JAKKS Pacific Inc (JAKK) 2008 Q2 法說會逐字稿

Good morning, my name is Diana and I will be your conference operator today. At this time, I would like to welcome everyone to the JAKKS Pacific second quarter results for 2008 conference 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.

Ms. Rosenberg, you may begin your conference.

Thank you, operator. Good morning, ladies and gentlemen. This is Genna Rosenberg, Senior Vice President of Communications and Investor Relations for JAKKS Pacific. Thank you for joining our teleconference with management of JAKKS Pacific to review the results for our second quarter and first six months of 2008, ended June 30. On the call today are Jack Friedman, Chairman, and Chief Executive Officer of JAKKS Pacific, Steve Berman, our President and Chief Operating Officer, and Joel Bennett, Executive Vice President and Chief Financial Officer. Mr. Friedman will first provide an overview of the quarter and our operational results and then Mr. Bennet 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 forward-looking statements, are subject to the Safe Harbor protection under federal security laws. These statements reflect our best judgment based on 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 in 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 the company's other reports, subsequently filed with the SEC from time to time.

With that, I will turn the call over to Mr. Friedman.

Good morning, ladies and gentlemen. This is Jack Friedman. Thank you for joining us this morning to discuss our results for the second quarter and first six months of 2008. For JAKKS Pacific second quarter 2008 net sales increased 12.2% to $145.3 million, compared to $129.5 million last year's second quarter. And sales for the first six months of 2008 increased 8.9% to $276.2 million, versus $253.6 million for the first six months of 2007.

Traditional choice from our diverse product portfolio were the largest contributors to the first half of 2008, the time period that is traditionally the lower volume portion of our year. While our nation deals with concerns over rising prices and economic stability, we remain optimistic that our 2008 product portfolio is filled with an exciting lineup of new products that we believe will continue to perform within our expectations and lead to another year of record sales for JAKKS. We experienced continued strong sales again in the second quarter in action figures, dolls, plush, electronics, and pretend play products and expect continued strength in these areas, as we enter into our busiest shipping periods, the third and fourth quarters. We begin to ship some of our new fall items in the second quarter, and with small quantities, with the majority of shipments on the new items shipping in the third quarter, as retailers begin to stock the shelves for the holiday season. We are particularly excited about many new items in the lineup including our new real working Iclops Night Vision Goggles, and the Girl Gourmet Cupcake Maker and the plug and play wireless motion gaming system called Multimotion, our plug and play Hannah Montana Pop Tour guitar and our Hannah Montana products. New WWE Pokemon and other action figures, Spa Factory, activity toys, a vast portfolio of new pretend play products and several other new JAKKS programs hit retail shelves later this year.

Pursuant to the stock purchase program announced in February of this year, we completed the $30 million buyback in the second quarter as reported in our last 10-Q filed with the SEC. Purchasing an aggregate of 1,259,300 shares of common stock at an average price of $23.82 per share, representing approximately 4.4% of JAKKS Pacific outstanding shares. Our financial position remains extremely strong with working capital of approximately $331.2 million, including cash, equivalents and marketable securities of $177.4 million as of June 30, leaving us with tremendous ability to execute our acquisition strategy.

Before I get more into details of 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 2008.

Thank you, Jack, and good morning, everyone.

Second quarter 2008 net sales were $145.3 million, compared to $129.5 million in the same period last year, an increase of 12.2%. Net income for the second quarter was $4.2 million, or $0.15 per diluted share, compared to the second quarter of 2007, when we had net income of $5 million, or $0.17 per diluted share. Net sales for the first six months of 2008 were $276.2 million, compared to $253.6 million in the same period last year, an increase of 8.9%. Net income for the first six months of 2008 was $5 million, or $0.18 per diluted share, compared to the first six months of 2007, when we had net income of $8.3 million, or $0.30 per diluted share.

