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Last time I omitted my conference call notes after I got basically no response about my request for discussion on the funny way Jakk's counted dilutive shares (the idea being, screw it, why bother putting notes together if nobody cares). But since I got a prodding over on the Hot Topic message board for Jakk's notes, here they are. I didn't really put together much of a commentary on the notes. There's nothing that I find disturbing. Lots of good news. I grumble like everyone else about the behavior of the senior management, but I still own the stock. I feel like I understand where they're coming from and why they don't always act in the shareholders' best interests. Jack is damn good, he knows it, he expects to be paid for it. I disagree with some of the methods and stuff like how diluted shares are counted, but overall I find the business operating well.

My overall impression of the conference call was positive. They're executing well. They'd have to be doing pretty crappy to justify the current stock price, so I'm happy.

Jack Speaks:

Operating income was $7.6 million in Q1 from $4.1 million last year.
Sales were $60 million from $50.8 million last year.
JV profit was $700K down from $5.2 million.

Net income was $6 million down from $6.6 million
Earnings per diluted share were 32cents, same as last year. [Remember folks, the number of shares computation is an average and not the ending number of shares as normal people might expect.]
A $200K one time charge is included above (due to Pentech closings).

Inventories are lower as a percentage of sales.

Flying Colors and Pentech acquisitions are fully completed, ready for another one.

Joel Speaks:

Joel stated that gross margin was 40.6 million (wow, I was impressed until...) but then he said it was up 100 basis points from last year: Oops, a massively incorrect statement, that was 40.6 PERCENT, not millions of dollars!

SG&A was up due to Pentech's warehousing and corporate infrastructure as well as infrastructure added for business expansion, but declined as a percentage of sales to 28.2% from 31.7%

(pro forma mumbo jumbo omitted)

18.9 million shares down from 20.4 million last year due to 1.5m share buyback completed in Q4.

$1.2 million cash flow from operations from $900,000 last year.

$210,000,000 net assets
$52,700,000 AR (up $5,700,000 from last quarter)
79 days sales outstanding in AR from 71 days from last year (up due in part to increase in domestic sales which carry longer payment terms)
$28,800,000 inventory compared to $17,200,000 last year (thanks to Pentech, but also due to increased shelf space in powerful armtwisting retailers, probably Wal*Mart)
95 days inventory outstanding from 91 days last quarter [WTF, why would you compare sequential quarters in a toy company's inventory?]
$51,600,000 cash and near equivalents
$104,000,000 working capital (up from $96,000,000 last quarter)
$1,300,000 debt

Jack Speaks again:
(misc guidance omitted)

Hasbro lost something like $24 million last quarter, Mattel was about the same. Jakk's sells mostly things under $10 retail (Ok now, Jack, you told us so and now you're claiming victory for it. Damn right! Way to go!) Jakk's is now positioned to be a toy, activity, and writing instrument company since it's expecting to ship an astronomical amount of writing instrument units. Business is good.

Questions and Answers:

1) Questions about organic vs acquisition growth.

Pentech's contribution was 7-8 million of revenue.

2) Mattel talked about big retailers changing their buying pattern; more Just In Time purchasing, less inventory. Comments?

Jack said that it's a very real trend in the business. It's been a long trend over the last 1-2 years. Jakk's has a staff to deal with retailers. Some want 6-8 weeks inventory on some products, 8-12 weeks on other products. Jakk's tries to deal with that, moderate it, and tweak it each week. They put a lot of time into it and claim it's one of their better skills. [It probably seems that way, but I suspect everyone is having to get very good at it. Maybe Jakk's is better than most, it's hard to know.]

3) There's been talk about slowdowns in the channels for motocross/BMX bikes (both Jakk's and competition)

Jack: There's been a slowdown in the extreme sports products, not too much. More in the freestyle bikes than BMX bikes.

4) Joel: Pentech SG&A was supposed to get down to the 20% level by the end of Summer.

Joel: They're out of most of the Pentech facilities. The goods are now being shipped out of the Jakk's distribution center. That target is still on track for the middle part of the year. SG&A for Pentech is down about 40% [great news!]

