JAKKS Pacific, Inc.
Q2 2021 Earnings Call Transcript

Published: 28 Jul 2021

[Operator:]

Good afternoon, everyone. Welcome to the JAKKS Pacific Second Quarter 2021 Earnings Conference Call with management, who will review financial results for the quarter ended June 30, 2021. JAKKS issued its earnings press release earlier today. The earnings release and presentation slides for today’s call are available on the company’s website in the Investors section. On this call this afternoon are Stephen Berman, Chairman and Chief Executive Officer and John Kimble, Chief Financial Officer. Mr. Berman will first provide an overview of the quarter along with highlights of product lines and current business trends, then Mr. Kimble will provide detailed comments regarding JAKKS Pacific’s financial and operational results, Mr. Berman will then return with additional comments and some closing remarks prior to opening the call for questions.

[Stephen Berman:]

Good afternoon and thank you for joining us as we review our performance for the second quarter of 2021. Our second quarter results exceeded our internal projections and positioned us for a strong back half of 2021. I will begin with an overview of our second quarter performance, with John covering our financials in more detail and then I will explain why we are excited about what’s in store for the back half of the year. Looking at the quarter, we are very pleased with our performance as we recorded second quarter positive operating margin for the first time in many years. Our bottom line has increased materially over the last 18 months and we continue to push the business forward on the stronger foundation. Our adjusted EBITDA in the quarter was $5 million, our first profitable second quarter since 2016. Our performance was driven by strong sales across the core business categories as we continue to focus on the priorities we have previously discussed, expanding gross margins, improving profitability by reducing costs, and driving down debt. JAKKS’ business has been built over the years by identifying, acquiring and/or building product expertise where we can be a leader. We are confident consumer demand will be timeless and we can provide compelling brands, product design and innovation to meet our margin criteria. This past quarter demonstrates how that formula works for us and differentiates us from other companies in and around the kids’ consumer space. This is another quarter of steady growth not due to an opportunistic pop at one segment or product line, but due to strong demand across the whole company.

[John Kimble:]

Thank you, Stephen and good afternoon everyone. Net sales for the 2021 second quarter were $112.4 million, up 43% compared to $78.8 million last year. As Stephen mentioned, we saw great results across the board in both our toy consumer products and costumes segments. In our girls and preschool targeted businesses, primarily dolls, dress-up, role play toys, plush and other consumer products, net sales were $49.3 million in Q2, up 50% compared to $32.8 million in the prior year. The big driver of the growth was the strong sales of Disney Princess and Raya merchandise slightly offset by lower sales of Frozen. Our Perfectly Cute ranges continue to positively contribute to the girls division. In our boys targeted division of action figures, vehicles, role play toys and other electronics products, net sales were $19.6 million, up 83% compared to $10.7 million last year. Sales for our videogame-related toys, Nintendo and Sonic, delivered the majority of the growth, while we still see our Black & Decker role play lines strongly contributing. We are continuing to see the growth in the boys business in both the U.S. and internationally, with more points of distribution and broader product ranges. In our outdoor seasonal division of ball pits, play structures, activity tables, foot-to-floor ride-ons, skateboards and other spring summer inspired toys net sales were $12.6 million in the quarter flat versus the second quarter of 2020. This division certainly benefited from a lot of online purchases last year. And our activity table business in particular continues to sell through about as fast as we can sell in. When you add those pieces together, second quarter sales in our toys consumer product segment were up 45% to $81.5 million globally compared to $56.2 million in the second quarter of last year. Growth came from North America, up 42%, while international also grew by 60% with the opening of retail stores throughout Europe.

[Stephen Berman:]