Now, for our sales by product categories. Worldwide sales of traditional toys which include action figures, vehicles, electronics, plush, role play, dolls, kites, pool toys, and outdoor and promotional products, were $127.4 million for the second quarter of 2008, and $239.2 million for the six-month period. This compares to $108.6 million in the second quarter of 2007, and $211.1 million for the first half of last year. Sales in the second quarter were driven by our 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 consists primarily of our Pen Tech and Flying Colors product line have worldwide sales of $10.6 million for the second quarter of 2008, and $16.7 million, for the first six-month period. This compares to $11.5 million in the second quarter of 2007, and $20.7 million in the first half of last year. We have several new activities in writing products including our spa factory line, girl gourmet cupcake line and more which we expect will increase sales in this category in the second half of 2008. Worldwide sales of our pet products were $3.6 million for the second quarter of 2008, and $8.9 million for the six-month period. This compares to $4.1 million in the second quarter of 2007, and $6.4 million for the first half of last year. Sales in this category were led by AKC and other licensed pet products.

Gross margins for the second quarter of 2008 were 35.8% as compared to 35% in the second quarter of last year. And 36.1% for the first six months as compared to 35.9% over the same period in 2007. The increases in gross margin for the quarter are due to our product mix, which included less lower margin closeout sales, offset in part by higher amortization of tools and molds. SG&A expenses in the second quarter of 2008 were $46.5 million, or 32% of net sales, as compared to $38.8 million or 30% of net sales in the same period last year. For the six months, SG&A expenses were $94.8 million, or 34.3% of net sales, as compared to $81 million, or 31% of net sales for the first six months of 2007. The increase is due to higher legal fees related to ongoing litigation, which reached $2.2 million in the quarter, and $5.3 million in the first six-month period, as activities surrounding the WWE lawsuits increased with discovery for the Connecticut action, and progressions and motions continue in the federal court, coupled with higher product development costs and other costs associated with the business.

Depreciation and amortization was approximately $2.8 million in the second quarter of 2008, and $5.6 million for the first six months, compared to $4 million and $7.9 million for the comparable periods in 2007. Stock-based compensation was $2 million for the second quarter, and $4 million for the first six months, versus $1.6 million and $3.7 million for the comparable period in 2007. During the quarter, we posted $1.3 million in profits from the video game joint venture with THQ, compared with $700,000 for the comparable period last year. For the six-month period of 2008, profits from the joint venture totaled $3.7 million, as compared to $2.2 million for the first six months of 2007. THQ and Jackson now announced last week the new World Wrestling Entertainment video game currently in development for the X Box 360 video game and entertainment system from Microsoft and the PlayStation 3 computer entertainment station. WWE Legends Wrestle Mania scheduled for release in March 2009 to coincide with Wrestle Mania 25. Regarding the arbitration over the THQ and JAKKS joint venture preferred return, an arbitrator has been selected and we expect things to move forward expeditiously as both parties seek a resolution on the terms.

Based on these overall variances, we had pre-tax income of $6 million for the second quarter, compared to $7.4 million in 2007. Operations used cash in the second quarter of 2008 of $21.6 million, and $6.3 million for the first six months of 2008. This compares to use of $6.2 million and provide cash of $16.2 million in the second quarter and first six months of 2007. Our financial position remains very strong. As of June 30, 2008, our working capital was approximately $331.2 million, including cash, and equivalents of $177.4 million. We continue to evaluate potential acquisition opportunities and expect to continue to grow our business by actively pursuing accretive and complimentary acquisitions, and executing on internal growth initiatives, including creating new products, and securing new licenses to provide continued growth for JAKKS Pacific.

Accounts receivable at the end of the second quarter were $102.4 million, compared to $89.8 million at the end of the second quarter of 2007. DSOs were 63 days, comparable to the 62 days in the same period in 2007. Inventory was $83.6 million at the end of the quarter, up from $78.6 million at the end of the comparable period in 2007. DSIs remain the same at 102 days. Capital expenditures were $9.3 million, for the second quarter, and $12.8 million for the first six months of 2008, versus $5.4 million and $7.7 million for the comparable periods in 2007, and we expect capital expenditures to be approximately $22 million for the full year of 2008. With that, I will return the call to Jack Friedman.

Thank you, Joel. We begin to ship many of our key drivers for this fall and the end of the second quarter with our major shipping quarter in full swing now in the third quarter. As is typical, we believe we have a terrific lineup for 2008, with several resonating as favorites amongst the buyers and media already. Two new exciting nonlicensed initiatives in our activity area are Spa Factory and Girl Gourmet. We believe the time is is right for a new Girl Gourmet cupcake maker and the product will be featured in QVC Christmas in July this weekend, and will hit retail shelves in August. Our new Spa Factory line which features all the ingredients for at home parties and we have retailer commitments across the board from all the majors to carry this line this fall.

