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Article by DailyStocks_admin    (10-02-07 05:21 AM)

The Daily Magic Formula Stock for 10/1/2007 is Jakks Pacific. According to the Magic Formula Investing Web Site, the ebit yield is 14% and the EBIT ROIC is 50 - 75 %.
Our Dupont Ratio Analysis:
EBIT Margins are 13.8% in 2006, and 21.7% in 2005.
Gross Margins are 38.5% in 2006, and 53.3% in 2005.
Tax Rate is 31.7% in 2006, and 31.9% in 2005.
Asset Turnover is 0.94 times in 2006, and 1.51 times in 2005.
Financial Leverage is 1.45 times in 2006, and 1.26 times in 2005.
According to the SEC Filings of JAKK (collected from the 10-K, 10-Q, and Proxy Statements ):

Company Overview

We are a leading multi-line, multi-brand toy company that designs, produces and markets toys and related products, writing instruments and related products, pet toys, treats and related products and other consumer products. We focus our business on acquiring or licensing well-recognized trademarks and brand names with long product histories (“evergreen brands”). We seek to acquire these evergreen brands because we believe they are less subject to market fads or trends. Our products are typically lower-priced toys and accessories and include:

Traditional Toys

Action figures and accessories, including licensed characters, principally based on World Wrestling Entertainment ® (“WWE”) and the Dragon Ball ® and Pokemon ® franchises, and toy vehicles, including Road Champs ® die-cast collectibles, Fly Wheels ™ and RC Racers & MXS ™ toy vehicles and accessories;

Electronics products, including Plug It In & Play TV Games ™, Vmigo ® virtual pet gaming system and Laser Challenge ®;

Electronic products, Role-play and dress-up products featuring entertainment and consumer products properties such as Disney Princesse®s and Dora the Explorer for girls and Black & Decker® and Pirates of the Caribbean ® for boys;


Infant and pre-school toys, TV activities and plush toys featuring Care Bears ®, Barney ® and Doodle Bears ®and slumber bags; and


Dolls including fashion and mini dolls and related accessories, includes Disney Princess dolls sold to Disney Stores and Disney Parks and Resorts and private label fashion dolls for other retailers, and soft body dolls featuring Cabbage Patch Kids ®.

Craft, Activity and Writing Products


Craft, activity and stationery products, including Flying Colors ® activity sets, compounds, playsets and lunch boxes, and Colorworkshop ® craft products such as Blopens ®, Vivid Velvet ®, and Pentech ® writing instruments, stationery and activity products.

Seasonal/Outdoor Products


Seasonal and outdoor toys and leisure products, including Go Fly A Kite ®, Air Creations ®, and other kites, Funnoodle ® pool toys, The Storm ® water guns and Fly Wheels XPV and Flight ™ vehicles; and


Junior sports, including Gaksplat ™ and The Storm ®.

Pet Products


Pet products, including toys, treats, beds, clothing and accessories, with licenses used in conjunction with these products, including American Kennel Club ® and The Cat Fanciers’ Association ™ brands, as well as entertainment properties, among others.

We continually review the marketplace to identify and evaluate evergreen brands that we believe have the potential for significant growth. We endeavor to generate growth within these brands by: creating innovative products under established brand names; focusing our marketing efforts to enhance consumer recognition and retailer interest; linking them with our evergreen portfolio of brands;

adding new items to the branded product lines that we expect will enjoy greater popularity; and

adding new features and improving the functionality of products in the lines.

In addition to developing our proprietary brands and marks, we license brands such as WWE , Nickelodeon (R), Dora the Explorer , Disney Princesses , Care Bears and Pokemon . Licensing enables us to use these high-profile marks at a lower cost than we would incur if we purchased these marks or developed comparable marks on our own. By licensing marks, we have access to a far greater range of marks than would be available for purchase. We also license technology produced by unaffiliated inventors and product developers to improve the design and functionality of our products.

