JAKKS Pacific, Inc.
Q1 2021 Earnings Call Transcript

Published: 28 Apr 2021

[Operator:]

Good afternoon, everyone, welcome to the JAKKS Pacific First Quarter 2021 Earnings Conference Call with management, who will review financial results for the quarter ended March 31, 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 the opening up for the questions.

[Stephen Berman:]

Good afternoon, and thank you for joining us as we review our performance in the first quarter of 2021 and our plans for the rest of the year and beyond. We are very pleased with our results for the quarter, it's the fifth consecutive quarter we delivered results that exceeded our internal projections and as a strong way to start 2021. Not only were we able to deliver strong sales growth, higher margins and significant improvement in profitability. We did so without the benefit of a big hit product or blockbuster tempo entertainment content. Our strong performance in the quarter was no fluke, it was the result of many steps we have taken in recent years to broaden our sales base, cut back on low-margin products and categories, reduce our manufacturing and operating cost and manage cash conservatively. As a reminder, the last two years, we've been working diligently to improve our profitability by laying out a three-pronged plan to improve results; first, we have been reducing our product costs and operating expenses to allow us to be profitable on the revenue that comes from our core basic product categories, the results are visible in the sharp increase in gross margin and dramatic reduction in SG&A as a percent of sales that we had in the quarter.

[John Kimble:]

Thank you, Stephen, and good afternoon, everyone. Net sales for the 2021 first quarter were $83.8 million, up 26% compared to $66.6 million last year. As Stephen mentioned, we saw great results across the board in our toy and consumer products segment. In our girls and preschool-targeted businesses, primarily dolls, dress-up, role play toys, plush and other consumer products, net sales were $45.2 million in Q1, up 13% compared to $40.1 million in the prior year. The big driver of the growth, the strong sales of Disney Princess and Raya merchandise anchored by the theatrical and streaming release in March, slightly offset by lower sales of Frozen. Our Perfectly Cute ranges also contributed in the positive column. In our boys targeted division of action figures, vehicles, role-play toys and other electronics products, net sales were $16.4 million, up 70% compared to $9.7 million last year. As Stephen mentioned, our video game-related toys delivered the majority of the growth with our Black and Decker role play line also strongly contributing. This business is expanding rapidly both in the U.S. and international 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 $18.3 million in the quarter, up 43% from $12.8 million in the first quarter of 2020 with growth across the whole division. When you add those pieces together, first quarter sales in our toys, consumer products segment were up 28% to $79.9 million globally, compared to $62.6 million in the first quarter of last year. The bulk of the growth came from North America, up 33%, while international grew by 5% despite significant additional retail closures in Europe and beyond. Net sales in our costume segment, Disguise, were nearly flat year-over-year at around $4 million in the first quarter. As a reminder, Q1 tends to be around 3% to 5% of our full year costume business. Moving down the P&L, gross margin in the 2021 first quarter was 31.1%, a 650 basis point improvement over the 24.6% in Q1 of last year, about a third of that improvement comes from the royalty line, which was $12.5 million or 9% higher than a year ago or 230 basis points better, driven partly by a mixed shift, but also the expiration of some legacy agreements with less than favorable terms, and the balance is attributable to the efforts Stephen just mentioned in bringing a stronger product margin line to market and fewer closeout sales.

[Stephen Berman:]