We continue to ship our core plug and play TV games line, which has a catalyst for growth into several terrific line extensions. Hitting retail in the third quarter, our new tween titles, including Hannah Montana Pop Tour guitar, that features 10 original Hannah Montana songs, and lets kids play guitar just like they're using the TV. The EyeClops Bionic Eye garnered numerous awards in 2007 in the U.S. and the original Eyeclops Bionic Eye is an international hit, Garnering recent accolades for toy of the year for 2008 in France, Japan and Belgium. New Eyeclops products expected to be drivers for us again this year including the portable bionic cam and our new exciting night vision goggles. They will both hit retailers mid August. These are real working night vision goggles and the initial reads by journalists who have previewed the line as well as sales and a couple of tests have been extremely promising. Our Ultamotion video game line is based on the most popular trends in video gaming today, motion games and are placed at our top accounts.

We have at least eight doll lines shipping to retailers in 2008. The Hannah Montana continues to be the number one favorite TV show among girls age six to eight, 9 to 11 and 12 to 14, beating out any other show on TV. We have excellent placement of our new singing holiday doll line, Malibu Beach House, and pretend pray products. Our new Fancy Nancy line did terrific at Target stores and we expect this line to continue to be great in the second half of the year. Our Camp Rock doll line hit Target store shelves in the second quarter and features one of the popular Jonas Brothers as a character from the new Disney Channel Movie. Initial sales have been very good with momentum expected through the holidays. Cabbage Patch Kids are celebrating a milestone 25th anniversary this fall, with the big birthday party slated for September 9 in New York City, and we have excellent retail support.

We will roll out our new line of NASCAR toy vehicles and play sets to retailers nationwide this fall and have excellent placement. With 75 million fans, it is the number one spectator sport with a 10-month session and we believe that our NASCAR range will be a great contributor in 2008. Disney pretend play products look absolutely beautiful and we will believe we will be hugely popular with girls this holiday season. WWE and Pokemon action figures continue to be strong contributors with many new assortments shipping for the fall. Internationally, WWE also remains one of, if not the strongest boys property in both the U.K. and Australia.

Based on this response, and despite certain uncertainties related to continued increases in fuel, raw materials, and transportation costs affecting both our industry and others who manufacture in China, and increased costs related to litigation and product testing that is affected gross margins in the bottom line, we believe 2008 will still be a record year for sales for JAKKS Pacific. We are working hard to execute on our strategy on behalf of our shareholders and are excited by the opportunities that lie ahead. With that, I will open the call to questions.

(OPERATOR INSTRUCTIONS). We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Drew Crum of Stifel Nicolaus.

Good morning, everyone. I want to start with the revenue guidance for the year that you're releasing. It implying less than 2% growth in the second half of the year. Given the pricing environment, the new products you talked about, and I think in the last call, you mentioned that you thought growth would be stronger in the second half. Just wondered if you could address that item. Is there any degradation with the product line, what has kind of changed your outlook? Thanks.

Well, we're reaffirming where we expected to be. The buying patterns of retailers have changed. So in terms of how much growth we had in the first half, we never implied any particular growth rate. We did expect to have a lot of our new key drivers shipping more so in the back half, but we're just showing our confidence in the new product lines and our existing product lines that we will in fact be able to achieve our previous guidance of $891 million.

Okay. Fair enough. Joel, expectations for legal costs, for the year, is it still $12 million?

Part of the reasons for the reduction is we're less certain and things have ramped up, and as far as how much time is spent on each different activity, out of an abundance of caution we're expecting probably more than that. The other question mark is the timing, the extent of insurance reimbursement. So all of these things have led to our belief that the costs will be a little bit higher than that in the back half. Or for the year, I should say.

Any update on your gross margin assumption for the year?

We have seen some increases in input costs. We will be implementing some price increases across our division in the back half.

Okay. Thanks, guys. I will jump back into the queue.

Thank you.

Your next question comes from the line of Tony Gikas of Piper Jaffray.

A few questions. Maybe just to give us a little color on the the crafts and activities category, it appears to be down about almost 20% for the first half of the year, what is driving that decline and your expectations for the back half of the year? Also, maybe just a little update on the WWE product line, how --

Hello? Hello? Tony? Anybody? Hello?

(OPERATOR INSTRUCTIONS).

