JAKKS Pacific, Inc. (JAKK) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to the JAKKS Pacific Second Quarter Earnings Conference Call with management who will review financial results for the quarter ended June 30, 2026. JAKKS issued its earnings press release earlier today. The earnings release and presentation slides related to today's call are available on the company's website in the Investors section. On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer; and John Kimble, Chief Financial Officer. Stephen will first provide an overview of the quarter and year-to-date along with highlights of recent performance and current business trends. Then, John will provide some additional comments around JAKKS Pacific financial and operational results. Mr. Berman will then return with comments about the balance of the year and beyond prior to opening up the call for questions. [Operator Instructions] Before we begin, the company would like to point out that any comments made about JAKKS Pacific future performance, events or circumstances, including the estimate of sales, margins, earnings and our adjusted EBITDA in 2026 and beyond as well as any other forward-looking statements concerning 2026 and beyond are subject to safe harbor protection under federal securities laws. These statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult JAKKS' most recent 10-K and 10-Q filings with the SEC as well as the company's other reports subsequently filed with the SEC from time to time. In addition, today's comments by management will refer to non-GAAP financial measures such as adjusted EBITDA and adjusted earnings per share. Unless stated otherwise, the most directly comparable GAAP financial metrics have been reconciled to the associated non-GAAP financial measure within the company's earnings press release issued today or previously. As a reminder, this call is being recorded. With that, I'd like to turn the call over to Stephen Berman.

Good afternoon, and thank you for joining us today. Our Q2 financial results were modestly better than our expectations and an improvement over the same quarter a year ago. Globally, our net sales finished at $139.2 million in Q2, a 17% increase compared to prior year when the sudden implementation of massive tariffs dramatically reduced customer orders. Year-to-date, our sales are 6% ahead of prior year at $245.9 million, our best first half since 2023. North America led the improved results, growing 20% year-over-year in Q2 and 3% for the first half. Our international business reflected smaller year-over-year growth of 3%, led by Europe, but is up 20% for the first half of the year. Overall, this is the highest level of international first half shipping in JAKKS history in over 10 years at $53 million. Keeping the focus on the first half, our Toys/Consumer Products business was up 5%. Those results were driven by the Action Play & Collectibles division, which was up as we supported the extremely successful second Super Mario Bros. film release in April, led by an array of 5-inch figures developed specifically for the film. Our product line also featured play sets, Diorama and Plush and was very well received with solid sell-throughs. Building on that, we have another wave of new product introductions shipping now for fall planogram sets and promotional spaces, some of which are already on shelf. As retailers knew we had a solid opportunity with this film, through the first 3 quarters of shipping, we have sold in more movie branded products than what we did for the first film, which is great, especially given the consumer reaction. Fans can also look forward to a lot more focus on Donkey Kong in the second half with a feature play set shipping along with a new figure multipack. Our Dolls, Role Play/Dress-Up business was up 12% in Q2 despite a lack of new entertainment support compared to the prior year. Of note, we have been steadily expanding our Frozen product line over the past 18 months, offering new role play patterns and refreshing key products. Although Frozen has been a cornerstone of our business dating back to the original film release, the business is up for the first half of this year versus prior year. In the fall, we have a strong retailer exclusive placed that will add more energy to this aisle as we build towards the Frozen 3 theatrical event in fall 2027. Retail pricing of our Disney Princess Style Collection assortments were heavily impacted by tariffs most of last year. And those price shocks have unwound over recent months, we see some customers bringing retail prices down closer to where they were pre-tariff, although admittedly, not across the entire product line. In general, it is true for the lower price points. We feel lower retails are contributing to improved velocity as consumers discover some of the strong innovative items we launched last fall as well as this spring. We're also seeing expanded listings and resulting in positive point-of-sale results. The [ Baby Bath Doll ] line launched in fall continues to sell extremely well, and our refreshed 6-inch Princess doll line with a sub-$10 price point has been a strong performer as well. Retail toy and consumer products POS at the top 2 U.S. accounts was positive in the first half, accelerating to double-digit levels in Q2. Our Disguise business also performed well, up 8% in the quarter and 9% in the first half. The popularity of Toy Story 5 and The Super Mario Bros. films are positive contributors to our business this year as well as our launch of K-pop Demon Hunter's costumes. Our outdoor seasonal business, which includes everything from activity tables and chairs to ball pits to ride-ons to skateboards and Hula Hoops, among other products, remained a slight drag on the results this quarter. We see this as a structural headwind rather than a transitory one. Retailers continue to reallocate in-store space away from large box items, and these bulky formats are poorly suited to the low-cost home delivery model that increasingly is shaping retail economics. We are not waiting this out. We are managing this business with a multiyear lens and a clear plan on 2 levers: partnering with retailers to defend and recapture shelf space and lost sales and reengineering packaging and product design to shrink box sizes and improve delivery economics. We are already advancing on both fronts. And while these investments will take time to fully show up in the numbers, we are extremely confident they position this business for sustainable, profitable growth as the category continues to shift. We like where we are headed. But for the quarter, we were down 12% and down 17% year-to-date to $11.1 million in sales. Gross margins held up very well in the quarter at 32.3%, slightly lower than last year's at 32.8%. Tight management of sales, marketing and overhead costs led to a slight operating loss of $142,000 in the quarter compared to a $2.8 million loss in Q2 of last year. Adjusted EBITDA in the quarter was $5.4 million compared to $2.3 million in Q2 last year. That increases our 12-month trailing adjusted EBITDA to $37.8 million. I will now pass it over to John for some comments, after which I will come back and discuss some product initiatives and areas of focus moving forward. John?