Thank you, John. I'd like to turn to the rest of this year now and outline how we plan to keep the sales momentum going with exciting new product launches, ongoing efforts to keep costs down and our efforts to further strengthen our balance sheet. We will continue to capitalize on the tremendous strength of our licenses with the Walt Disney Company. Building on the momentum, we anticipate a third straight year of growth for Disney Princess, which is being driven by several key factors, including Disney Princess Style Collection, a robust line of role play items and accessories designed for today's modern girl with a uniquely stylized and ownable Disney Princess look and feel. Disney Princess Dress-Up in large dolls, a beautiful lineup of easy to dress large dolls with matching girl size dresses. We expect to benefit from the continued retail distribution expansion in addition to increased demand in the marketplace with the ever growing strength of the Disney Princess universe. We will continue to also support the Frozen franchise with a diverse line of products that brings the magic of Arendelle to fans in a variety of scales and formats. Beyond the core Disney Princess business, we will continue driving the great performance of product lines based on Raya and the Last Dragon. In addition to launching a dynamic line of toy products inspired by Encanto, the upcoming November theatrical release from the Walt Disney Animation Studios, centered around an extraordinarily family who lives in a magical home in a vibrant town nestled in the hidden mountains of Colombia. The Encanto product line will feature fashion dolls, large dolls, playsets, dress-up and role play. Other 2021 initiatives within our girls division include, extension to our Perfectly Cute doll and accessory line at Target, the new launch of toys and collectibles based on Haribo, a global successful gummy candy brand, a brand new beautifully designed interactive item based on a theme we are certain will resonate with girls and we expect to perform very well this fall. In our boys division, we expect to continue to maximize the success of video game-related product lines, including Apex Legends, Super Mario Brothers and Sonic the Hedgehog. In addition, we are planning for continued growth in our Black and Decker product line as well as a strong launch for the re-release of Creepy Crawlers, JAKKS' owned IP, that has been a classic toy brand for more than 45 years. In our seasonal division, sales of the ReDo skateboard line continue to grow with the expansion both at Target and Amazon. And as mentioned previously, we will broaden the product line with a variety of strong licenses. We are also expecting a great boost from our new line of licensed and unlicensed trampolines, which are hitting the market this summer, and we expect to perform very well in the back half of the year. Categories of business that have historically been steadily sellers for us and we expect will continue to perform include activity tables, ball pits, play tents and foot-to-floor ride-ons. This success is based on a combination of great product, best in class distribution and evergreen licenses, including Mickey Mouse, Minnie Mouse, Frozen, PAW Patrol, Fisher-Price, Blue's Clues, amongst many others. With our Disguise Halloween and Carnival segment, we expect a much more stable environment for Halloween 2021. Given that Halloween falls on a Sunday and the assumption that the pandemic will be sufficiently under control by the fall, we will anticipate a more typical level of celebration, lead to great sales performance by our broad portfolio of both license and generic themed base costumes and accessories. New licenses in 2021 include Apex Legends, Bendy and the Ink Machine, Blippi, Chucky, Ghostbusters, Hocus Pocus, Peppa the Pig, PJ Mask, Raya and the Last Dragon and Spirit amongst others. As new licenses become available, we will seek to grow the portfolio, while at the same time meeting the cost and pricing discipline that has allowed us to show such encouraging progress across the Company. Taking a step back and looking at what we expect for our results in 2021, let me offer a couple of observations. First, some of the cost and working capital tailwinds may reverse a bit as the year goes on. In 2020 and the first quarter of 2021, with so much of our workforce at home, we spent very little money as a company on expenses like airfare, hotel, trade shows, basic IT maintenance, just to name a few areas. Our whole company took a paycut last year to help preserve cash. Many of these costs will rise this year, but the other costs have been eliminated and aren't coming back. We remain committed to improving our cost structure. Second, working capital is probably at a level that needs to be increased. We're expecting growth over time and having inventories at an 11-year low, we will need to build back some of that inventory level for future growth. In addition, we will need to increase some capital expenditures over last year's level, but again, the new normal for us is to continue spending more prudently and intelligently. Third, the toy industry has some difficult comparisons in 2021 as manufacturers sell-in and retail sell-through were exceptionally strong last year. In 2020, some of the strongest toy categories were ones that we don't have a big presence in, such as games, puzzles and activities. Those categories might not be as strong in 2021. We faced a difficult comparison last year because of Frozen II's released in 2019, but the comparisons are not as difficult this year. We expect to be able to grow our sales in 2021 and we expect to be significantly more profitable. Our trailing 12-months adjusted EBITDA is nearly $40 million. We are proud of this and considering it was negative just a couple of years ago. Finally, we are hard at work on strengthening our balance sheet, with a strong product and cost momentum we have built over the last year, we are in a good position to reduce our overall debt and realign our borrowings with our growth plans. If we can get our debt payment structured in a way that it can be paid down with our improved operating cash flow, we believe investors will see how much value there is in our shares. In closing, I would like to thank our incredible team as well as our extended team of customers, licensors and vendors for all their hard work and support over the last year, coming together to deliver these great results in the first quarter. We continue to take the steps needed to position the Company for profitable growth and we couldn't do it without the dedicated team we have around the world. With that, we will now take questions. Thank you.