Well I can answer if we're still on the call, I can respond at least to the craft question. The craft area is typically driven by licenses and there haven't been hot licenses in the category of late. As far as what is going to drive the business and what gives us comfort in the back half is the launch of some of our new product lines, and in particular the Girl Gourmet Cupcake Maker and also the Spa Factory.

Can you guys hear me now?

Yes.

Okay. I don't know what happened. Sorry about that. So then the second part of the question was how are WWE sales trending right now? How much of a focus is that? Is that meeting your expectations? And then on the JV update, it sounds like you found an arbitrator. What is the next step in terms of timing? Is this something that could be resolved in the next 90 days? Or does it get stretched out?

This is Jack, Tony. We don't know how long it will take. We are delighted to finally settled in on an arbitrator and we have really no idea how long the process takes, but we're encouraged to finally get to this point on it.

And WWE sales?

WWE sales are fine.

It is still a focus. It is still an important product line.

It is still important to us. Of course it is is a focus. We continue every six weeks to roll out new products.

Okay. And then I guess what is your expectation from the arbitrator? I mean what is the ultimate goal here, what is your -- is your expectation that your split will come down?

No. Not our expectation.

And then I guess just last question, use of excess cash going forward?

We're continuing to pursue acquisitions aggressively. There is a number of deals with the credit markets, given what they are, and it seems to have increased the deal flow, and as we had mentioned earlier in the call, we did have a buyback, and that is always under consideration, though nothing is on the table. So we do have a number of different uses that we would expect to execute on in the near term.

Okay. Thanks, guys.

Thank you.

Your next question comes from the line of Arvind Bhatia of Sterne.

Can you hear me? Hello?

Hi, Arvind.

Hi, sorry. A couple of questions for you guys. One, I think somebody tried to ask the costs question, gross margin question. Wondering if you can help us understand the second half of the year, how you're thinking about these cost pressures, and in other words, have you in your mind, adequately handicapped the pressure that you see today price increases, versus cost pressures, kind of how you have built in the second half. And then if you can help us think about the second half from the standpoint of how EPS will look like, should we be expecting more growth in the third quarter versus fourth quarter. Just a general idea. I know you don't give specific quarterly guidance but help us understand where you think there will be greater growth in the third or the fourth quarters.

I think the greater growth will likely come in the third quarter, which is the sweet spot of our year, and the higher volume in that quarter is going to give us some leverage on tools and mold amortization which was about 90 basis points higher in Q2 in '08 versus '07. When we launch products, we begin to amortize the related tools and molds. And since a lot of the products ship toward the end of the quarter, we have the amortization without the corresponding level of revenue, which we will have in the third quarter. So we will be able to lever on that. In addition, we have been modifying products and packaging to offset in part some of the input costs. So we're looking at a lot of different areas in order to minimize the impact of these higher input costs.

You don't think that the third and the fourth quarters will be a surprise to you in terms of the cost, that your new guidance incorporates the trends that that you see today.

I would say we're in a tough economic position right now. We know how to manage our business. And we're on top of things. And working the best we can with our retailers and vendors, and we will totally expect to get through it.

I think one of the things that we've -- that we have achieved thus far and expect to continue to achieve is if we don't sell in we're certainly not going to make our expectations. If our sales were down, basically it is an indication that the consuming public is still interested in buying products. Our sell-through is good. So given those, the key is if we're not selling in, we're certainly not going to make the bottom line. And the reason --

That's the point I'm trying to make. Your top line obviously looks actually quite healthy, you're beating expectations on the top line, and I think everybody is trying to understand is the cost side is taken care of, then I think the treat is going to feel -- the Street is going to feel a lot more confident about the estimates for the year. And I guess what you're saying is you have done the best you can in terms of handicapping the costs at this point. I guess one more question, if I could, is on the product side, if you were to kind of rank the priorities, the biggest upside potential, the biggest risk factors, et cetera, on the product side for the third quarter, could you help us understand where the focus is going to be?

The EyeClops Night Vision Goggles, the Hannah Montana Plug and Play guitar, the Cupcake Maker, we've got a lot of key drivers, probably more than we've had in the last few years, so we're very pleased with the placement and also with the -- at this point, the industry accolades and acceptance of these items.

Great. Thanks, guys. And good luck.

Thank you.

Your next question comes from the line of Todd Schwartzman of Sidoti and Company.