We have obtained an exclusive worldwide license for our joint venture with THQ Inc. (“THQ”), which develops, publishes and distributes video games based on WWE characters and themes. Since the joint venture’s first title release in 1999, it has released 29 new titles. We have recognized approximately $72.1 million in profit from the joint venture through December 31, 2006. We and the joint venture are named as defendants in lawsuits commenced by WWE, pursuant to which WWE is seeking treble, punitive and other damages (including disgorgement of profits) in an undisclosed amount and a declaration that the video game license with the joint venture and an amendment to our toy licenses with WWE are void and unenforceable (see “Legal Proceedings”).

We sell our products through our in-house sales staff and independent sales representatives to toy and mass-market retail chain stores, department stores, office supply stores, drug and grocery store chains, club stores, toy specialty stores and wholesalers. Our three largest customers are Wal-Mart, Target and Toys ‘R’ Us, which account for approximately 27.5%, 17.6% and 13.6%, respectively, of our net sales in 2006. No other customer accounted for more than 10.0% of our net sales in 2006.

Our Growth Strategy

The execution of our growth strategy has resulted in increased revenues and earnings. In 2005 and 2006, we generated net sales of $661.5 million and $765.4 million, respectively, and net income of $63.5 million and $72.4 million, respectively. Approximately 10.1% and 24.3% of our increased net sales in 2005 and 2006, respectively, were attributable to our acquisitions since 2004. Key elements of our growth strategy include:

Expand Core Products. We manage our existing and new brands through strong product development initiatives, including introducing new products, modifying existing products and extending existing product lines. Our product designers strive to develop new products or product lines to offer added technological, aesthetic and functional improvements to our product lines. We use real-scan technology in our action toys, and we incorporate articulated joints and a flexible rubberized coating to enhance the life-like feel of these action toys. These innovations produce higher quality and better likenesses of the representative characters.

Enter New Product Categories. We use our extensive experience in the toy and other consumer product industries to evaluate products and licenses in new product categories and to develop additional product lines. We began marketing licensed classic video games for simple plug-in use with television sets and expanded into slumber bags through the licensing of this category from our current licensors, such as Nickelodeon.

Pursue Strategic Acquisitions. We intend to supplement our internal growth with selected strategic acquisitions. Most recently, in June 2005, we acquired the assets of Pet Pal Corp. which expanded our offerings and distribution into pet toy, treats and related products, and in February 2006, we acquired the business of Creative Designs International, Ltd., a leading manufacturer of girls’ dress-up and role-play toys.. We will continue focusing our acquisition strategy on businesses or brands that have compatible product lines and offer valuable trademarks or brands.

Acquire Additional Character and Product Licenses. We have acquired the rights to use many familiar corporate, trade and brand names and logos from third parties that we use with our primary trademarks and brands. Currently, we have license agreements with WWE, Nickelodeon, Disney, and Warner Bros®, as well as with the licensors of the many popular licensed children’s characters previously mentioned, among others. We intend to continue to pursue new licenses from these entertainment and media companies and other licensors. We also intend to continue to purchase additional inventions and product concepts through our existing network of product developers.

Expand International Sales. We believe that foreign markets, especially Europe, Australia, Canada, Latin America and Asia, offer us significant growth opportunities. In 2006, our sales generated outside the United States were approximately $99.1 million, or 12.9% of total net sales. We intend to continue to expand our international sales by capitalizing on our experience and our relationships with foreign distributors and retailers. We expect these initiatives to continue to contribute to our international growth in 2007.

Capitalize On Our Operating Efficiencies. We believe that our current infrastructure and operating model can accommodate significant growth without a proportionate increase in our operating and administrative expenses, thereby increasing our operating margins.

The execution of our growth strategy, however, is subject to several risks and uncertainties and we cannot assure you that we will continue to experience growth in, or maintain our present level of, net sales (see “— Risk Factors,” beginning on page 12). For example, our growth strategy will place additional demands on our management, operational capacity and financial resources and systems. The increased demand on management may necessitate our recruitment and retention of qualified management personnel. We cannot assure you that we will be able to recruit and retain qualified personnel or expand and manage our operations effectively and profitably. To effectively manage future growth, we must continue to expand our operational, financial and management information systems and to train, motivate and manage our work force. There can be no assurance that our operational, financial and management information systems will be adequate to support our future operations. Failure to expand our operational, financial and management information systems or to train, motivate or manage employees could have a material adverse effect on our business, financial condition and results of operations.