Thank you, John. It is truly exciting to be able to sit here today and talk about set strong first half results, but part of that as enthusiasm is being aware of some of the great things we have in the works for the back half of the year. I would now like to discuss some of what we feel will be the highlights as we work through the balance of 2021. We are extremely excited about Disney’s Ultimate Princess Celebration, a 15-month global program celebrating all the Disney Princess characters through themes of courage and kindness via content, product and experiences. The campaign launched in April ‘21 and continues into 2022. Retail activations will kickoff next month during the first ever World Princess Week and we anticipate continued strong performance at retail resulting from this global campaign. We see continued demand for our Disney Princess style collection with great role play items, including our suitcase, phone, totes and vanity. New distribution at Walmart including playdate dolls, core dresses, and low price dress-up accessories will also contribute to year-over-year gains. We are also anticipating great performance from our cross category product line celebrating Walt Disney Animation Studios’ upcoming all new original film, Encanto, scheduled to hit theaters this coming November. In our seasonal division, our Heart Supply skateboarding line has recently launched as we will continue to grow the presence of our ReDo Skateboard brand. Both brands are expected to perform well as we expand points of distribution. With our Disguise costume segment, along with our retail partners, we are expecting strong demand for Halloween 2021. As you know, Halloween is on a Sunday this year, which should generate more excitement and by extending performance in both décor and more importantly to us, costume and accessory sales. JAKKS is prepared to meet the strong demand, which has been reaffirmed by a great Easter for retailers, which is really the opposite of what we had last year. This should drive strong sales growth across our entire portfolio. Our growth in Disguise comes from many areas, such as new license acquisitions, including two new studio portfolios between Universal and Sony and new content volume will be driven by the return of big movies like The PAW Patrol movie, Jurassic World, Minions, and Ghostbusters. Our evergreen core businesses continue to be strong staples, with Disney, Hasbro and Harry Potter all contributing and we have strong growth in gaming costumes as kids and gamers continue content with their favorite gaming properties. Collectively, gaming costumes are up 43%. International expansion is currently up 20% for the year and we anticipate strong additional orders for the remainder of the year. We have been increasing our efforts this year to drive international growth for Disguise. This will enable a more balanced year round business encompassing several holidays like Carnival, Book Week, and Everyday Dress Up. We are hiring and expanding our team of costume experts around the world and look forward to sharing more news about our plans in the future quarters. We are hopeful that the world is on path to return to pre-pandemic norms. But whatever that timeline may prove to be, we expect that the core basic play patterns will continue. As we know many experienced more home life in the past 18 months than ever before. We intend to continue to meet demand by offering the fun engaging products with brands that our consumers love. And importantly, we continue to work on new brand and category initiatives for 2022 and beyond. We remain disciplined and agile in our management of the pandemics effect on our businesses. We work closely with our retail partners to mitigate logistic setbacks and secure domestic goods early on. We are confident in our ability to deliver products in the second half of the year, as well as our media and promotional plans to support that product at retail. Our workforce has started to return to the office, traveling is picking up and in person sales meetings are beginning to return to the calendar. As a result, we expect to see some modest cost increases in the back half of this year. These changes shouldn’t be surprising, given the developments of the past year, and in fact, are in line with our budget and expectations set back in early first quarter. Overall, I am extremely proud of how we have managed business initiatives in the first half of the year. Overcoming supply chain challenges to deliver such a strong second quarter is a great achievement for us. And we are continuing to focus on improving our cost structure, strengthen our balance sheet, and ultimately driving shareholder value. The amazing team we have in place has well positioned our company for a strong remainder of the year. I want to thank everyone for their fantastic effort around the world. With that, we will now take questions. Thank you.

[Operator:]

Our first question comes from Steph Wissink of Jefferies. Your line is open.

[Steph Wissink:]

Thanks. Good afternoon, everyone. Stephen, this first question is for you. It’s just as an observation, very strong across almost all of the segments of the business, actually, all of them I think. Maybe share a little bit about how the business has changed from being somewhat hit driven in the past to just a real, strong diversified portfolio of drivers.

[Stephen Berman:]

Okay. Thank you, Steph. Firstly, the divisional segmentations that we have been building over the years and some of those were through acquisitions, some of them internally, now has really matured. And what we already do in these segmentations from the seasonal areas to our girls division and boys division is adds up licensing content to the categories which are extremely strong for us. So, first is our basic core seasonal business has very strong foothold and foot for right on indoor play environments, tents and ball pits and so on. And we own those categories, or the category leaders. And all we are doing now is achieving new licenses to grab those categories and build up them, while introducing new businesses such as the outdoor seasonal, skateboard line of ReDo, The Heart line that we want to target. The actual full up interior segmentation of our business has grown materially. So, the strong demand continues and we are just building up that. It’s been something that we have had to work through. We have been from the Delta-v days to the Hannah Montana’s to the Frozen 1. We have the benefit of achieving some great home run licenses and properties. But then afterward, it’s hard to parlay that business continuing forward. So, we have put a huge effort over the last 3, 4 years to build up these really strong platforms and grow off these platforms by brick and brick, so in a sense, singles and doubles and then a home run or grand slam comes like whether it’s in a condo or another property that we have next year, that will just be part and parcel of our business. But we don’t need that business for us to grow on margin and grow revenue. So, really the basic core business like the Halloween business. We have now expanded materially in the international territories. We picked up majority of the rights that we have now international that will really come to fruition for us next year. And those businesses that are really stable businesses that we just got to continue year in and year out that become the leaders in this category. So, what we put under place, and the criteria that we have put in place, has really performed over the last few years and it really showed this year. All the fruits of what we have put together.