5) Are back to school bookings for Pentech on target?

Jack: "At least, yes."

6) Is the WWF strength continuing? Any other bright spots?

Retailers are buying less "in chunks" and having less inventory on hand. Even with that, there's been a "wonderful increase for the quarter." WWF is "trending up" with less inventory on shelf, very good sign. Extreme sports is doing pretty good. Pentech is selling very well across the board. Back to school is going to be dramatically higher than last year, with higher margins at Jakk's than when Pentech was running it themselves.

7) Joel: Depreciation/amortization for the full year target, also cap ex

Depreciation is about 8 million, cap ex is 12-15 million, down as a percentage of sales. Pentech doesn't require molds and tools.

8) Pentech question about quarterly distribution of earnings.

Jack: For Pentech, it's about 40% back to school, etc. Couldn't make much sense of this.

9) Game release schedule?

Q2 will have a Gameboy Color game coming out.

10) What are the chances of getting the WCW license?

Nothing definitive to say. Jack has had about a 20 year relationship with WWF and it remains as strong as ever. They are in discussions. There are contracts "to be pulled out." Jack is confident it will work out (be part of Jakk), but not sure how long it will take. No guarantee.

11) Gross and operating margins: Are these sustainable in the 40-41% range?


12) Receivables reserve...

8.7% allowances, 2.5million for bad debt.

13) How confortable with inventory?

Extremely clean, with normal reserves. "Clean clean clean."

14) Income is up relative to sales. Why?

Last year they were operating with a transition services agreement with the sellers of Flying Colors. Costs were much higher than what they could provide the services to themselves for. They've eliminated 3rd party warehouses. Etc.

15) JV: Did the JV incomes have any associated expenses? [Ahhh, the question we've been waiting for.]

The gross number was $1.1 million with $352,000 costs.

Followup: Is that the rate they will be accruing costs in the future?

Yes, it will approximate the people part of the allocation. (?)

16) What's the Pentech expected run rate for the year?

Roughly $50 million.

17) Compare and contrast [someone had too many liberal arts classes in college] Gooze and Zyrofoam products in terms of consumer demand, margins, penetration at the retail leve.

Distribution is excellent on it, beyond the traditional uses. Additional distribution. Sales are excellent. Inventory low at retail. Both are sent on a daily basis. Margin are a little higher than normal.

18) WCW: Any idea of what licenses would mean for that? Would it suck?

If/when it would happen, Jack thinks highly enough of their execution [I agree], they would do better than Toy Biz. Don't know where it would go. It might mean huge increases. Not really sure.

19) How's die cast stuff doing?

Die cast hasn't had much effect one way or another on Remco results. Mattel's were up for the quarter.

(guidance question deleted)

20) Inventory is up year over year.

Pentech is a big part of it (tends to be 8-10million, esp now before back to school). Others are coming down. These numbers are really minimal numbers needed domestically. They believe they're doing a good job of managing it. [we all know about big retailers strong-arming people like JAKK]

21) Battlebots?

Shipping in early June. [YES!!!!!] It will show on Fox Kids, will increase exposure to kids. Forecast is unchanged.

[Th-th-th-th-that's all folks]

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screw it, why bother putting notes together if nobody cares

I certainly would never want to leave you with the impression that your analysis isn't dead on, extremely valuable, AND greatly appreciated. Your posts on this board and HOTT have been immeasurably valuable to me, but they only let me rec each post once and I can only name you a favorite fool one time (which I did a LONG time ago).

I have to admit, though, that since HOTT and JAKK are both more than double my dollar cost average, I don't obsessively check their stats and news each day like I did when JAKK was plunging from 20 to 7 or when HOTT had that dip where they went from 38 to 28 (19 to 14, split adjusted). Lately, my attention has been focused entirely on PPD, which is currently going through the mother of all short squeezes. Once I'm dollar cost averaged down to 0 on that one, I probably won't pay much attention to it either.

Still, one of the reasons I feel so comfortable with HOTT and JAKK is because of your thoughtful analysis. The basic idea is that if there was something seriously wrong with JAKK, Deli or Brewer (or someone else) would have said so by now. I'm now comfortable knowing that the major concern with JAKK is management compensation and funny share dilution. Good to know, but I'm not that concerned about it. And if I was, I wouldn't even know how to begin to analyze the share dilution issues of my other 17 stocks.