Moreover, implementation of our growth strategy is subject to risks beyond our control, including competition, market acceptance of new products, changes in economic conditions, our ability to obtain or renew licenses on commercially reasonable terms and our ability to finance increased levels of accounts receivable and inventory necessary to support our sales growth, if any.

Furthermore, we cannot assure you that we can identify attractive acquisition candidates or negotiate acceptable acquisition terms, and our failure to do so may adversely affect our results of operations and our ability to sustain growth.

Finally, our acquisition strategy involves a number of risks, each of which could adversely affect our operating results, including difficulties in integrating acquired businesses or product lines, assimilating new facilities and personnel and harmonizing diverse business strategies and methods of operation; diversion of management attention from operation of our existing business; loss of key personnel from acquired companies; and failure of an acquired business to achieve targeted financial results.


CEO Background

Jack Friedman has been our Chairman and Chief Executive Officer since co-founding JAKKS with Mr. Berman in January 1995. Until December 31, 1998, he was also our President. From January 1989 until January 1995, Mr. Friedman was Chief Executive Officer, President and a director of THQ. From 1970 to 1989, Mr. Friedman was President and Chief Operating Officer of LJN Toys, Ltd., a toy and software company. After LJN was acquired by MCA/Universal, Inc. in 1986, Mr. Friedman continued as President until his departure in late 1988.

CEO Ownership

Jack Friedman owns 793,497 Includes 3,186 shares held in trusts for the benefit of children of Mr. Friedman. Also includes 175,000 shares of common stock issuable upon the conversion of options held by Mr. Friedman. Also includes 120,000 shares of common stock issued on January 1, 2007 pursuant to the terms of Mr. Friedman’s January 1, 2003 Employment Agreement, which shares are further subject to the terms of our January 1, 2007 Restricted Stock Award Agreement with Mr. Friedman (the “Friedman Agreement”). The Friedman Agreement provides that Mr. Friedman will forfeit his rights to all 120,000 shares unless certain conditions precedent are met prior to January 1, 2008, including the condition that our Pre-Tax Income (as defined in the Friedman Agreement) for 2006 exceeds $2,000,000, whereupon the forfeited shares will become authorized but unissued shares of our common stock. The Friedman Agreement further prohibits Mr. Friedman from selling, assigning, transferring, pledging or otherwise encumbering (a) 60,000 of the 120,000 shares prior to January 1, 2008 and (b) the remaining 60,000 shares prior to January 1, 2009; provided, however, that if our Pre-Tax Income for 2007 exceeds $2,000,000 and our Adjusted EPS Growth (as defined in the Friedman Agreement) for 2007 increases by certain percentages as set forth in the Friedman Agreement, the vesting of some or all of the 60,000 shares that would otherwise vest on January 1, 2009 will be accelerated to the date the Adjusted EPS Growth is determined. The Friedman Agreement further provides that Mr. Friedman is prohibited from selling, assigning, transferring, pledging or otherwise encumbering 30,000 shares issued him on January 1, 2006 until January 1, 2008.

Management Discussion from 10k

Net Sales

Traditional Toys . Net sales of our Traditional Toys segment were $658.8 million in 2006, compared to $568.7 million in 2005, representing an increase of $90.1 million or 15.8%. The increase in net sales was primarily due to the addition of the Creative Designs line of products, which we acquired in February 2006, with sales of $181.1 million and increases in sales of WWE actions figures and accessories, Doodle Bear, Speed Stacks, Snugglers, Dragonflyz and Trolls, offset in part by decreases in sales of TV Games, wheels products, dolls, Sky Dancers, Care Bears and Cabbage Patch Kids.