[Steph Wissink:]

Alright, that’s great. And Stephen another one for you is just as you step back and think about the biggest opportunity for the second half, maybe not even relative to 2020, but even over the last couple of years, do you think it’s disguised more so or the core toy business? Where do you expect the greater amount of outperformance potential if it plays out now as your goals might suggest?

[Stephen Berman:]

Well, firstly, I would say across the board that were two areas I see are really strong growth with Disguise, because Disguise also had a Halloween and kind of all and those holidays, really hurt last year during the pandemic. So, that itself just hurt. That’s how the business, because people weren’t going out. So, now return back to some of the norm, we have that offset of growth. But we also have a tremendous lineup of new properties, and current properties that are just doing really, really strong in the sales. And then in our girls division, our Disney girl line, were up 30% in sales overall. We actually have a lot of new things that we are launching a lot – our new lines launching August 1, which is Givi, which is where we will talk about it more in third quarter. We have a tremendous lineup with our Disney style collection that’s doing really, really well, but just with the Disney backing it up for the first time, the new 18 months of the Christmas initiative. There is just a lot of strong power behind the evergreen category. So, it doesn’t necessarily have to have euphoric that we are getting called double-digit growth in many areas like Nintendo, the Black & Decker, all the main core categories are growing very well, but the euphoric side would be really Disguise and the Disney girl segmentation.

[Steph Wissink:]

Okay, that’s great. John, I have a couple of quick ones for you. I just wanted to clarify on the $60.6 million of inventory on the balance sheet. I think Stephen has mentioned that you had pulled in some inventory a bit early. I am just wondering if you can help us contextualize how much of that $60 million might have been a pull ahead?

[John Kimble:]

Yes. I think it’s the number if you look at recent years. It’s a little bit higher than where we have been. But I don’t know that we can – I can grab higher, and I can tell you it’s $5 million or $10 million higher. I mean as you know, we kind of finished pretty lean, December 31. And we felt really good about that in terms of turning inventory into cash and felt that we would have to pull stuff, build stuff back up again a little bit. I think what we just really want to highlight is the fact that as much as were problems with the supply chain, that the team is really working through all of that. And between inventory that we have in hand for our domestic replenishment as well as, we didn’t really speak to it so much in the narrative. But our retail inventories continue to be down year-over-year. So, I think it just sort of sets us up real well for additional sell and in the back half of the year.

[Steph Wissink:]

Okay, that’s great. And then last one for me is on gross margin, just wanted to think through that the margin has taken such a significant step up over the last couple of years from either the low to mid-20s, now into the mid to high-20s and even 30% plus, so maybe just share with us a little bit about margin levels today. Where could those margins ultimately progress to over the course of the next 2 years?

[John Kimble:]

Yes. That’s kind of a good one, spending quite a bit of time trying to get a strong feel for that. I think the royalty line, we have had some good improvements over the past year or so. And I think we are sort of approaching the end of that, short of if we have something kind of pop on the owned IP side of things that wouldn’t necessarily be royalty bearing, but on the flip side. Then we would end up having to invest probably a bit more on marketing and promotion. On the product margin side, It’s fortunate that initiatives as soon as revenue that we put in place a couple of years ago is helping to buffer us a little bit against some of the freight costs, which everybody has been talking about. I would like to say that we can still grind out some more points in that area and get us to be a little bit more comfortably in the low-30s. But we are still kind of working hard towards that. And then you know what, as soon as we can get to there, then we can talk about like, does that feel about right or is there still more upside from there. But I think it’s going to be more the product margin and our mix of subcategories and brands and being disciplined about margin performance rather than chasing top line which is going to help drive the gross margin story.

[Steph Wissink:]

Okay, that’s great. I will pass it on. Thank you.

[Stephen Berman:]

Thank you, Steph.

[Operator:]

Thank you. I am showing no further questions at this time. Ladies and gentlemen that concludes the conference. Thank you for participating. You may now disconnect.