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No. of Recommendations: 6
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?

Yes.

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]

DeliLama
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