Craft/Activity/Writing Products . Net Sales of our Craft/Activity/Writing Products were $52.8 million in 2006, compared to $62.0 million in 2005, representing a decrease of $9.2 million or 14.8%. The decrease in net sales was primarily due to decreases in sales of our Flying Colors activities and our Pentech and Color Workshop writing instruments and related products, offset in part by an increase in sales of our Creepy Crawlers activity sets.

Seasonal/Outdoor Products . Net sales of our Seasonal/Outdoor Products were $33.7 million in 2006, compared to $21.0 million in 2005, representing an increase of $12.7 million or 60.5%. The increase in net sales was primarily due to increases in sales of our Fly Wheels XPV and Flight toys and our Funnoodle pool toys, offset in part by decreases in sales of our Go Fly A Kite and junior sports products.

Pet Products . Net Sales of our Pet Pal line of products, which we acquired in June 2005, were $20.1 million in 2006, compared to $9.8 million in 2005, representing an increase of $10.3 million or 105.1%. The increase is attributable to the growth in sales of this new line of products through our existing distribution channels and having sales for the entire year in 2006.

Cost of Sales

Traditional Toys . Cost of sales of our Traditional Toys segment was $410.3 million in 2006, compared to $334.7 million in 2005, representing an increase of $75.6 million or 22.6%. The increase primarily consisted of an increase in product costs of $68.8 million, which is in line with the higher volume of sales. Furthermore, royalty expense for our Traditional Toys segment decreased by $1.2 million and as a percentage of net sales due to changes in the product mix to more products with lower royalty rates or proprietary products with no royalty rates, from products with higher royalty rates. Product costs as a percentage of sales increased due to the mix of the product sold and sell-through of closeout product. Our depreciation of molds and tools increased by $8.1 million due to new products being sold in this segment.


Craft/Activity/Writing Products . Cost of sales of our Craft/Activity/Writing Products was $29.0 million in 2006, compared to $39.9 million in 2005, representing a decrease of $10.9 million or 27.3%. The decrease primarily consisted of decreases in product costs of $8.6 million and royalty expense of $2.2 million, which were in line with the lower volume of sales. Additionally, our depreciation of molds and tools was comparable year-over-year.

Seasonal/Outdoor Products . Cost of sales of our Seasonal/Outdoor Products segment was $19.1 million in 2006, compared to $14.0 million in 2005, representing an increase of $5.1 million or 36.4%. The increase primarily consisted of increases in product costs of $5.6 million which were in line with the higher volume of sales, partially offset by a decrease in royalty expense of $0.3 million. Furthermore, royalty expense for the Seasonal/Outdoor segment decreased as a percentage of net sales due to changes in the product mix to more products with lower royalty rates or proprietary products with no royalty rates, from products with higher royalty rates. Product costs as a percentage of sales also decreased due to the mix of the product sold. Our depreciation of molds and tools decreased by $0.2 million, which was comparable year-over-year.

Pet Products . Cost of sales of our Pet Pal line of products, which we acquired in June 2005, was $12.1 million in 2006, compared to $6.3 million in 2005, representing an increase of $5.8 million or 92.1%. The increase primarily consisted of increases in product costs of $4.8 million and royalty expense of $0.8 million, which were in line with the higher volume of sales. Additionally, our depreciation of molds and tools increased by $0.3 million.

http://www.edgar-online.com/bin/cobrand/?doc=A-10 0...
Management Discussion from 10q

Comparison of the Six Months Ended June 30, 2007 and 2006

Net Sales

Traditional Toys . Net sales of our Traditional Toys segment were $108.6 million in 2007, compared to $99.3 million in 2006, representing an increase of $9.3 million, or 9.4%. The increase in net sales was primarily due to increases in sales of WWE actions figures and accessories, role-play and dress-up toys, Pokemon, Rocky action figures, Bio-Bytes, Eye Clops, Vmigo, In My Pocket toys, Cheetah Girls toys and Sweet Secrets toys, offset in part by decreases in sales of Dragonball Z action figures, TV Games, wheels products, Sky Dancers, Doodle Bears, Dragon Flyz, Speed Stacks, Trolls, Care Bears and Cabbage Patch Kids.

