Legal Costs Take Toll on Jakks Pacific Profit in Q1

At least some Jakks Q1 legal expenses were from ongoing efforts to dismiss a suit by World Wrestling Entertainment against Jakks and WWE videogame joint venture partner THQ, CEO Jack Friedman told analysts in a quarterly earnings call. In December, a federal judge dismissed WWE’s RICO claims against Jakks, saying the statute of limitations had run out. The judge also found that WWE hadn’t justified a claim for RICO injury. WWE sued Jakks in 2004, claiming violation of its intellectual property via secret payments by Jakks to a WWE licensing agent involved in a joint venture with Jakks at a time when licensing rights for WWE videogames were being sought. That federal suit was resolved, but WWE also sued Jakks in Connecticut Superior Court, an action still pending.

Jakks is waiting for a California judge “to tell us which arbitrator we're going to use” in its separate dispute with THQ, Friedman said. That is expected to happen “very shortly” and it will then take about 60 days after that probably to enter into arbitration, he said. The companies dispute the preferred return rate for the distribution period for WWE games started July 1, 2006, and ending Dec. 31, 2009. THQ sued Jakks in April 2007 to force arbitration and name an arbitrator. The judge appointed an arbitrator in August, but Jakks rejected his selection.

Despite the drop in profit, Jakks Q1 revenue grew 5.5 percent to $130.9 million, driven by sales of its traditional toy categories, including Plug It In & Play electronics. But Chief Financial Officer Joel Bennett said sales of traditional toys slid to $118.3 million from $119.5 million a year ago. Traditional toy sales brought 91.3 percent of company total revenue in Q1 this year, up from 89.2 percent a year ago, he said. The WWE videogames contributed $2.4 million in profit during Q1, up from $1.5 million a year ago, Bennett said.

The company’s international business “benefitted from strong sales” of WWE and Chronicles of Narnia Prince Caspian action figures and Plug It In and Play products during Q1 and “we expect the momentum to continue” in Q2, said Chief Operating Officer Stephen Berman.

Some closeout sales impacted company Q1 gross margins and bottom line, Friedman said, not elaborating. Jakks shares were down 8.67 percent at $25.06 in late afternoon trading.

Jakks finalized integration of its Play Along division in Q1 and expects “to benefit beginning in the second quarter from the operating efficiencies as a result,” Friedman said. As part of that integration, Jakks combined operations in Hong Kong and Florida, reducing space and headcount by unspecified amounts, Bennett said.

Several new products Jakks demonstrated at American International Toy Fair (CED Feb 19 p5) will start shipping in Q2, although most key new products won’t reach store shelves until Q3, Friedman said, adding the company is “feeling very good about our shipping dates this year.” Jakks is especially optimistic about such new products as EyeClops Night Vision Goggles, Plug It In and Play Hannah Montana Pop Hero Guitar and a line of Ulti-Motion game systems, he said. The version of the Night Vision Goggles shown at Toy Fair had a range of only 20 feet, but that’s improved to 50 feet in total darkness, Friedman told analysts. They will sell for $79 or less, he said.

Jakks is “confident” it will achieve its 2008 forecast of at least $891.4 million in sales, $93.6 million in income and $2.91 diluted earnings per share, “despite the recession affecting the U.S. economy and some challenges that are affecting our industry and others who manufacture in China,” said Friedman.