[Operator:]

Our first question comes from the line of Steph Wissink with Jefferies.

[Steph Wissink:]

Couple of questions, if I could, just to start with your concluding comments, Stephen, growing sales and being more profitable this year. Can you just help us contextualize the component that is Halloween. Halloween last year was substantially impacted to the negative, how much of the growth this year is the coming back online of Halloween versus the underlying business, excluding Halloween?

[Stephen Berman:]

So we expect to see in majority of our categories growth in both sales and in profitability, for -- and specifically with regards to Disguise, which is Halloween and carnival because we are building a very strong international presence for Halloween and carnival. There will be a very nice increase, one of which -- because Halloween was a -- one of the worst Halloweens we saw in 2020 based off of COVID and based off of just the entire environment wasn't enthusiastic to go out and COVID restricted everyone. So if we lift the COVID cloud, we'll have a really strong Halloween and besides that, we think we're going to have based off what occurred during the Easter at retail that retailers now have been buying more than we projected earlier in Halloween and carnival based off the success of Easter. So Halloween will have very, very nice growth we see it, but we also see very nice growth -- division and our girls division, and in our seasonal division and boys. So, we have and in the Nintendo and Sonic is remaining extremely strong, our Black and Decker is extremely strong. The positive thing for us that is extremely strong, the positive thing for us -- and we've gone through it over the last 2.5 years, we have created and now we have a very strong evergreen business that expands just with new licenses and adding a few different categories within each of these areas. So for instance, the seasonal business, we didn't have trampolines last year and we didn't have license skateboard. So we have our basic business that's very solid and we have new -- two new categories that will jump in, and it's not looking to be a grand family's growth initiatives. These are very much singles and doubles and if something turns into a home run or grand slam, we do not base on our general business, so we have a strong platform and growth in the majority of the areas and we see it across the board and yet Disguise will see a very strong growth this year as well.

[Steph Wissink:]

I want to just follow on one of the tracks, which is video games and one thing we know about you over decades is that you're very nimble, very opportunistic. In video games, you seem to be early and really in size with some of the biggest licenses, are there other licenses in video games that would be obvious opportunities for you, whether it's on the back of the rise in video game play last year or the new console cycle or just a big sense of penetration now of the Nintendo Switch, does that afford you any other licenses that aren't currently in the portfolio?

[Stephen Berman:]

All of the above. So the Nintendo Switch growth and expansion is just fueling the brand of Nintendo and we -- when we took over the Nintendo rights, we actually were one of the only companies that ever were -- was able to work with Nintendo and build their mascots and get growth with all these different characters that they normally never allowed it at a certain time. But now we have a really strong building relationship with them, then you add the Sonic, the general Sonic, and then you add the movie Sonic, which actually pushes that further, Apex Legends. So we do it in toys, where we think it's appropriate and then we do it in Halloween and carnival, where we think it's appropriate. So some of the areas we don't want to get into the video game toy business, because it's a very higher age grade than what -- it's more of a collectable business, so we'd rather stay more in that kids consumer business. There are other ones that we are looking to achieve and hopefully will be announced shortly but that whole category, a big part of our Halloween business and carnival business is that video game genre, which is just growing, and growing and growing and a lot of the pop culture and like music, like the Billie Eilish and so on. So there is a lot going on, but specifically with the video game genre, we are really solid in the Apex Legends and Nintendo and Sonic and we got a few other ones that are appropriate. At the same time like the Disguise Minecraft Sword that we expanded sales materially and that's -- it's not doing a complete line of toys, it's some of just the right SKUs for the right properties. So we don't need to go into a whole deep line of product to have success with the video games.

