The Grinch of poor sales stole Christmas from Jakks Pacific, and he may be taking the new year, too.
Shares of the Malibu-based toymaker lost 20 percent of their value Dec. 19 – dropping from $17.35 to $13.85 a share – after the company announced its products did not sell well during the crucial holiday season. As a result, the company reduced its guidance for full-year 2011 earnings per share to a range of 28 cents to 31 cents, compared with previous guidance of $1.32 to $1.35. The company originally expected annual revenue of $770 million and now forecasts $660 million.
“The magnitude of the miss is dramatic and shocking,” Gerrick Johnson, an analyst at BMO Capital Markets in New York, wrote in a research note to investors Dec. 19. “This reduction implies a 46 percent decline in fourth quarter sales.”
For the last four months of 2011, Jakks was distracted by an unsolicited offer from Oaktree Capital in Los Angeles to buy out shareholders at $20 per share and take the company private. In a letter to Oaktree on Oct. 5, Jakks Chief Executive Stephen Berman said the board had voted unanimously to reject the offer because future toy launches would increase the share price.
“Oaktree is attempting to take advantage of current adverse macroeconomic conditions in order to buy Jakks below its intrinsic value,” the letter stated. “Execution of the company’s strategic plan – including potentially transformative projects planned and already under way – will provide significantly greater value to the company’s stockholders.”
The most promising project in the pipeline is Monsuno, a series of boys’ action figures that is scheduled to debut this spring and will be supported by a cartoon TV series on Nickelodeon.
Arvind Bhatia, an analyst at Sterne Agee & Leach in Dallas, said Jakks originally planned for Monsuno to augment its sales figures. Now, revenue from the new toy might simply replace money from the toys that flopped in December.
“The big hope is Monsuno, but this holiday season makes you wonder how successful it will be,” Bhatia said. “If the core business had remained stable, then Monsuno would be the growth driver for next year. Now it will be a challenge to keep total sales flat unless Monsuno is a breakout hit.”
Johnson said Jakks’ disappointments in the holiday season include the I Am T-Pain Microphone, Big Hands and the Max Force line of toy blasters.
Jakks did not return calls for this story.
Oaktree responded in an e-mail that “as a general matter, Oaktree does not comment publicly on its activities.”
As for how the fourth quarter letdown will affect Oaktree’s buyout attempts, Bhatia thinks the fund probably considers itself lucky that its $20 price was not accepted.
“I don’t foresee another offer in the new term,” he said.
Jakks’ stock closed at $14.15 on Dec. 28, well below its September high of $19.88.
But Johnson at BMO thinks that Oaktree may still be looking toward a takeover, largely due to the potential of Monsuno.
“I don’t think the new guidance changes Oaktree’s opinion on the intrinsic value of the company or how they might improve it,” he said. “It does make $20 per share look much more appealing. They may pull the $20 price and come back with a cheaper offer, but I think they are still interested.”
For 2012, Johnson is taking a wait-and-see approach to the Monsuno launch, even though his economic model assumes revenues of $50 million for the new line this year.
“It has all the elements – a TV show, good sponsors and marketing,” he said. “But a successful toy launch is binary – either it is or it isn’t.”
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