Can you maybe quantify the inflation that you saw in 2Q in freight, resins, some other raw materials, perhaps, and also what the -- how that continued in July thus far?

We've seen 18 to 25%, but as far as how much that makes up of a particular item, it is probably 3 to 5% on costs. Based on the relative amount of the raw materials as a part of the overall cost.

And I'm sorry, I didn't catch your -- did you address the freight costs specifically?

A lot of -- most of our goods are shipped collect, so that doesn't affect us. Where it affects us is when we bring inventory in, and ship domestically, and we haven't really quantified that. We do have arrangements with places where we've committed to certain volume, so oil above a certain level, we're somewhat protected. So there is less exposure on that as opposed to on the other input cost, raw materials and chips and such.

And just to refresh, what percent of COGS roughly is resin?

Our product, we've got 3,000 items, it is really hard to come up with an aggregate across the company.

I see.

But along those lines, what we've done is we've committed across the three divisions to the raw material suppliers that we are getting a better price as opposed to having three separate companies buy smaller quantities. So we're addressing these increases in a number of different ways, that being one of them.

Thanks. Also, your girl's lineup looks extremely strong for the foreseeable future. Does that, and also the fact that WWE does go away, does that enter into how you think about acquisitions, what types, specifically, of acquisitions you look at going forward?

No, this is Jack speaking, we look at all kinds of acquisition, some of them add on to a category, some put us in new categories, some could help us internationally, wherever they fall, it isn't as definitive as, well, we need to replace WWE. We have made strides to replace WWE in 2010 by getting TNA and UFC, and we think we will be okay in that area.

Okay. My last question is what -- regarding the arbitration, what needs to happen for arbitration to commence?

The arbitrator has to accept the position and the judge has to put it in motion and then it is a baseball arbitration, we make our submission, they make their submission, and then the arbitrator will make their decision.

In other words, even though it has been -- it has been a little while now since the arbitrator has been chosen, he needs to formally accept?

The arbitrator hasn't been chosen until last week.

Okay. So now, he needs to accept that, that role?

I believe they have been accepted. And the next step is once the time line is set, each side will make a presentation, including the use of experts, and the arbitrator will then decide on a number, either their number or our number, the baseball method, means that they won't pick something in between, it will be one or the other.

Is there any reason why either JAKKS or THQ would want to delay the start of that presentation?

No.

No, it has been almost two years, and I think both sides are very anxious to get the process over with.

Got you. That's all I've got. Thank you very much.

Thank you.

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

Hello, Ed, how are you? Ed?

Is that correct?

Ed, your line is open.

Hello, can you hear me?

Now we can hear you.

Sorry about that. It is technical difficulties all around. But under SG&A costs for this quarter, you mentioned that litigation costs was $2 million. Is that correct?

Yes.

What was driving a lot of the other increases? Was that due to product testing?

Yes, product development, which includes testing, was up $2.6 million year-over-year. This is the result of multiple testing by all of the different retailers. One of the things we're trying to do is do fewer testing but that more retailers will accept. But at this point, we test ourselves, they test, they each test, so we're working on that, as a possible area of reducing the costs.

Great. And then on the last question I have, is Hannah Montana, what are the recent trends on that? And also, do you anticipate any type of concert or any type of events that she's going to have to maybe drive her popularity in the back half?

Yes, we anticipate a concert in the fall, and she just released a new album last week.

She also has new television shows starting in the fall of '08.

Great. Thanks a lot.

Thank you.

Your next question comes from the line of Jeff Blaeser of Morgan Joseph.

Hello, Jeff?

Hello?

Hi, Jeff.

Sorry. Any minimum guarantee payments or closeout sales in the quarter? I know last year was at a pretty significant amount.

Not of any consequence. It was certainly lower than last year.

Any licenses expiring that could require --

That occurs on a regular basis. But not of any significance than last year.

Other than WWE.

Oh, no, that we would have written off, yeah.

That was my question. And then on the Hannah Montana Pokemon and WWE side, do you expect those categories to be up year-over-year at this point?

Probably flattish.

Flattish? Okay. And then on Hannah Montana, the SKU count this year versus last year, and any feel for what average price year-over-year would be?

Hannah Montana side, we plan to be slightly up.

We didn't have the first half last year.

Right. No, understood. Okay, so flattish across the board in those three categories. Thank you very much.

