JAKKS Pacific Inc (JAKK) 2008 Q1 法說會逐字稿

Good morning, I will be your conference operator today. At this time, I would like to welcome everyone to the JAKKS Pacific first quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you.

Miss Rosenberg, you may begin your conference.

Thank you. Good morning, everyone. This is Genna Rosenberg, Senior Vice President of Communications and Investor Relations for JAKKS Pacific. Thank you for joining our teleconference with JAKKS management to review results for the first quarter ended March 31, 2008. On the call today are Jack Friedman, Chairman and Chief Executive Officer of JAKKS Pacific; Stephen Berman, our President and Chief Operating Officer; and Joel Bennett, our Executive Vice President and Chief Financial Officer. Mr. Friedman will first provide an overview of the quarter and our operation results and then Mr. Bennett will provide detailed comments regarding our financial results. Mr. Friedman will then conclude the prepared portion of the call with highlights of our product lines and current business trends. Prior to opening up the call for your one on one questions.

Before we begin, I would like to point out that any comments made about our future performance, events or circumstances including the estimates of sales and earnings per share for 2008 as well as any other forward-looking statements are subject to the Safe Harbor protection under Federal Security laws. These statements reflect our best judgment based on our current market trends and conditions today and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected on our forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult our most recent 10-K and 10-Q filings with the SEC as well as our other Company reports subsequently filed with the SEC from time to time. With that, I'll turn over the call to Mr. Friedman.

Thank you. Good morning, ladies and gentlemen. This is Jack Friedman. Thank you for joining us this morning to discuss our results for the first quarter of 2008. First quarter 2008 net sales for JAKKS Pacific increased 5.5% to $130.9 million with traditional toy sales from our diverse product portfolio driving the business. As is typical, the first quarter is expected to be our lowest sales volume quarter. We are quite optimistic that our 2008 product portfolio will continue to perform within our expectations and believe we were on track to achieve our 2008 guidance and another record year for JAKKS Pacific.

We experienced continued strong sales in the quarter in several traditional toy categories including action figures, dolls, plush, electronics and pretend play products. With the largest contributions coming from those based on the Disney characters between pop star Hannah Montana and Classic Princess as well as Puppy in My Pocket, WWE, Chronicles of the Narnia Prince Caspian and Pokemon.

Disney recently picked up a third season of its top rated Hannah Montana television show earlier this month. And the show's star, Miley Cyrus continues to dominate between market with Miley having won two Nick Kids Choice awards during the quarter. Our Hannah Montana line looks great with major Hannah Montana contributions coming from several JAKKS divisions later this year and retail support for our line is extremely strong. Both JAKKS and Disney are excited by the potential for a new plug-and-play Hannah Montana Pop Hero Guitar video game developed for tween girls which allows Hannah fans to rock out on the Hannah Montana guitar while playing the notes to the songs as they come up on the TV. In addition, new fashion dolls, play sets and role play products are all on track for later this year and we expect the 2008 Hannah Montana line to be even bigger than last year. But Hannah is just one contributor from JAKKS portfolio that gives us confidence in our outlook for the rest of the year. We're also excited about our new real working EyeClops night-vision goggles. Our new girl gourmet cupcake maker, our new plug-and-play wireless motion gaming system called the Ultimotion. Additional new Disney initiatives and several other new JAKKS programs hitting shelves later this year.

Product development efforts were up in the first quarter as we work to get the new items developed and produced simultaneously. We've also been working hard on our lines for 2009 and beyond and we believe the increased product development is an investment into our future that will contribute to a great year for JAKKS Pacific.

With first quarter sales growing more than 5% over same period last year, our performance reinforces our confidence that we will achieve our guidance targets of at least $891.4 million in net sales and $93.6 million in net income and diluted earnings per share of $2.91 for 2008. Our financial position remains extremely strong with working capital of approximately $359.2 million including cash and equivalents of $238.3 million as of March 31. Leaving us with tremendous ability to execute our acquisition strategy. We are actively seeking out the next investment into our future. Before I get more into details about our products' performance in the quarter and our outlook for the future, I would like to turn the call over to Joel Bennett for a review of our financial performance for the first quarter of '08.

Thank you, Jack. Good morning, everyone. First quarter 2000 net sales were $130.9 million compared to $124.1 million in the same period last year, an increase of 5.5%. Net income for the first quarter was $900,000 or $0.03 per diluted share compared to the first quarter of 2007 when we had net income of $3.2 million or $0.12 per diluted share. 2008 was impacted by higher litigation costs, product testing as well as restructuring costs which increased $3.2 million year over year to $4 million or $0.10 per diluted share.

Now for our sales by product categories. Worldwide sales of traditional toys which include action figures, vehicles, electronics/role play, dolls, kites, pool toys and outdoor and promotional products were $118.3 million for the first quarter of 2008 compared to $119.5 million in the first quarter of 2007 representing approximately 91.3% of overall sales in the first quarter of 2008 versus approximately 89.2% of overall sales in the first quarter of 2007. Sales in the quarter were driven by action figures, dolls, electronic toys, and pretend play products based on WWE, Hannah Montana, Pokemon, Disney Princesses and other popular licenses. Our craft activity writing products which consist of our Pentech and Flying Colors product lines had worldwide sales of approximately $6.1 million in the first quarter of 2008 compared to approximately $9.2 million in the comparable period of 2007 representing 4.7% of total sales for the quarter versus 7.4% of total sales for the first quarter of 2007. But later in 2008, we have several new activities and writing products including our spa factory line. Gourmet cupcake maker and more which we expect will increase sales in this category.