Thank you, Stephen, and hello, everybody. This has been a solid quarter, wrapping up a solid first half of the year. As Stephen has pointed out, everything has been going pretty much in line with our expectations, which is a plus when that actually happens. Our FOB-centric business model is alive and well. Our first half shipments were over 75% FOB, reaching as high of a level as we've seen this decade. From a seasonality point of view, we have planned this year as a bit more front weighted than normal given the strength of Super Mario and since we do not have any new toy introductions in the second half supporting holiday theatrical releases. And so far, that outlook is holding up. As I look at our financial results, I'm focused on seeing gross margin dollars increase 3% in the first half to a little over $80 million. That's a pretty good outcome and reflects solid execution against what we saw as the opportunity, a bit better than the last 2 years and a couple of million dollars short of where we were in 2023. Ultimately, as a company, I want to see us optimizing for margin dollars and not margin percentages. As we do the extra work to identify incremental business outside of the traditional U.S. mass market, I believe that is going to require more complexity and financial creativity in how we assess new opportunities, which is something we're in progress on working through. But establishing more annuity like evergreen revenue streams while continuing to thoughtfully manage overhead should create another flow of long-term bottom line profitability, which I feel we're only starting to wrap our heads around. As the majority of our overhead costs are fixed, I think we have an opportunity in this area given our momentum over the past couple of years, but it will admittedly take some time to build and prove out. To that end, we managed a bit of leverage in both selling and G&A in the first half, offsetting gross margin percentage being down slightly. That led to a slight operating loss in the quarter and a $5.7 million operating loss in the first half improved over the $6.5 million loss last year in the same time period. Working our way down the P&L, that leads us to the topic of IEEPA tariff refunds. As mentioned last quarter, we applied for refunds for tariffs we paid under the regulations, which the Supreme Court ultimately struck down. We're pleased to share that we've had essentially all of those funds refunded to us as of the second quarter close. We don't anticipate any more refunds going forward. In the quarter, we took the opportunity to revalue on-hand inventory that was still burdened by those tariffs to essentially undo the excess carrying cost that the tariffs generated upon import, thereby reducing the value on the balance sheet. The remainder of funds received, we have recognized in the P&L this quarter as nonoperating other income of $6.8 million. These refunds have raised our projection for pretax net income for the year, so our Q2 tax estimate has been adjusted accordingly. We have opted to back this gain out of our published non-GAAP projections of adjusted EBITDA and adjusted earnings per share. With that said, adjusted EPS for the quarter was $0.25 and $0.09 for the first half of the year. That compares favorably to $0.03 of earnings in Q2 last year and being breakeven year-to-date EPS at the same time last year. From a balance sheet perspective, we finished the quarter at $60.6 million in restricted and unrestricted cash compared to $43.1 million at the same time last year. That increase is largely driven by stronger operating results and the aforementioned tariff refunds. As of July 17, the comparable cash on hand number was $47.1 million to give you an extra bit of context to remind you of the seasonality in our working capital. Our inventory level at the end of the quarter was $58.3 million, down from $71.8 million at this time last year and up a bit from $52.9 million last quarter. Finally, the Board has approved our sixth consecutive quarterly cash dividend of $0.25 per share. The dividend will be payable to shareholders of record as of August 28 and will be payable on September 28. And now back to Stephen for some more discussion of what's ahead.