[Steph Wissink:]

The comments that Stephen made on working capital being at 11-year low on the inventory side, can you just help us rationalize how you think about the exit point coming out of 2021, where do you want to be on that continuum of not as low as you are, but certainly not as high as you went for?

[John Kimble:]

Yes, that's -- it's sort of a real-time question. I think as we look at a lot of different things, both on the income statement and the balance sheet and think about exiting '21, we know that 2020 was a very unusual year, which fortunately worked out pretty well for us on average. We know that we are operating in a more productive way than we were in 2019 and beyond, so in a very basic way those create -- set a goal post for us that frankly, looking up and down those two financial statements, those are some of the parameters we're sort of looking at. I don't know that I can say anything more focused on that.

[Operator:]

Our next question comes from the line of Gerrick Johnson with BMO Capital Markets.

[Gerrick Johnson:]

First quarter has all the trade shows, New York Toy Fair and Nuremberg, Hong Kong, how much kind of ballpark do you see from not going to those and how much of that contributed to the SG&A savings?

[Stephen Berman:]

It'd probably be -- if we just sort of give you the approximate amount for all those, you have Hong Kong, you have Nuremberg, you New York and you also have the U.K. Toy Fair, it's approximately about $400,000 to $500,000, that's excluding of the actual fair itself, the employees involved and samples that have to be included to get around all those different areas, so it's approximately that number.

[Gerrick Johnson:]

Wow, a lot smaller than I thought it would be. And kind of can related to that, being that you're a smaller toy company, do you think not having the ability to show your products in sort of those venues or maybe having fewer in person presentations, do you think that puts you at a disadvantage relative to the large toy companies?

[Stephen Berman:]

No, I'd say, it's not at a disadvantage. It definitely hinders our business in general, not having the physical meetings that you have, in fact, I went out during May to one of our large retailers and had a face to face meeting and at that time, we were able to pick up immediate white space for our licensed skateboards and licensed trampolines, and that was May last year. So that kind of a meeting does have a benefit, but for us, the virtual trade shows worldwide that we've done have bode very well. I prefer to have more and there's I think a real good hybrid that will come out of COVID that would need the amount of physical meetings that the sales teams will have for spring and fall, but we don't need the amount of trade shows that we've had in the past. I think a lot of that will be kind of figured out and filtered out eventually, but we don't need to have a Hong Kong Toy Fair, a New York Toy Fair, a Nuremberg Toy Fair, an Olympic Toy Fair or U.K. Toy Fair and then a New York one. That's just a tedious amount of trade shows and we're not getting the benefit outside of people traveling and running all over the place, and I think there is that hybrid that we will figure out ourself, but we're happy because we do know that we have the fall show that will be happening in September in LA. So we're happy that, that will occur and we believe that Hong Kong Toy Fair will be a very important toy fair, because primarily we're very prominent FOB company.

[Gerrick Johnson:]

Yes, I agree with you on the efficiency of the hybrid model going forward for a lot of industries, including my own. You mentioned that your POS in your top three accounts is up over 20%, but then later on, you're talking about the industry being up over 40%, so that would seem to me that you lost share in a quarter, so why did you lose share -- and yes, I guess, why did you lose share in the first quarter?

[Stephen Berman:]

I don't think we lost share what it was in that area, as I mentioned, I believe in the pre-recorded script was games, puzzles and activities is strong. In our areas, as I mentioned, we've had double-digit growth in several areas, Nintendo, Black and Decker was tripled and so on, and Disney Princess was strong. So across the board, we saw very strong growth, even if the industry was up, Disguise isn't part of first quarter, so for us, it was very strong for us, we couldn't be happier with our results from the growth in revenue, the extreme growth in profitability and EBITDA. So for us, I couldn't see -- and I think entirely what we've done and we're very happy with it.