Worldwide sales of our pet products were up to $5.3 million in the first quarter of 2008 compared to $4.2 million for the first quarter of 2007. Representing approximately 4.1% of overall sales in the first quarter as compared to 3.4% of overall sales in the same period in 2007. Sales in this category were led by AKC and other licensed pet products. Gross margin for the first quarter of 2008 was 36.2% as compared to 3.4% of overall sales in the same period in 2007. Sales in this category were led by AKC and other licensed pet products. Gross margin for the first quarter of 2008 was 36.2% as compared to 36.7% in the first quarter of last year. The 50 basis point decrease in gross margin for the quarter is due to our product mix which included more lower margin closeout sales, offset in part by lower write-offs of TV game development and license advances. Adjusted for closeouts, sales grew 3.1% to $127.9 million with adjusted gross margin 37.6%.

SG&A expenses in the first quarter of 2008 were $48.3 million or 36.9% of net sales. As compared to $42.2 million or 34% of net sales in the same period last year. This increase is due to higher legal fees related to ongoing litigation which reached $2.6 million in the quarter. As activity surrounding the WWE lawsuits increased with the recent dismissal of the Federal claims by the Federal courts and as the Connecticut action progresses. In addition, higher advertising and marketing costs and increased product development costs in part due to increased product testing.

Depreciation and amortization was approximately $2.8 million in the first quarter of 2008 compared to $4 million for the comparable period in 2007. Stock-based compensation for the first quarter of 2008 and 2007 was $2.1 million. During the quarter, we posted $2.4 million in profits from the video game joint venture with THQ compared with $1.5 million for the comparable period last year. Strong sales on the joint venture WWE Smackdown and Raw 2008 title developed for the Sony PlayStation 3, PlayStation 2 consoles, PSP hand-held as well as the Nintendo Wii console and the Nintendo DS hand-held and X-Box 360 console as well as various mobile carriers worldwide. Based on these overall variances, we had pretax income of $1.3 million for the first quarter of 2008. Compared to $4.8 million in 2007.

Cash flow from operations in the first quarter of 2008 was approximately $15.4 million, compared with $22.4 million in Q1 2007. And our financial position remains very strong. As of March 31, 2008, our working capital was approximately $359.2 million including cash and equivalents of $238.3 million. We continue to evaluate potential acquisition opportunities and expect to continue to grow our business by actively pursuing accretive and complementary acquisitions and executing on internal growth initiatives including creating new products and securing new licenses to provide continued growth for JAKKS Pacific.

Our Board of Directors recently authorized a stock buyback program of up to $30 million worth of the Company's common stock and to date, no shares have been purchased under the program. Accounts receivable at the end of the first quarter were $81.9 million compared to $75.1 million at the end of the first quarter of 2007. DSOs were 56 days, comparable to the 55 days in the same period in 2007. Inventory was $66.9 million at the end of the quarter down from $69 million at the end of the comparable period in 2007. DSI's increased to 87 days from 96 days at the end of the first quarter of 2007. And capital expenditures for the quarter were $3.5 million and we expect capital expenditures to be approximately $19 million for the full year of 2008. With that, I'll return the call to Jack Friedman.

Thank you, Joel. Well, we are in full swing getting into production on our many new key drivers for this year. And are on track to begin to ship many of these new items late second quarter. With the majority of the sales on our key any new items shipping in the third quarter. As is typical.

As we mentioned, we're feeling extremely confident about our line-up for 2008. With several resonating as favorites amongst the buyers, analysts and media who have seen the lines. Some new products stem from organic nonlicensed product innovations developed here at JAKKS while others are innovative initiatives based on our stellar licensing portfolio. The bottom line is there are new initiatives with great potential coming from every area at JAKKS. In pets, we showcased our 2008 line at the Global Pet Expo in the quarter and we are buoyed by the response to new lines including the U.S. Army, a complete line of Arm & Hammer oral care products for dogs an extension of our White Bites oral dental chews more new AKC and CatFancy Association products and more. Expansion into new drug and mass accounts has been progressing on plan and retails are responding to the quality offering that is moving consumers in about every channel.

In seasonal, we saw a modest improvement in kite sales in the quarter with successful programs at Club stores and other accounts as we approach summer and have been working on new seasonal and kite initiatives we expect to bring to market in 2009. Our new Pentech pen spinning product line called Spins which capitalizes on a popular sport of spinning pens through the fingers is hitting retail shelves just about now. And if it takes off in the U.S., as it has throughout Asia and Europe, it could be a nice addition for JAKKS.

