Jakks Pacific Chief Executive Stephen G. Berman plays Monsuno. a line of… (Ricardo DeAratanha, Los…)
For the last 18 years, Jakks Pacific Inc. has been a player in the ultra-competitive Southern California toy-making business, up against the likes of giant Mattel Inc. in El Segundo and others.
But Jakks' roster of toys — including the Smurfs, Monsuno action figures and Winx Club fairy dolls — have not been pulling in the fun for investors.
Sales have declined five straight years. In the most recent quarter, revenue fell 27% and the Malibu company lost $46.9 million compared with net income of $214,000 a year earlier.
Jakks Chief Executive Stephen G. Berman blamed poor results partly on broad trends affecting the industry.
"Movie properties have shorter windows at retail now, which has impacted sales of our Smurf products, and throughout the industry few movie toy sales are meeting the expectations," Berman said during a conference call with analysts.
"Struggling retailers, both in the U.S. and internationally, are plagued with slow toy sales and weakening international currencies," Berman said.
In the U.S., the toy market is expected to pull in $2.7 billion in revenue this year, up 1% from the prior year, according to research firm IBISWorld. That would be a considerable improvement over the previous five years, when total revenue dropped an average of 6.2% annually, IBISWorld data show.
Several lawsuits seeking class-action status have been filed against Jakks management, alleging that they made "materially misleading statements regarding the company's business and operations."
The lawsuits, filed in federal court in Los Angeles, are a sign that many shareholders are unhappy with the company's performance and are weary of waiting for a turnaround.
It didn't help that the company turned down a takeover offer in 2012 for $20 a share, or more than four times the current share price.
Jakks executives recently launched a restructuring, involving layoffs, to reduce costs and to return to profitability next year. The company suspended its dividend, which was 7 cents a share, in the second quarter.
Jakks can apparently still count on prominent shareholder and billionaire Patrick Soon-Shiong, who is said to be intimately involved in what the company hopes will be its turnaround product. Jakks and Soon-Shiong's NantWorks technology company have teamed with Walt Disney Co. to develop its first "augmented reality" toy, the Disney DreamPlay App Suite. Jakks plans on expanding the technology to some of its other lines of licensed toys.
Children will be available to virtually interact with characters and trigger animation on Android and Apple devices. Berman said in an email that "the future of the industry clearly lies in the convergence of technology and toys as children turn to smart devices more and more for additional entertainment."
In 2012, the company spent $1.7 million fighting a takeover bid by investment firm Oaktree Capital Management, which had offered $20 a share to take the company private.
Jakks rejected that offer, saying it undervalued the company. Talks with Oaktree stalled in June of last year.
What the company desperately needs is a blockbuster product, something it hopes it has in Disney DreamPlay.
"Maximizing digital play is key to our strategy to compete in this changing landscape," Berman said, "and we believe our DreamPlay line will bring us to the forefront of digital play and innovation."
Berman added: "And although technology is growing more prevalent in children's play patterns, parents and caregivers are still looking for a balance in the toy box. Our business is built on evergreen, core brands and traditional product categories such as dolls, dress-up, role play and preschool toys."
Of seven analysts covering Jakks Pacific, one rates the stock a buy. Five recommend holding the stock, and one rates it as underperform and a strong sell.
Edward M. Woo, a senior research analyst for Ascendiant Capital Markets, said that Jakks is "in a pretty rough position right now. A lot of it has to do with the fact that they are just not making the right toys. They are not selling very much."
"Competitors like Mattel and Hasbro have managed to do much better than Jakks," Woo said. "They have better toys; there is no other way to say it, whether it is Barbie for Mattel or Transformers for Hasbro."