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Earnings are out. Check out http://biz.yahoo.com/bw/000216/ca_jakks_p_1.html

The consensus estimate was $.29. The dreaded, hated whisper number was $.43.

They posted $.49.

That's the good news.

Now, to the bad news.

4Q 98 4Q 99 % Increase
A/R 11,926,725 38,024,903 219%
Sales 23,873,161 62,508,216 162%
Inv 2,918,941 19,978,113 584%
COS 14,330,658 36,596,188 155%
A/P 13,418,344 41,152,476 207%
DSO 45 55 22%
DIO 84 101 20%
Flowie 1.09 2.29 110%

Ouch!

Days Sales Outstanding (DSO)increased from 45 to 55 and Days Inventory Outstanding (DIO) increased from 84 to 101. I did those Flow Ratio numbers quickly, so don't take them as the gospel, but they concern me, nonetheless.

So, as I sit here staring at that great EPS number, mulling over the bad stuff, I'm thinking about pulling the trigger and selling.

Anybody know why I shouldn't sell? Mitchinc, are you still holding JAKK?

Ace
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Ouch!

I wonder how much of this is attributable (sp?) to their practice of gobbling up other product lines, or to their video game JV with THQI. I'm not a whiz with numbers, but hopefully this won't become a trend.

At least the earnings were good.

Good investing, all.


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I've still got it. I really had set my mind to hold all my stocks at least a year, if not longer. DSO increasing would be a red flag for sure. I've got to admit, my selling stratey is not as formulated as my buying strategy. I feel that I am a little more conservative on the buying side. Certain imperfections (ie. missing an estimate, etc) may keep me from buying a stock but it might not cause me to sell a stock. I'm still holding CMED, too. :-(

I don't like DSO rising, but I know it happens. Some questions that might be good to ask:

1) Did DSO rise last year this same quarter? It might have something to do with Christmas, etc.

2) If we back the volume of sales represented by the increase in AR, would they have still beat estimates? If not, my fear is that they are manipulating numbers and that alone would make me think about selling. If they would still beat their estimates, then it is merely a red flag to watch. (However, I watched CMED rising AR as a red flag right past the red light stage and perhaps heading towards going down in flames stage.

Again, though. I tend to hold and tell myself to give them time. I can't conscientiously advise others to do the same, though.

If JAKK's other numbers look good (ie. their Gross Margin is improving it looks like), I'll add this to my white-knuckle portfolio.
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Ace,

A/R and A/P are in line with each other, so those numbers don't concern me much. Also, DSO doesn't concern me much because my experience with another retail type stock indicates that this is typical with the Christmas season.
Inventory, however, is the number that stuck out for me. If we assume the excess inventory (above the % increase in sales, also assuming inventory increases in proportion to sales) turns out to be a bust, i.e. we write it off as a loss, what do you calculate the eps to be? I'm getting some screwy numbers and don't trust my math.
In other words, sales increased 162%. Take the excess of inventory above a 162% increase and back it out of the eps. What do you get?
Thanks in advance.

Keith
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kaclaw and mitchinc:
Thanks for your feedback. Unfortunately, or fortunately, the numbers this morning bothered me a great deal, so everything about JAKK is academic for me now.

I set a stop @ 20 and JAKK fell through it about 12:00 noon today.

Hate to let this company go, but there's too much risk going forward for me to hold.

The postive spin I can put on this experience is that I'm in the black with JAKK, which beat the market over the 9 month period I held. Plus, I have a little cash to plow into a new investment, so things look bright for me.

Good luck!

Ace
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I may have wished I followed your lead. Stick around at least on the F8 board. I may need a shoulder to cry on.

I'm still up 33%, too. We must have bought about the same time.
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Mitch and Ace,

The conference call resolved my concerns regarding the inventory. If you will recall, JAKKs typically ships product directly from the manufacturer to the retailer. This, obviously, limits and controls inventory. Two things happened last quarter that substantially increased inventory.
First, the Flying Colors acquisition. Apparently, flying colors product is not drop shipped like the other product, thus, increased inventory. Management attributed $10 million of the inventory to Flying Colors. They also said the $10 million number would remain constant. Clearly, our concern over inventory is based on the premise that inventory is listed as an asset, but can quickly become a liability if not sold. My first fear was that this inventory was unsold Christmas product. This apparaently is not the case at all. Instead $10 million is attributable to the status quo for Flying Colors.
Management said they intend to maintain $2 million for the rest of the business.
The balance of the inventory was attributed to the shutdown of industry in China until the passing of the Chinese New Year. I know nothing about this holiday, but, apparently, all things shut down.
With respect A/R, management confirmed this was seasonal and that 75% of A/R has been paid. What I've found is that the major retailers (Walmart, etc.) have a concrete net 60 days policy. Additionally, the 60 begins to run on receipt of the invoice. This typically means 60-72 days outstanding. Based on the high volume of sales to these large retailers for Christmas, this makes sense. Also, the fact they have now seen the majority of it turn coincides with that timing.
Conference call was very calming and very bullish. They clearly are excited about new product, which is encouraging to the extent we are able to wean ourselves off of WWF dependence. They clearly are after some of the Harry Potter licenses. Buzz around the Extreme sports product indutry is that industry wide they expect 300 million in sales this year. We are estimated to have 50-70% of that market now. Also, the Charlies Angels movie product master license could be a big winner (movie stars Cameron Diaz and Drew Barrymore). Management said very little was given up for that license so the downside risk is virtually nil.
Management said they are very comfortable with $1.65 next year and see 30% growth as a "worst, worst case scenario."
They shipped 100,000,000 pieces of product this year compared to 1,000,000 a year ago.
Very bullish call. A must listen. And frankly, very comforting. I have been concerned about any drop in the WWF popularity and how it would affect the company. The aforementioned estimates by the company were based on WWF sales leveling off. Very comforting.

Keith
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Keith,

The balance of the inventory was attributed to the shutdown of industry in China until the passing of the Chinese New Year. I know nothing about this
holiday, but, apparently, all things shut down.

I live in Taiwan. Chinese New Year is like our Christmas holiday, except businesses all shut down... (I guess they aren't after those last minute presents).
It lasts about 15-20 days. I'm a bit confused about the timing of it in relation to last quarter. It is just ending now (2/18), which means it started around the beginning of February. How did this affect the quarter balance sheet?

I want to thank you for the informative post. I'm holding simply based on the impressive top and bottom line, to say nothing about the growth prospects.

I too think the A/R and A/P can be considered a wash. Worst case scenario, I'm even willing to accept a bad quarter of inventories. (How much of this could be from falling off of WWF demand?)

good luck to everyone,
Derek
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Derek,

Thanks for the info on Chinese New Year. Actually, the timing does make sense. Much of Jakks' product is manufactured in China. Anticipating a manufacturing shutdown of 15-20 days, the company stockpiles inventory in the 4th qrt. By the time Chinese New Year ends, hopefully that inventory stockpile is depleted and manufacturing resumes as normal.

Keith
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