A plush line based on the virtual playground NeoPets.com launched at Target in the first quarter and so far, it has been trending wonderfully for us. We're working closely with Nickelodeon to cross promote the items on the site which is the original and largest virtual community for kids and expect this line to only grow as we expand to other major retailers later this year. Another program with Nickelodeon for this year is Slime. I Love Slime. The Nick Kids Choice awards achieved the highest rating ever and many of today's top stars got Slimed on national TV. JAKKS is cosponsoring a Slime Across America tour hitting cities nationwide this summer and a number of major promotions Nick is executing on to promote Slime. JAKKS has had much success with Nick Slime back when it was called Goos and we believe the time is right to bring back this gooey compound for kids of today. The line of Slime products hitting retail later this year should do well for us. Our fun and irreverent SpongeBob plush line also ships to retailers later in '08.

We have two new exciting initiatives in our activity area. Spa Factory and Girl Gourmet. Cupcakes are usually popular with cupcakes popping up in cities across the U.S. The feature items in our new Girl Gourmet cupcake maker and response from our retail partners has been sensational. Kids can microwave a cupcake in 30 seconds, frost it with Gourmet frosting and they're delicious. This item will start to ship in second quarter and based on retail commitments and their expected promotional plans for the girl gourmet cupcake maker, this product has the potential to be a breakout hit for the fall season. We expect it to be formidable competitor to Easy Bake Oven and other play food items on the market.

Our new Spa Factory line gives girls all of the tools to pamper themselves for at home spa parties starting with robes and slippers to making their own aromatherapy potions with essential oils whether alone or with their friends, we think girls will love Spa Factory and retailers have been extremely supportive with commitments from all of the majors to carry the line this fall. JAKKS is in the doll business, for 2008 we have at least eight doll lines shipping to retailers, something we're quite proud of. This is exciting. Camp Rock is slated to be Disney's new big hit. Along the caliber of High School Musical. Starring the hottest boy band around, the Jonas Brothers. JAKKS is launching Camp Rock dolls at the end of the second quarter at Target and as well and the potential for Camp Rock is phenomenal and long-term with more JAKKS products slated for next year to other retailers as well. Of course, our Hannah Montana line performed well last year and in 2008, we have dynamic new Hannah Montana dolls that sing and dance. Our Hannah Montana beach house play sets, new wigs and hairstyles featured on the TV show, dance mats that teach kids to dance like the touring pop star, new musical instruments, new electronic products and more. Every key retailer looks at Hannah as a hot growth category and we're confident that this will keep up with demand while managing the property at retail to maximize the property longevity.

We announced the new line of Taylor Swift dolls that will be hitting Wal-Mart and other retailers in August. The endearing country music star won CMT female video of the year and video of the year during the quarter and the response from country music fans to her upcoming Signature doll line has been promising. Fancy Nancy based on the children's book series that has been on the New York Times best-seller list for over 100 weeks. We created an adorable lodge doll line with dress up outfits for the doll and matching dress up outfits for little girls which hit Target shelves early in the second quarter. Juku Couture is a new fashion line inspired by trendsetters in Harajuku, Japan based on the tween fashion craze of layering and mismatching clothing shipping to retail this summer.

Our beloved Cabbage Patch Kids are celebrating a milestone 25th anniversary since the original craze in 1983 when Coleco first introduced it to kids. Young parents and grandparents of today identify with this classic brand and there are a number of special initiatives and high profile celebrity tie-ins slated to commemorate the brand and drive sales for JAKKS at retail later this year. Shortly, we are roll out our exciting new line of NASCAR toy vehicles and play sets designed for fans of all ages and in particular, kids 3 to 8. And our NASCAR toys should have excellent placement in retailers for this fall. With 75 million fans, it is the number one spectator sport with a ten month season and we believe that our NASCAR range will be a great contributor in 2008. Vehicles and play sets based on our MXS motocross brands seem to be on the rise with good placement for 2008.

Puppy in My Pocket has been doing terrific and the new character extensions such as ponies and jungle animals are also performing to our expectations with expanded shelf space at some accounts. Many accounts, actually. We have a new line of beautiful pretend products based on Disney's fairies in anticipation of the new platinum DVD Tinkerbell coming out this fall and also a new line of sleeping beauty pretend products including an enchanting styling vanity and line of dress and role play toys. Our Black & Decker role play products are still doing terrific for boys and will continue in the line as well as Lodge Cars, the movie, workbench based on the movie -- a planter of novelty toys and many private label brands in the role play toys category that consistently perform and are strong contributors to our overall business.

The plug it in and-play TV games line has been a catalyst for growth and for several terrific line extensions. We continue to ship our core TV games based on video game licenses, game shows and kid driven titles. We'll ship new tween titles based on Disney's High School Musical and Hannah Montana in the second and third quarter. As I mentioned, the plug it in and play Hannah Montana pop hero guitar video game is expected to be a top item in this category. Our EyeClops bionic eye further extends the plug and play category for JAKKS and with many members of the media last year, touting EyeClops as one of their top picks with the recent nod by the Scholastic Instructor magazine, identified EyeClops as their teacher's pick in the current April/May issue. Our new EyeClops bionic cam which features a multi zoom lens, a color LTV screen for portability and built in camera and flash drive so kids can now use their EyeClops to see things on the go will begin to ship at the end of second quarter. As well as our exciting EyeClops night-vision goggles which is looking even better than we had hoped. At Toy Fair we showed the product to retailers and media who were awed by the 20 foot range. Well, now, it is coming in at a 50 foot range in total darkness. These are real working night-vision goggles at a price point of $79 or less. We expect this line to perform excellently for us.