[Gerrick Johnson:]

Some of the categories you did mention that you're counting on for growth such as video game, toys, Disney Princess role play, Black and Decker, ReDo and now trampolines and licensed skateboards. Those are all categories that I think have done very, very well owing to the pandemic, right? Video games and role play and outdoor, especially, so how much are you counting on kind of the pandemic trends that we saw in 2020 continuing into 2021?

[Stephen Berman:]

So what we -- the trends, I think, will still occur right now for the first half just based off of what occurred at retail and what we're seeing in the benefits it achieved through a lot of the people in the U.S., but for what we see and we've had it, Nintendo is getting additional -- and Sonic are both getting additional distribution more than what we've had, Black and Decker, the same. So it's -- one is we're getting additional increased distribution through some of the specialty trades and dollar trades and you add our mass retailer making a larger footprint in some of our areas, so that part we see growth through distribution and more consumers or customers that will be purchasing it. Then when you have the trampolines and you have the skateboards, we're not looking for material growth to have -- the skateboard line, you'll go from $0 million to $100 million, but we're looking at continued growth and distribution in these areas. So they become an evergreen category for us. That becomes just our basic business and all we need to do then is filter out the correct licenses that are appropriate in these categories and put those under the categories in which we see that are appropriate for the age grade of that license and that's where we see expansion. On real growth, you'll see through -- we have a lot of new licenses, we have Encanto, Raya is a great property that will continue. There's a lot of new things that are occurring and the first one of -- it's the first quarter we haven't come out with a lot of news, but we see a lot of new areas with just new launches. So we have new Daniel the Tiger products, we have Haribo, which is a property that's a worldwide global toy brand, we have a very confidential on-trend girl product line that will be launching in fall, we have Creepy Crawlers and then you go right back into our basic business, Disney evergreen is our favorite category, which we've grown from Style collection and Disney Princess is growing. So we see, we're hitting on all cylinders and with a lot of excitement for just some new categories and properties that will come our way.

[Operator:]

Thank you. I'm not showing any further questions, I would now like to turn the call back over to Stephen for closing remarks. We do have a follow-up from Gerrick Johnson.

[Gerrick Johnson:]

Input costs is one thing you briefly touched on about input logistics kind of creeping up towards the end. I remember the last time we spoke, you were pretty confident that you'd be able to hold margin and input costs weren't going to be an issue, can you revisit that for me, I mean, how are you thinking about input costs, are you pretty much locked in with your manufacturers or could there be some inflation that could hurt that gross margin going forward?

[Stephen Berman:]

That's a great question. So with regards to input costs, right now we have selective areas that we've been working with our manufacturers, these factories have worked with us decades and decades and even some of them even longer from our THQ time. So a lot of these manufacturers, where they've seen increases, whether it's with resin or metals and so on, where those increases have occur, we will then at the same time, work with them. In certain areas, it doesn't go across the board like in our Halloween cut and sew, and certain other areas, and Plush, we will then work with our retailers as we've had and selectively increase prices where we have those price increases. We will not be increasing prices just to increase it across the board, it's not necessary, but in order for us to hold our margins and increase our margins appropriately and work -- and we need to work with our manufacturers and retailers. So we've been doing that early on to any of the areas that we see that -- a good example right on are table and chairs, those are actual increased costs and we'll just -- we're not looking to increase the margin from that, we are working factories and the retailers to make sure we have the appropriate retail price points, but we're actually trying to allow the retailers to keep their margins, JAKKS to keep their margins and the manufacturers.

[Gerrick Johnson:]

Okay, so you're still pretty confident that you can hold gross margin?

[Stephen Berman:]

Maintain or grow margin, yes, we are.

[Operator:]

Thank you. I'm showing no further questions in the queue, I would now like to turn the call back over to Stephen for closing remarks.

[Stephen Berman:]

Everybody, thank you very much for the call today. We're excited about the quarter, we're excited about this year, and we're also looking to 2022, because we have a lot of new initiatives and a lot of things within our wings. So appreciate that and thank you very much.

[Operator:]

Ladies and gentlemen, that concludes the conference. Thank you for your participation, you may now disconnect.