Anyway, I don't want you to feel underappreciated. Your contributions on these boards is invaluable. Recently I even copied one of your old HOTT posts (a reading list to the novice investor) to the PPD boards, along with a link to the original.

You put so much thought and detail into your conference call notes that I'm sometimes ashamed that I don't have anything to add to the discussion. If it gets too time consuming or tedious, I'd be glad to accept the cliff notes version (example- list 5 good things and 5 bad things about the call). But don't assume that a lack of response on my part indicates indifference. I'm mighty grateful for your valuable insight.

OK- now that that's out of the way, here's my take:

* I agree with everything Deli said in his last post, and am happy remaining long on JAKK for the forseeable future.

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I guess that particular statement was a bit harsh. I chose the wrong words. A lot of people here care about a lot of things and lots of people have been putting time and effort into posting stuff (both here and on Yahoo). It was definitely surprising to discover a significant unexpected factor that distorted the earnings per share of JAKK and then get no response about it; I was kind of looking for someone to double check my math to see if I made a mistake. :-)

Anywayz, thanks for the kind words.

Now, looking at Jakk's results, I guess I was surprised to see that Jakk's had really pulled it off. Things appear to be turning around there. I just hope that it's for real and not like Sunbeam in the late 1990's under Al Dunlap. But if money disappears from one place (i.e. the JV) and re-appears somewhere else (i.e. Pentech), that would be bad. The dollar figures for Pentech are very large in comparison to the JV, so I don't think that's the case.

I went back and looked at the Q1 10-Q last year as well as the 10-K for 2001. Here's what I see...

Accounts Receivable
March 31, 2001 = 57 million (86% of quarter's sales)
March 31, 2000 = 40 million (79% of quarter's sales)
March 31, 1999 = 38 million (way over 100% of quarter's sales)

Inventory, net
March 31, 2001 = 29 million (48% of quarter's sales)
March 31, 2000 = 17 million (34% of quarter's sales)
March 31, 1999 = 20 million (79% of quarter's sales)

Cash flow from operations
Q1 2001 = 1.2 million
Q1 2000 = 16.8 million mostly due to sales of marketable securities
Q1 1999 = 3.6 million

Adjustments to earnings to get cash flow
Q1 2001 = 6 million minus 1.2 million = 4.8 million
Q1 2000 = 6.6 million plus 10.2 million = 16.8 million mostly due to sales of marketable securities
Q1 1999 = 2 million plus 1.6 million = 3.6 million mostly due to depreciation and reserves

Now we can expect depreciation to be something like 2 million (since they expect 8 million for the year). Accounts receivable is up 5.7 million. Inventory is up about 0.8 million from last quarter. This explains just about all but 0.3 million of the adjustments to cash flow. People over on the Yahoo board are wondering about where 0.7 million of JV money went. This means that there could be as much as about 1 million that we can't easily account for. I'd argue that even if JAKK's senior management was unscrupulous numbers massagers, the results are better than what they could "manufacture". In other words, the results are pretty good, especially for a stock with a P/E of 8.

Of course, it's entirely possible that I made a mistake in math or logic. Point it out if you see anything wrong, please.

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you own Jakk and Hott Topic? So do I, they appeared on my small cap radar screen using the foolish 8. Do you have Chicos FAS too?
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I don't own Chico's Fashion but it looks like a solid stock. As long as you are in a position to understand it and follow it. You can do very well with small caps when you can keep an eye on the actual business. Or you can get creamed if you don't really understand the business.

I don't know if they're technically smallcaps but I own JAKK, HOTT, FOSL, TOPP, PPD, PIXR and FUN.

And according to Delilama's profile, he owns "mostly HOTT, but also JAKK, GTNR, CROS, and little ACY".

All other things being equal, though, large caps are preferable. If two companies are completely identical in valuation, growth, debt, margins and efficiency, favor the larger one. But if you see a great small company that the street hasn't picked up on yet, carefully chosen high quality small caps can do very well for you.
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Thank you Brewer And EJ.....You guys are always very helpful. I have chosen to buy half of my intended position today and hold off with the other half if and when the stock ever drops.