Our new Ultimotion wireless motion video game line which combines plug-and-play gaming with the role play in one of the most popular trends in video gaming today, motion games and are very well placed in our top accounts. We have an unlicensed title on popular sports and several titles co-developed with Disney slated for later this year. Our action figures also continue to be a strong category for JAKKS driven by our WWE and Pokemon figures which position JAKKS with two of the top five action figure lines at retail. Internationally, WWE also remains one of, if not the strongest voice property in both the U.K. and Australia and we have many new assortments from both lines rolling out in 2008.

New Pokemon Diamond & Pearl figures, play sets and accessories will feature a battle in system allowing kids to connect all of the pieces to the large scale play set making it massive in size. And we continue to roll out new Pokemon characters that kids seem to be clamoring for. In 2008, new WWE four inch figures and the largest scale ring ever join the line-up with new classic superstars and superstars currently in programming. Action figures, play sets and role play toys based on the next installment of Disney's franchise, The Chronicles of Narnia, Prince Caspian touted to be one of the biggest family films of the summer, opening in mid May began to ship in the quarter. We will also be producing toys for the third installment of the franchise Voyage of the Dawn Treader which hits theatres in 2010 on a worldwide basis. We've been working with our Discovery kids line and expect to ship the line of interactive toys that make learning fun for retail in fall 2008. We have smart animals and other products based on nature as well as learning toys and other genres.

Based on the response and despite should uncertainties related to price increases and production issues that are affecting both our industry and others who manufacture in China, we believe 2008 is shaping up to be a great year for JAKKS specific. The portfolio of product that we have developed and nurtured along with our relationships with retailers, licensors and consumers has positioned us well for this year. We're working hard to execute on our strategy and on behalf of our shareholders and are excited by the opportunities that lie ahead. With that, I will open the call up to questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Tony Gikas from Piper Jaffray.

Good morning, guys. Few questions. Maybe just a little bit more color on the legal fees, how they're expected to progress through the year. Also, on the ad spending, looks like that was higher as well as product development. How should we plan those line items through the balance of the year? And then maybe just a little bit of comment or color on the gross margin. How are input costs affecting you? Do you expect the gross margin to be flat on a year over year basis? Then I have a follow-up.

Okay. Regarding the legal, within our original forecast that we reaffirmed today, we believe that we have the appropriate amount of legal fees reflected in there. The only thing that we don't control is the timing and in a low volume quarter, obviously it is of more prominence as it is this quarter.

Was the timing for legal fees higher in this quarter or was it just--?

Yes. Again, we believe we have enough in the forecast. It is just, as I said in the lowest volume quarter, it stands out a bit more.

Ad expense and product development then?

Product development increased -- we've indicated in prior calls the increased prudent activities in testing at the factories related to recalls within the industry. We have not had any problems. But we also have a lot of new products. So, a portion of it was just increased normal testing but we've also got a number of new initiatives, new licenses, nonlicensed products rather that we're introducing this year. Several of which incorporate adapting technology into our products including the night vision. We've also got a handful of other big key items, Girl Gourmet, Spa Factory, the next generation EyeClops, the Ultimotion, et cetera. So, all of these -- all of this spending is in anticipation of the launches of some key items for this year.

Okay.

Margins, Q1, as I mentioned in my portion, ordinarily, we do closeouts at or above costs. We did have some that were below cost and adjusted for the closeouts which were about $3 million this quarter. The gross margins would have been 37.6%. We do expect expansions for the year. Again, our forecast hasn't changed. It is more just the timing of the way things played out.

And with a softening retail environment, do you anticipate taking ad spending up? Is there anything there that we should be aware of? And then two, just a housekeeping question, amortization for tools and mold was up in the quarter. How do we plan that line item and depreciation was well below trends, maybe just a little help there?

Regarding depreciation, amortization, basically, as more time passes, from the last acquisition which was CDI, the limited live assets are quickly being fully depreciated. So, we're expecting about a $4 million decrease year over year and then next year it goes down another 3 million or $4 million, these related to play along and CDI. So, we'll see that continue to trend down as those assets get fully amortized. What was the other part, Tony?

The other part was ad spending. You know, how do you feel about--?

Right, right, right. Easter came actually early. It was in March this year and ordinarily the spend usually occurs in April. So, while we do have some key items that we expect to advertise, that will hit, more third and especially fourth quarter. So, year over year, it was more of a shift as opposed to a need to push the sales at retail.

Okay. Then the last one was the amortization of tools and molds? Sorry.

I mean, at $19 million in CapEx, most of the tools and molds will be brought on-line the end of the second quarter beginning the third quarter when we started shipping big all of the new items. So, it should be about what it is, for Q2 and then probably up a few hundred thousand a quarter in third and fourth quarter.

Okay. Thanks, guys. Good luck.