Thank you, John. Midyear is always an exciting time in the business as we get closer to all the energy and excitement around Halloween and the fourth quarter holiday season, while also seeing the full lineup for the following year, solidifying and receiving positive feedback from customers around the world. And as much as we've mentioned before, I cannot emphasize enough the traction we are getting, elevating our level of focus and performance outside of the U.S. We are increasingly working with key existing accounts in Europe on exclusive launches while listening to our customer needs and curating new offerings to open new accounts on the strength of our broad brand portfolios. We are additionally working with more distributors to specifically reach additional accounts in more fragmented markets. Our evergreen brands and categories with global appeal create a platform where products designed toward lower price points can reach a very wide audience when we can form the right partnership between our vendors in Asia, the licensors and the right distribution partner to reach smaller accounts around the world. We have recently added 3 senior sales professionals to our global organization to further drive our business to higher levels, in addition to opening our first office in South America with an eye towards longer-term growth there. Turning back to the near term. I want to highlight some of the exciting areas as we move into the second half of the year. Our Disney Darlings line continues to expand both in the U.S. and in Europe with broader listings, which earned great sell-through success so far this year. The Snuggly Stars Doll sub-segment has recently launched in the U.S. in-store and online and selected accounts with rapid sell-throughs. You will see a much broader Disney Darlings assortment on shelf later this year, supported by a 360 marketing campaign across regions as our baby dolls continue to be the happiest baby dolls you will find in the marketplace. There is no cringe at JAKKS, and there is no cringe in the Disney Darling line of products. In Disney Princess, our ages and stages strategy is introducing new core large dolls and matching dresses. Our 2 featured items will be Grow and Style Rapunzel Doll and our interactive dance with Me Bell. The Bell Doll will be featured out of aisle at key U.S. accounts as our must-have Princess toy this holiday season. With Disney ILY, we are introducing a new range with lower price points to further expand the product portfolio. We are also investing with a focus on the serious Disney fan who has proven to be the most enthusiastic ILY consumer. We see an opportunity by increasing our reach to more of them, especially given the current breadth and depth of this line. Moving to our Sonic business. This fall, we're launching Giant Metal Sonic, the biggest, most sophisticated feature, large-scale action figure we've ever released as part of our Sonic the Hedgehog product line, inspired by the metal Sonic from the Sonic Superstars video game. At over 20 inches tall, it recreates the ultimate Boss battle as Metal Sonic faces off with a 2.5-inch Sonic figure, which is also included. With anime light-up eyes, sounds and slashing arm action, it comes in the 35th anniversary packaging, and we believe will top many holiday wish lists. These large-scale toys have always been well received by the Sonic fan base, and we secured strong retail support and placement this fall. Also this fall inspired by the DC Sonic crossover series, we have more new product arriving for the fall that we plan to announce soon. As I mentioned, fans should look forward to the new Super Mario-inspired film product in fall with a mix of core items and strong retail exclusives. They'll also see our continued support and innovation within our evergreen Nintendo business, including a number of items themed to Super Mario Wonder Game. This past quarter, we also launched as a retail exclusive, a new collector doll line of DC Comics characters, featuring Poison Ivy, Catwomen and fan favorite Harley Quinn. We saw a nice presale engagement and these dolls continue to sell through well. In the fall, we will be mixing in a range of other classic Warner Bros. characters that fans love and haven't been able to get in these products' executions. In our disguise costume business, beyond the properties already mentioned, our product line this year features other new entertainment releases, including Disney's Descendants 5, Paw Patrol: The Dino Movie and Minions & Monsters, just to name a few. We remain on track to deliver a strong year of results in 2026, both financially and achieving potentially exceeding our initial plans, but more importantly, making substantial progress in building this business for growth in 2027, '28 and beyond. In 2027, we have 2 top-tier theatrical releases from Sonic the Hedgehog and Disney Frozen franchises lined up for Q1 and Q4, respectively. But beyond that, there are a number of additional initiatives, some entertainment-led, some working with our key customers on private label opportunities and some opportunities just classic new toy lines with innovation driven by creativity of our design and marketing teams. In addition, we and the trade are extremely excited to launch our anime, Manga and WEBTOON digital entertainment initiatives in 2027 and beyond. We're opening up brand-new distribution channels while working differently with our well-established current distribution partners to bring a lot of different offerings to the market that we will discuss in more detail later in the year and throughout 2027. And now we will take a couple of questions. Operator?

