Jakks Pacific and Build-A-Bear v3.0: Q3 ER
Jakks Pacific and Build-A-Bear v3.0: Q3 ER
$BBW: Jakks Pacific's Q3 results as a guidance for an options trade
Jakks Pacific ($JAKK) had a “perfect” Q3 earnings call
I am a proponent of consumer sectoral trades, especially involving small cap companies around earnings season. This is because I’m a simple man that prefers to analyze widget businesses – and Build-A-Bear and Jakks Pacific are two businesses I can understand.
On November 1, Jakks reported its 3Q results with an impressive year-to-date Gross Margin of 32+%, highest level since 2011, and up 600 basis points vs. Q3 2022. Now that’s impressive.
Other highlights:
Gross profit of $107.0 million, up 16% compared to $91.9 million in Q3 2022.
Cash and cash equivalents totaled $96.4 million as of September 30, 2023 compared to $76.6 million as of September 30, 2022, and $85.5 million as of December 31, 2022.
Total debt was zero, compared to $67.7 million as of September 30, 2022, and $67.2 million as of December 31, 2022.
Jakks’ earnings call commentary on seasonality
Jakks’ CEO, Stephen Berman, noted something that caught my eye regarding seasonality and Halloween sales in general:
Last quarter, we discussed how the seasonality has moved around this year. So we saw it catching up this quarter with a 19% year-over-year growth in Q3…especially having third quarter and fourth quarter being as strong because of Halloween and the actual holiday season.
Berman also hinted that their popular segments on Nintendo and Disney IP have been very popular this season. Again, tailwind from the summer blockbusters.
His analysis on JAKK’s price demographic is also noteworthy:
I think it's over 70% is under $40 at retail and a good portion of it is under $20. So we're in the right category of business, and we're right for the holidays.
Trading Jakk’s Pacific: Extended for now
All in all, I am watching JAKK as closely as BBW to go long but it’s well extended beyond my preferable entry point near Weekly MA-10 at $20.20, with the current spot at $28.18.
Hovering over 40% from the Weekly 10-MA after the Q3 earnings breakout is not an ideal entry, in my opinion, as it is exhibiting some distribution on the weekly chart. This could be a very good trade if it can retest and bounce off of WMA-10. I’ll watch on the sidelines as it consolidates near my preferential entry point.
Build-A-Bear’s Q3 Halloween sales and early holiday shopping
It has been my experience that Jakks earnings results provide a reasonable guidance for the Build-A-Bear demographic and its seasonal trend. Here, I wouldn’t be surprised if we see some overlapping congruence between the two companies, especially with BBW’s Halloween segment being wildly popular. The Gallop data from a month ago also seems to align with Jakks’ consumer sentiment:
Build-A-Bear’s Q3 Earnings Preview
There’s a lot to like about BBW’s ER this season. I’ll reinforce the point that it has fantastic fundamentals, a disciplined, albeit slightly conservative management, and a strong retail moat in both online and physical channels. Build-A-Bear’s price range, between $15 and $50, is also in an ideal spot that is quite popular with typical holiday toy shoppers.
The Gross Profit Margin has been in the range of 50% year-over-year, and BBW's fiscal year 2023 has 53 weeks compared to 52 weeks in 2022. This is estimated to be additional $7 million in total revenues with approximately 35% flowing through to EBITDA. This could potentially mean an upper-range guidance for FY2023.
The Street is expecting Build-A-Bear to report $0.51 EPS and $108.11M in revenue. Sell-side analysts miscalculated its earnings results last quarter, which, in my view, is good news—an opportunity to trade the expectations disconnect. One benefit of low coverage by the sell-side is that their expectations are often misguided and overlooked when it comes to actual earnings performance. Nor are they likely to carry out Lynch-type research to see the hype around Pompompurin™ sets.
I expect that BBW will secure at least $0.54 EPS and $110M in revenue this quarter, covering the Halloween season.1
I’d also like to point out that BBW’s seasonality for December and January has been strong over the past 5 years. This trend might demonstrate its tendency to align with other toy subsectors during the holiday months. It supports the thesis that this period could yield a profitable trade going into Q3 earnings and beyond.
Current Positioning in Build-A-Bear
I added a few ‘24 Jan calls to backtest their liquidity and bid-and-ask spread. So far, the calls are widely in $0.05 increments, which is not ideal considering the premium is priced below $1. One impediment in this trade – but I’ve found them to be more liquid after earnings. I plan on cautiously adding additional calls this week, both ITM and OTM, to increase my stake leading into the earnings. A pivotal week, nonetheless.
Disclaimer: I have a long position in BBW, with calls expiring on January 19, 2024.
This is based on the Capital IQ model and my earnings probability model.