Thank you.

your next question comes from the line of Steve Epstein with Defiance Asset Management.

Hi, everybody. Couple of questions. And some follow-ups. On inventory levels, could you comment on inventory levels at retail for JAKKS at the beginning of the first quarter? And the end of the first quarter? And just what their trends and behavior have been. It is well publicized they have gotten much more conservative on the inventories they're carrying in this economic situation.

This is Jack. I'll answer it the best that I can. We're comfortable with our inventories at retail. It is something that we look on on a daily basis. I would say that some of the Hannah Montana products came in very, very late or into January, some of the retailers were expecting it to hit a week or two earlier in December. That they would have sold it through. But the sell-throughs on that inventory that has hit shelves are doing very, very well. So, I would say that we've basically had some closeouts that we needed to take care of that Joel mentioned and we are in great shape at retail.

Retailers over the past years have been desirous for less weeks on hand. That varies by retailer by retailer. We think that we and our major retailer are quite sophisticated at handling those inventory situations. And we do, and our retailers like to buy a lot of our product on a letter of credit basis. It is beneficial to them and to us as well.

So, Jack, exiting Q1, your retailer weeks on hand inventory has been -- is appropriate for the current situation now?

Absolutely.

Okay. So, coupling that, the retailer trends of being more conservative on weeks on hand with, you mention the majority of new products will ship in Q3. I assume revenue growth should be higher in the second half than in the first half. Is that fair?

Definitely.

Okay. And then on -- can you quantify the operating efficiencies of integrating play along that you cite over again in the second quarter?

Yes. I want to bring out our new items are beginning to ship out of the Far East late second quarter which we are very thrilled that we're shipping them as early as we can. As early as we are, including night vision, our Girl Gourmet, our Spy Factory. Our new EyeClops and our ultimotion and spins and some of our private label program. We're actually feeling very good about the -- our shipping dates this year. And we are -- I would like to emphasize, given the opportunity now, we're very excited about Camp Rock. It was something we weren't able to talk about until very recently. And Jonas Brothers are hot as can be. They seem to be the equivalent of Hannah Montana.

Jack, are those shipments a little earlier then -- I know it is a matter of weeks but a little earlier than they were last year?

Not so much in dollars but we are getting our new products and we have many more new products this year than last year. I guess if you're asking for a hint of what Q2 is looking at, we don't want to comment on Q2 but we're very satisfied with our business. We're sorry some of the things -- we're sorry for shareholders and our sales and everybody that some of the things dropped into Q1 the way they did. Sometimes that was (inaudible) and I think our stock is down this morning, but everything is really on target for us.

What is really more of a timing issue the way the analysts have spread out, the sell side has--.

As Joel mentioned, we do always do some advertising for Easter to get some things kicked off and unfortunately, Easter was in Q1 and we expense it as it happens. That was a swing of a couple of million dollars Joel, a couple million dollars from '07 to '08 because of when Easter was. Unfortunately, that pricing is hard to do anything different about it. We're actually very well satisfied with our first quarter internally.

Okay. Is there a typical amount on new product launches, a typical percentage of orders that are in for full year by this time? Give an idea of what you actually get to see?

It doesn't really work that way. What you get is your space allocation and some ad and other commitments for end caps and things of that nature. That becomes our guide. At this time, you're basically getting forecasts and our salespeople work on a daily basis with our retailers working out when we can ship, how much to ship, how much they need. How much to launch with. It is not as simplistic as you ask the question. It is very complex and interesting and I think we and our retail partners do a good job managing it.

Looking for kind of the evidence behind your sources of optimism if it is, you know--?

It is a lot of enthusiasm from our retailers and we do get forecasts from -- verbal forecasts for them on many of our products. And they're excellent.

Okay. One last question. The play along integration, could you quantify the operating efficiencies?

Yes. Basically, what we did is we started or we finalized combining our operations in Hong Kong and also in Florida so we have smaller space and fewer head counts. But we're expecting in upwards of a million dollars over the second, third and fourth quarter.

Okay. Thanks, guys.

Thank you.

your next question comes from the line of Todd Schwartzman with Sidoti & Co.

Hi, good morning. What are you seeing in terms of costs related to China compensation, insurance, occupancy and such, utilities?

Our presence there, we do have a testing office, a testing facility. We don't have a lot of space of our -- our employees are not subject to those same pressures. On the manufacturing side, we've been doing some off-season production, working closely with the factories to manage -- or to help them manage their capacity so they tend to absorb more of the increase in the inputs.

In the development process, we look at the margins that we need to make and again, work with the factories and design, redesign items to hit the margin. So, while certain input costs are going down, a lot of our new -- a lot of our items are new each year. We don't have any precedence in terms of pricing. All new items, we have all new pricing. We've got more than 80 different factories that we deal with so to some degree, there is some competitive aspects to where we place the orders. So, while certain inputs are going up, we are taking advantage of different opportunities to keep a handle on things.

One of which in the last year or so, we started combining all of the requirements of all of our divisions on some of the raw materials, mainly the plastics. So, instead of having three individual smaller companies, purchasing raw materials, we make a commitment now across the Company so we're able to extract costs that way. And we bang out in upwards of 200 million units of product a year so $0.01 here and $0.01 there really goes a long way.