[Operator Instructions] And our first question comes from the line of Eric Beder of Small Cap Consumer Research.

I want to ask a question about the domestic market here. So we went through this shock. We're coming back out of it. How do you see the market changed? And I guess, what are the opportunities from that, that you can take advantage of?

Well, first, thank you very much. One of the things that we've seen versus last year is that the market adapted to the price changes that occurred throughout the industry with prices being raised where appropriate due to the tariffs and also the volatility of the cost of petroleum with regards to resins as well as container costs. So I believe, at least for us, we have mandated and have achieved what we needed to going into this year, which is reducing costs in various products to achieve bringing back the price points to the correct price points that we see more volume in. Those are the price points during usually the spring and summer under $30 retail. So we've done that, adapted to it very quickly. In addition, we've dove very deep in with the value trade and the specialty trade such as the T.J. Maxx's, the Ross's and so on as well as our strong major customers like Target, Walmart and Amazon going into the Five Below, the dollar trade and so on. So we became very diversified through this, both on an FOB basis and slightly on a domestic basis. So we're also seeing the appetite at retail that the POS is quite strong during the spring versus last spring. So the appetite is there for the right product at the right price points.

Okay. So basically, you can -- you've kind of matched kind of taken your advantage and set the prices where they would need to be and still maintain kind of the margins that we're seeing right now?

Yes and plus, yes.

Okay. Now you mentioned about the chain in international, a great opportunity. Some of these markets are as concentrated as we are in the U.S. What does that mean for kind of the level of FOB you see internationally and the potential for margins going forward on that?

The great thing about international is it's growing in a great path in EMEA, Latin America, South America and Southeast Asia. So we're growing with, one, our product categories and lines are really more appropriate today than they were 5 years ago for the international markets. That's one. Two, we have the majority of the licensing rights that work in the territories. We have the right ones that are correct for our company. That being said, there are certain properties that work well in U.K., Germany and France that don't work well in Italy or Spain. So we really are very quick to market with the right product at the right country at the right level. The same goes for Latin America, South America and Southeast Asia. In addition, we have the FOB structure that we started since inception that is very much a footprint internationally. So primarily, the majority of our sales internationally are on an FOB basis, which helps us then enhance our own margins internally, giving also a lower price to the customer, which they can enhance their margin as a customer and also then have a lower price for the consumer, which gives them a great price point to have. So all of those combinations on top of great product, great licenses and strong momentum in all of our different categories, it's allowing us to grow pretty rapidly. And going forward for the next 2, 3 years, we see strong growth diversification in various countries and just some really strong initiatives that we see going forward.

Okay. And final question. What are you seeing in terms of potentially either for new licenses, M&A, you keep on piling up more cash. How should we be thinking about that kind of potential, I guess, near and longer term?

Thank you for that question. One thing is we are a strong healthy balance sheet, which gives us a lot of strength going forward and looking at different opportunities. But the first part of the question, we have a lot of licenses in which we have not been able to announce yet because some of them are under contract. But our license portfolio is diversifying very strongly in each of our categories of business, the 5 different segments that we focus on. We are focused -- we are a toy company. We are a kids consumer product company. So while a lot of companies are focused on the kidult, which we are heavily focused on in the anime segmentation that we're moving into, and we are into that in certain other areas. We are truly a toy kids consumer product company, and we don't forget about kids at the young age that will never change from that age group from birth to 6, 7 years old. So that's the key focus that a lot of companies are moving out of, and that's a key focus that we're diving deeper in with the understanding of kidult is a great market, and we've been in it since we did WEF decades ago and Nintendo and Sonic and the Simpsons. There's kidult involved, but the anime segmentation, Manga, VTubers and digital entertainers are truly kidult and above. So we are in all the areas of business. But I do think it's interesting to hear people focusing on more in the kidult area and that's the true toy business where we're focused on. So we're focused on that acquiring licenses. If there's an opportunity in the acquisition area in a segment that would benefit the company and our shareholders, we have been looking. We are speaking to bankers and so on and so forth. So if an opportunity arose, we have the cash, we have the availability with banking to be able to get additional capital if needed. So that's on our platform. And going into this year, we're looking at going into the 2027 and '28, which we feel very strong and confident about. And we will be sitting with the Board of Directors looking at different capital allocation initiatives. But going through the first half of the year, having a strong performance and then looking at what happened in the last year back and so on and so forth, we're just really focused on shoring up our business, taking market share and then looking to grow in the future.