Craft/Activity/Writing Products . Net Sales of our Craft/Activity/Writing Products were $11.5 million in 2007, compared to $15.1 million in 2006, representing a decrease of $3.6 million, or 23.8%. The decrease in net sales was primarily due to decreases in sales of our Flying Colors activities products and our Pentech and Color Workshop writing instruments and related products.

Seasonal/Outdoor Products . Net sales of our Seasonal/Outdoor Products were $4.9 million in 2007, compared to $5.6 million in 2006, representing a decrease of $0.7 million, or 12.5%. The decrease in net sales was primarily due to decreases in sales of our RC Flight toys and our Go Fly A Kite and junior sports products, offset in part by an increase in sales of our Funnoodle pool toys.

Pet Products . Net Sales of our Pet Pal line of products were $4.6 million in 2007, compared to $4.1 million in 2006, representing an increase of $0.5 million, or 12.2%. The increase is attributable to the expanding line of products and expanding distribution.

Cost of Sales

Traditional Toys . Cost of sales of our Traditional Toys segment was $69.3 million in 2007, compared to $60.5 million in 2006, representing an increase of $8.8 million or 14.5%. The increase primarily consisted of an increase in product costs of $6.7 million, which is in line with the higher volume of sales. Product costs as a percentage of sales increased due to the mix of the product sold and the sell-off of closeout product. Furthermore, royalty expense for our Traditional Toys segment increased by $1.5 million and as a percentage of net sales due to changes in the product mix to more products with higher royalty rates from products with lower royalty rates or proprietary products with no royalty rates. Additionally, certain royalty advances and guarantees were written off for licensed product whose sell-off period had expired or that is projected to not recoup the advances through future sales or meet its contractual minimum guaranty. Our depreciation of molds and tools increased by $0.6 million due to the depreciation of new products being sold in this segment.

Craft/Activity/Writing Products . Cost of sales of our Craft/Activity/Writing Products remained comparable at $7.7 million in 2007 with $7.7 million in 2006. Although product costs remained comparable, product costs as a percentage of net sales increased primarily due to the mix of the product sold and sell-off of closeout product. Royalty expense also remained comparable year-over-year, but increased as a percentage of net sales due to changes in the product mix to more products with higher royalty rates, from products with lower royalty rates or proprietary products with no royalty rates. Additionally, our depreciation of molds and tools was comparable year-over-year.

Seasonal/Outdoor Products . Cost of sales of our Seasonal/Outdoor Products segment was $3.8 million in 2007, compared to $4.0 million in 2006, representing a decrease of $0.2 million, or 0.5%. The decrease primarily consisted of a decrease in product costs of $0.2 million which was in line with the lower volume of sales. Royalty expense and our depreciation of molds and tools remained comparable year-over-year

Pet Products . Cost of sales of our Pet Pal line of products was $3.4 million in 2007, compared to $2.6 million in 2006, representing an increase of $0.8 million, or 30.8%. The increase primarily consisted of increases in product costs of $0.6 million and royalty expense of $0.2 million, which were in line with the higher volume of sales. Additionally, our depreciation of molds and tools was comparable year-over-year.

http://www.edgar-online.com/bin/cobrand/?doc=A-10 0...



Buy or Sell JAKK? Give us your opinion!

Is this a good business? Is this a good industry? Who are the suppliers and customers? Do they have a good product? Are the margins and ROIC sustainable? Tell us what you think!

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Username Comments
dailystock_admin 
Administrator
Posts: 249

Reg: 09-24-07

10-02-07 05:28 AM - Post#11    
    In response to Stock_Man

Reading that the CEO must meet some pre-tax income requirements or he forfeits some stock, it sounds like the CEO has a very good incentive to make money for the shareholders.

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Edited by dailystock on 10-02-07 05:39 AM. Reason for edit: No reason given.

 
dailystock_admin 
Administrator
Posts: 249

Reg: 09-24-07

10-05-07 12:06 PM - Post#15    
    In response to Stock_Man

It would be interesting to find out the reason gross margins dropped so much in 2006 vs 2005. Will it recover in 2007?

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