This is Jack. I would like to do to that. On apples to apples basis, we certainly have increased our selling prices this year. When there is something to compare apples to apples, as well as virtually all of our competitors and some of those price increases at retail, we haven't seen a decline in unit sales so far.

So, aside from commodity costs, there is no specific category of expense related to China that you're growing particularly concerned about. Is that a fair assessment?

The yuan has increased against the dollar and raw materials, labor and transportation have all increased.

Jack, just some clarification on a statement you made before regarding revenue. You mentioned that you expect sales growth to be greater in the back half of the year versus first. That is even in light of the fact that your comps are going to be more difficult in the second half?

I don't know that they're more difficult. I don't know how to say it that way. I mean we have lots of good selling products and lots of new product coming out that we have great shelf space and various plans for it and I don't know how to say it differently setting here today and we don't think it will change. We're feeling really good about the year.

The back half is really the meat of the year for us. So, although the comps especially in Q4 having been up so much, we do have a lot of new products coming out. So, we really have the flow that will enable us to achieve the growth, especially in light of the placements that we have on it.

Got you. And where are you with the THQ arbitration?

This is Jack answering that one. We're still waiting for the California judge to tell us which arbitrator we're going to use and as soon as the -- you don't know when a judge is going to do anything. We do expect it very shortly and then probably about 60 days after that, we would probably go to arbitration. I'm just guessing that 60 days. That would seem likely for both side to be able to prepare the information for the arbitrator.

Can you talk a little bit more about distributions for NeoPets. You mentioned later this year, you're going to be -- I don't know if it is penetrating some new categories of retail or can you talk about which customer categories you'll be further penetrating?

Initially, the deal that we had struck required us to ship Target first and very shortly we'll be shipping all of our major retailers and specialty accounts. On a worldwide basis, not just in the U.S.

When is that ramping up significantly domestically as well as abroad? Which quarter?

In probably the very end of second quarter getting into third quarter.

What about the Camp Rock products? When do those launch?

They will be. let's say in the next 30 to 50 days. We're very excited about that product line.

The movie is out in June, correct?

I'm not sure if it is June or July.

Okay. Final question. No buybacks during the quarter. What's holding you back?

Nothing really holding us back. We had sort of an informal threshold. The stock has been trading up and holding up pretty nicely. So, we're sort of in that range but it just wasn't low enough although today might be as good a day as any -- not today, but once our window opens, it might be as good as any this week to commence that.

When does that window open?

Two, three days after the announcement of the earnings.

Great. Thanks, guys.

You're welcome.

Your next question comes from the line of Edward Woo with Wedbush.

Good morning. I had a question, you mentioned that you guys were implementing price increases. Have you guys already done that for your products and what's been the range of the increases?

We have implemented that. It is a hard question to answer and we would rather not get too far into it. We have our strategy and in some cases, we've changed certain things in certain products. I could answer it best the other way. I think you'll see price increases in the toy industry anywhere from 5% to 15% this year depending on the product and JAKKS is probably not any different than our competitors.

Great. The other question I have is has there been any change in the outlook for possible acquisitions, M&A industry?

Yes. There has been. Since our last significant acquisition which was CDI, we got into a period from our point of view that people were asking a lot of money for their companies. I guess there was a lot of M&A and private equity stuff going on. And starting going back to about last November, things seemed to have started to change dramatically. Some of that is recalls. Scared particularly, the smaller guys that could put them out of business. It scares some of the retailers that the small supplier might not be able to back up a recall. And multiples have been coming down and we have more, much more activity going on right now than we've had probably in the last two years combined. So, on that, we can't promise anything. There is never a deal until a deal is done. We're very active in the category and of course, we have the balance sheet to support it.

Great. One last question. Is there any update to the WWE litigation?

Only in the sense that it is processing and we did spend money if the first quarter in the Connecticut Court, our attorneys are moving to have it dismissed in Connecticut. We'll see what happens. We hope for -- we're hoping for and not hope against hope but we're hoping for early dismissal and finally put the whole thing to an end.

Great and good luck.

Thanks, Edward.

Your next question comes from the line of Sean McGowan from Needham and Company.

Good morning, Sean.

Thank you. A couple of -- these areas are follow-ups. I want a little bit more detail. Regarding the legal expense increase in the first quarter, why would those expenses not have been accrued in the fourth quarter when the activity around the dismissal was most heavy? Why would there be an increase in first quarter '08 over '07? I know maybe you didn't get the bill but wouldn't the accrual have been matched better in the fourth quarter?

We do record the expenses in the period where the services have been rendered. Initially, the judges' one-page dismissal came at the end of November. The more complete opinion didn't get completed until I believe the end of December. So, most of the work -- actually the activity surrounding it actually started in January. So, we do again record the expenses in the period where the services have been rendered. It is just that the reconsideration motion, the response to the WWE appeal both in the Federal Court plus the activities increasing in the Connecticut action, that one is proceeding on a new track.

Fast track.

Fast track, rather. So, it just geared up in the quarter.

Would you expect this level to be sustained then?

