JAKKS Pacific Inc. (JAKK) reported fourth quarter 2010 earnings of 30 cents per share, beating the Zacks Consensus Estimate of 25 cents and adjusted earnings of 22 cents in the prior-year quarter. On a GAAP basis, the company reported earnings of 30 cents compared to a loss of 7 cents in the fourth quarter of 2009.

During the quarter, the company reported a 0.4% year-over-year decrease in revenues to $198.0 million. However, the reported revenues were below the Zacks Consensus Estimate of $171.0 million.

For full fiscal 2010, earnings per share were $1.52 as compared to adjusted earnings of $1.03 in 2009, while net sales dropped to $747.3 million from $804.3 million recorded in the prior year.

During the quarter, gross margin expanded 480 bps to 33.1%, despite continuing cost pressures and shift in product mix. Selling, general and administrative expenses grew 2.1% year over year to $27.6 million.

Financial Position

As of December 31, 2010 JAKKS had cash and cash equivalents and marketable securities of $278.6 million versus $255.0 million at the end of December 31, 2009. The company’s working capital and long-term debt at the end of the year were $389.8 million and $89.5 million, respectively.

During the quarter, the company purchased 0.3 million shares for $5.6 million, relating to the previously announced share repurchase program of $30.0 million.

Guidance for fiscal 2010

In 2011, JAKKS expects adjusted earnings to be in the range of $1.32 to $1.35 per share, up 4% to 6% year over year. The company’s sales guidance is $770–$775 million, implying a growth of 3% to 4%.

The company expects growth across all units, including role play toys, action figures, Halloween costumes, electronics, kids’ furniture, dolls and more for 2011. The company is also interested in acquisitions and is looking for possible targets. However, JAKKS expects cost inflation to continue in 2011.

In the first quarter of 2011, the company anticipates net sales in the range of $60 to $65 million, with a loss per share in the range of 39 cents to 45 cents.

Our Take

We remain optimistic about JAKKS’ long-term growth potential with new product launches, possible acquisitions, resolution of litigation and a strong financial condition to facilitate growth. Additionally, the company’s restructuring plan and cost-saving initiatives are expected to improve profitability for 2011 and beyond.

However, higher input cost, faltering consumer confidence, uncertainty regarding labor issues in Asia will add to the concern. Moreover, JAKKS’ earnings outlook for the first quarter and 2011 seems to be conservative. They are both below the Zacks Consensus Estimates of a loss of 29 cents and $1.46 respectively.

Accordingly, the company has a Zacks #2 Rank (short-term Buy recommendation) on the shares. We also reiterate our long-term Neutral rating.

Hasbro Inc. (HAS), one of JAKKS’ primary competitors, reported its fourth quarter 2010 earnings of 99 cents per share, which were well ahead of the Zacks Consensus Estimate of 95 cents. The better-than-expected results were driven by tight cost-control initiatives, which more than offset the muted growth in sales.

 
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