture and toy electronics.

Sales slumps due to the recession led Jakks to cut overhead, and consolidate certain Asian and New York operations last year. The restructuring resulted in about 200 layoffs, 60 of them in the L.A. area.

Bennett admits that until mid-2009, the company probably was more optimistic than it should have been about how quickly its customers’ shopping habits would turn around as the recession lifted. So the company further cut costs by deciding not to attend certain industry shows this fall and instead open a permanent showroom in Santa Monica.

But Wedbush Morgan equity analyst Edward Woo said Jakks’ level of restructuring was timely and appropriate for the downturn it was facing, and contended that the company actually benefits from the serendipitous timing of the end of its WWE license.

While a new line of products for girls based on country-pop star Taylor Swift is unlikely to be as hot as Hannah Montana’s Rockin’ Lights Electric Guitar, at least Swift’s star is rising, whereas the Hannah franchise is winding down as its teenage star Miley Cyrus approaches adulthood.

“It’s almost worked out textbook for (Jakks),” Johnson said, “If you’re going to lose a line and have to replace it, you want to lose the line that’s in decline and get a line that’s on the rise.”

Jakks also benefitted recently by ending years-long litigation between itself and Agoura Hills video game developer THQ Inc., its former WWE business partner that had the license to make wrestling-based video games. The pair had an agreement to share the revenue for the figures and games based on an undisclosed formula.

After years of squabbling over whether each partner was being paid fairly, THQ in December agreed to pay Jakks $20 million over four years in exchange for ending litigation and dissolving their longtime joint venture to create and market WWE products. THQ then signed its own multiyear deal with WWE.

Relations between Jakks and WWE had been strained for years over allegations that certain Jakks executives paid kickbacks to originally win the license. WWE’s own federal and state lawsuits against Jakks dating from 2004 were dismissed in 2007 and 2008, respectively, although appeals continued into 2009.

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