There are ebbs and flows to it. Again, we believe that we have enough in the forecast to accommodate where we'll be by the end of the year. The flow of it is there is a flurry of activity and drafting motions and presenting motions and then you wait for the judges to read and consider so there could be a two or three month lull in between significant upticks in activity.

The best thing that could happen, Sean, would be the Connecticut judge to throw everything out shortly and then the expense will come down below what we've anticipated for the year.

Okay.

Certainly within a low volume quarter, it sticks out a lot more prominently than it would if we had the same expenses in Q3 or Q4.

Looking at the--?

Lastly, on that, Sean, we have had which isn't untypical, some problems collecting on the insurance from our insurance company and we don't calculate any of that until we receive it. We're in the process of putting papers back and forth to find out what we'll get. But we don't -- we don't -- we pay it and when we get the money from the insurance, we collect it. We don't accrue any of that anticipation from the insurance company.

You mean the legal fees are covered by insurance?

Some of it, yes.

We have a D&O policy that covers the directors and officers.

Okay. That's helpful. Regarding the closeouts, I mean closeouts are a normal part of the business. I seem to remember last year in the first quarter that you had some -- that you called out closeouts as a factor affecting margins in the first quarter. What specifically was there in the first quarter of '08 that would have resulted in an unusual shift in margin?

Well, ordinarily, we aim to get certainly above cost. We did have a few items that were in need of greater price reductions.

Were these items that were launched in '07?

I believe '06. Steve Sacks was one of them and Doodle Bears and Trolls. They're things -- the inventory certainly doesn't depreciate and I think Steve Sacks was actually the biggest. In this particular case, on the $3 million in closeouts, we had about a $600,000 loss on that which is more unusual. Usually it is either neutral to gross margins but as I mentioned, adjusted for those sales, the gross margins would have been 37.6%.

Were there any product categories that were significant in the first quarter of '07 that were way down? In the first quarter of '08?

Not particularly. I think that Doodle has, kind of slowed down. I mean significant maybe percentagewise but not in terms of dollar contributions. A big year for Doodle was not '06.

Okay. And couple of -- one more question then. Regarding kind of how things work at retail. I would have guessed, I did guess, that given Hannah being incremental over a year ago, Pokemon being incremental over a year ago, most of EyeClops, incremental. NeoPets incremental, huge increases in the pet line. All of which you could observe at the end of the first quarter at retail. Just seemed to suggest a healthier than 5% increase of sales. Should we conclude that most of that stuff actually shipped in the fourth quarter?

Some of it shipped. Some of it shipped in the fourth quarter and there is a desire as everyone has been discussing for the retailers to carry less weeks on hand. The NeoPets launched initiative--.

Remember, none of our new initiatives shipped in Q1 at all, Sean.

Right. But there was -- Hannah was certainly not there a year ago and was a huge sale space, I think the pet supply stuff was there at the very end of the first quarter. Would have shipped in the first quarter. Right?

I think pets moves along as it moves along, it is a steady flow of business. I did say and I don't want to get stuck in anything and make a big thing out of it, Sean, that with the excitement of the retailers to get goods in, there are a couple of our retailers that got on their shelves later than anticipated, some of the Hannah Montana stuff and therefore had it in January and work off those inventories before buying new inventories. There's nothing dramatic in that. Just a comment on it. So, there's nothing to read between the lines on that comment.

Last thing is NeoPets line launched as an exclusive to Target initially. It will roll out to other retailers later in the year.

All right. I would have thought the increase in Toys R Us' pet line alone would have been -- would have accounted for entire increase in the pet line. It looked like there was a lot more shipment than in fact occurred. Anyway. Take the next question.

Thank you.

Thanks, Sean.

Your next question coming from the line of Arvind Bhatia from Stern Agee.

Good morning. Thanks for taking the question. I just want to be absolutely clear in terms of your EPS guidance for the year. So, in the 2.91 that you're guiding, you're using Q1 reported EPS of $0.03. You're not adding back the $0.10, is that right?

Correct.

So, you're guiding for the balance of the year for EPS to be at least $2.88.

You're good.

Pardon me?

You're good!

And the Street I guess before this, the way the sell side had it modeled was 9 months was roughly $2.78 based on the consensus of $2.97 for the year and $0.19. I guess what you're implying is, a lot of this is timing and the way people had modeled, et cetera and you're not seeing anything to suggest softness in your business, despite the economy? Just want to be absolutely clear.

Correct. Again, we didn't go out with a lofty forecast taking into account the economy and everything else. We do have a lot of initiatives that are going to result in the launch of some key items that we've mentioned a number of times. So, we definitely have the product flow to achieve the forecast.

Right. And then also last quarter, I believe you had indicated that you were expecting contribution from WWE to be down I think you had said 20%. Is that still how you're looking at it? Or has that changed?

What we -- the 20% down is what we were forecasting for the JV.

That's what I meant.

Yes, I think that last year, I think it was -- hold on. About $21 million. Q2 was forecasting a little bit down. And sales for the WWE video games were in excess of 230 million or $240 million. We're just being conservative with some new competition from even their own portfolio licenses. They have USC coming out so out of an abundance of conservativism, we just forecasted down.