With all the hype about tech stocks , my best investment last year was an apparel retailer. I have since fallen in love with this one. Now it is fairly priced , but when I bought it it was VERY cheap.

The stock was Abercrombie & Fitch(ANF). Great company with plenty of free cash flow to fund further expansion. They are a nuche clothing marketer that sells to college age group(mainly preppy designs). They have some fo the best(If not THE best) margins in the business.

I bought at $8.50 per share and it is now nearing $38 per share.

I like to hear from fellow investors like you guys(EJ and Brewer) now more than ever. I used to be in love with tech, now I am in love with whatever stock has compelling value and reasonable expectations of steady growth.

Love the suggestions, please keep your stock ideas and current investments coming, as we seem to share the same investment criteria. By the way, I also own PPD. Another winner so far for me. Bought at 13 and now over 20. I am looking at and liking PLMD too. I bought PPD through the uncertainty because I realized the insiders were making some of the biggest purchases they have made in years.
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I was going to buy ANF around 10. Then it soared to 12 and I figured I was "too late". And anyway I didn't know anything about it, other than the stock had been beaten up and everyone in the world seemed to be wearing their shirts.

Keep an eye on tech. It's the most hated industry in the stock market right now. I wouldn't call it oversold exactly, but it's gone from extreme overvaluation to reasonable valuation. The other sector that the market is skeptical about is oil. Philips Petroleum is selling for 7 times earnings. Now granted, their earnings have spiked up a bit, but if oil drops to $20 a barrel, they'll still be raking it in. Everywhere I look, people are driving monster trucks, minivans and suv's that were developed when gas was cheap. But somehow, P or CHV or APC aren't as being defensive like chewing gum or tobacco.

What people who loved and now hate tech don't take into account is why they loved it in the first place. It's not that tech is so great. It's that companies like tech are great. Companies that make lots of money and can grow fast with no debt are great companies. Just because Mr. Market is bipolar doesn't mean we're suddenly going to go back to beating clamshells open with rocks.

The advantage of a stock like JAKK or ANF is you can keep an eye on it easier than you could keep an eye on some obscure tech companies. You start seeing ANF employees twiddling their thumbs on the saturday afternoon before christmas, maybe you think about selling.

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Exactly EJ....that is also the way I see it. I shouldn't have insinuated that I hate tech, cause I don't . I was just generalizing. I am actually more engaged with the companies financials and growth potential than anything else. "Growth at a value" is what I look for.
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I'm looking at JBX (Jack in the Box) right now, which is a huge fast food restaurant in the Western US. It's got pretty solid growth (double digit in all categories) with a pe of 9 and price to cashflow of 6. I had avoided it before because it had too much debt (3:1 debt to equity last year), but they seem to be paying off debt quite rapidly.

Some analyst recently downgraded it on the theory that with gas prices so high, nobody will buy 99 cent Jumbo Jacks. Um, ok. So why did they have 46% eps growth last year?

Seems like a no brainer, but everyone's scared about California blackouts. Why JBX should be singled out is just odd. The only explanation is that Wall Street is made up of New Yorkers who think the state is about to fall into the ocean or something.
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Take a look at RSAS(RSA Security) when you get a chance. I think it is a little pricey but it has huge potential. Curious about what you think.
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Perhaps the analyst you are talking about was refering to the high energy costs associated with California businesses right now. I found this article today:

Seems like a small issue to me. As they can always regroup the higher costs by raisning prices accordingly. Like you said earlier, I don't think a few cents is going to make a difference in people's food buying habits.
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Speaking of fast food (ejandresen looking at JBX) have you ever looked at Rubio's Restaurants (RUBO)? They're a small chain from San Diego. They have the best Mexican fast food I've tasted and the restaurants are always packed when I go in. Their stock price is (and has been for quite awhile) quite low. They are expanding into new markets up and down the west coast, but I'm not sure what appeal they would have outside of the Western U.S. They seem like an up and coming company to me.
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