So, similar what you model now is the same as what you had indicated last quarter.

Right. There's been no change.

No change there. And then--?

These are things that, there are a lot of time spent in drafting and filing motions and responding to each other's motions. Then there is a lull while the judge contemplates everything -- or judges since we've got the two suits going. So, it is really a timing thing and considering that the federal case has been going on for almost four years, you can imagine that there are a number of months where there are lulls. So, it is more of a timing thing.

Then with the Olympics this year, wondering should we be building any extra cost or have you built any extra cost in the event of any kind of disruption during that time from China shipment-wise? Is there any extra cost that you're looking at this year?

A lot of our production is done in the South and the Olympics are in the north. I think there's some pollution concerns plus the manufacturing we have is pretty clean. We're not involved in dirty manufacturing. So, any limitations on production shouldn't really affect those factories in the South.

Got it. Going back to the guidance thing a little bit. You guys obviously have been giving annual guidance. Is there any thought or consideration that perhaps -- could you be giving guidance one quarter out. Because I think it would help analysts model and the volatility of shipment, et cetera. Much better.

I think the problem is -- this is Jack, Arvind, I think the problem with that particularly is certain products get ready for shipment near the end of a quarter or miss the end of a quarter or retailers shift it. First they wanted it June 20. Then they don't want it until July 10. And those millions of dollars that come close to the end or beginning of the quarter could affect it too much in our opinion for us to give guidance by the quarter.

Well, I think I just feel like your business from retail seems pretty strong. I hate to see the stock being affected just because of timing issues but if you can maybe quantify the best you can and then whatever is on the cusp maybe can be also talked about a little bit so we can have a better idea. I'm just -- my two cents on that.

The best answer we can give you to that is you had asked the question if the $0.10 that was missing from the quarter, we anticipate picking that up to still it our forecast for the year. We're confident in that. Also, there are two things going on. If you look at the increase in sales, it was 5.5%. We had our 4% forecast. What we could not have anticipated is the timing of the legal. So, if, as, just a hypothetical, say you increased sales each quarter by the 4%, you would have actually been pretty close but we never would have forecasted legal to say be way up in Q1 and down in Q2. That becomes too arbitrary.

Right. Okay. And then can you tell us what price point your Ultimotion product will be coming out at?

Yes, the Ultimotion will retail probably in the $59 to $69. Safer would say $79, Arvind. You might see it on ad in certain places lower but $79 would be the initial target price for it.

Okay. Great. Those are my questions. Thank you, guys.

Thank you, Arvind.

Your next question comes from the line of Gerrick Johnson with BMO Capital Markets.

Good morning, Gerrick.

Hi, good morning. Can you discuss your retail take away? Your point of sale. Was that at your expectations for the quarter, ahead, below?

This is Jack speaking. I would say it was pretty well on target for the quarter. OEs, a little bit of ups and a little bit of downs but overall on target.

Okay. And historically, you do most of your shipping FOB so I was wondering if your order flow has been affected by any changes in perhaps the way retailers are choosing to be fulfilled this year.

No. I would say it is similar to the last couple of years and I don't know if I would use the word majority on LC.

Okay.

Probably closer to 50/50.

Okay. Okay. That's all I have. Thank you.

Thank you.

Your next question comes from the line of John Taylor with Arcadia Investment Corporation.

Good morning, John.

Good morning. I got a couple of questions. Mostly kind of focused on the supply side of things rather than on retail. So, with all of the quality concerns there have been some cutbacks in excess of capacity out there. Particularly in China and I'm wondering if you -- how you guys are thinking about potential upside? A lot of your key products are shipping relatively early and if you get positive reads, I'm interested in whether you think you can capitalize on that with getting, production above sort of where you put it in your plan? So, that's one side of the question. The other side of the question is are you having any trouble in China, getting all of your items manufactured? There's been some comments that some guys are -- the factories are in a position of pick and choose which ones they want to do. I wonder if you could just talk about that a little bit?

I'll answer the second one first. We're not having difficult in that. We spend a great -- over the years, we spent a great deal of time cultivating our relationships with factories. I think Joel mentioned we use over 80 factories to produce our goods.

On the important products, the potential important products, the first part of your question, John, what we do is we looked at the overall situation. If there are chips as example necessary and those require long lead time, we'll take some risk on the items that have upside potential and bank those. And it is built into our numbers if we need to eventually throw them away, hopefully that doesn't happen. But all of those things are built in, will double and triple tooling on the slower -- on the slower components.

It is something that I think we do quite sophisticated but the overall answer to your question is yes, we are in a position to jump on upside potential and we worked extremely hard and we've emphasized through this conversation and other conversations on this conference call that we're shipping our new products earlier than ever because we do want to get those reasons and see what the velocities are and try to grab an upside. But for our overall forecast for the year, they're reasonably conservative forecasts.

Okay. But so when those -- if you get in a position where the conservative forecast go up, you're feeling like you've got some flexibility and can monetize some of that?

Absolutely.

Yes, okay. Thank you.

Thank you.

There are no further questions at this time.

Okay, thank you all very, very much. Appreciate your time this morning. And we look forward to giving you great numbers in the future. Bye.

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