Thank you.

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

Joel, you mentioned earlier, I think it was during the first line of questioning, you said something to the effect that buying patterns at retailers have changed. I was wondering if you can expand on that, and how so?

They're buying less up front and it is more in re-orders. And so the timing, it is hard for us to project what sales will be in a particular quarter. That's why we've gone to the annual guidance.

You go through -- this is Jack. You go through certain periods in our business, and it depends on the economics that are going on, where right now, the buyers would rather have a little less than a little more, and they're feeling bullish, they would have a little more than a little less to take care of opportunity. Right now, there is kind of a conservative mode due to the economic stuff that is going on.

Okay, great. That's helpful. That leads me into my next question. In the press release, you mentioned transportation costs being an issue. So I would like to touch on the FOB versus domestic issue. Have you seen a change in your mix of FOB fulfillment versus domestic?

No, not really. It is what the retailers -- how they want to handle it.

Right.

It is a big issue. Everything is an issue. Everything is as big as JAKKS is getting, every percentage point, or basis point has meaning but it is not a huge issue. I was trying to say it before. I think that we're doing a great job of managing our business in these uncertain times, and are staying on top of it, we're maintaining margins, and we believe that we will be able to continue to manage our business properly and profitably.

Right. I think the mix between FOB and domestic is an issue, because it is all about inventory risk. So I was just wondering if you're seeing more domestic fulfillment versus FOB as compared to perhaps last year.

I would say it is similar to what it has been in the past.

Okay, great. Thanks a lot.

Thank you.

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

Hi, guys. Thank you. I have a few questions. First, Joel, can you give us an estimate of what the full-year tax rate is expected to be?

31%.

When you broke out the legal expenses, can you give us an idea of what the -- how much of that is incremental to last year, versus the total cost?

$600,000 for the quarter.

Was incremental?

Yes.

Okay. This is the first -- I believe this is one of the few quarters where the pets business is down. I think there might have been one other but it is the first time it is down as much as it is. Can you talk about what is going on in that category?

Part of it is we're introducing some new product lines. We're working with Toys R Us on the product line that we're doing for them. Part of it is mix. Again, with buying patterns of retailers, I think for the year, or six months, we're up, so there is more inventory in the channels from before. It is the constant evaluation and we're continually getting more SKUs into the various retailers.

Well, I know that in the first quarter is when you really rolled out the bigger section at Toys R Us. Is that accounting for maybe some of the sales coming earlier in the year? And do you expect the category to be up for the year?

Yes, we expect the category to be up double digits.

Okay.

Again, last year, it did 25, 28 million, so now it will be north of 30, so it is good percentage gain, but you know, the dollars are not significant.

A couple of others. Can you just remind us, I know I've asked this before but I just need to go over this again, what are the categories of expenses that are in direct selling?

Co-op, ad buys, commissions, and warehousing and fulfillment.

So is warehousing and fulfillment, is that where you would take the cost of getting a product from a factory in China to a domestic warehouse?

No, that would be coming through cost of goods. That would be part of the landed cost of the item.

Are there transportation or fuel-related costs that would explain why that direct selling expense is up as much as it is?

Part of it is at the end of each quarter, we have fleck flavor, and depending on the timing at the end of the quarter, that is impacting things. We have pallet program. There are a lot of different things that drive it. Also part of it is just an accounting fundamental, capitalizing the warehousing costs, and depending on the level of inventory, that can fluctuate from quarter to quarter. So there is a number of things that drive the other direct.

Okay. And the final question, obviously we're expecting pretty robust second half in terms of a number of new products, and increases in some existing products, but can you talk about what categories you expect to show declines for the year?

In year-over-year comp -- well, each category is expected to be up year-over-year. But the amount of growth in the front half versus the back half may change. The girls category with the Cupcake and the Spa Factory, that growth, it was down for the first half, but it is going to grow a lot more in the back half because of the full distribution of those items.

We will have a little bit of a slowdown of Pokemon and some of the girl's activity areas but we will also pick up with our new Slime Line, which is in our boys category, and in our Cupcake and spa line, so really they offset each other in each category.

And particularly high hopes for Night Vision, we shipped it in a couple of test stores, and the sales on it are just excellent so far.

And do you expect the strength of Night Vision to eat away at the core of the Bionicle line.

No, we had more SKUs in the EyeClops line and it is the first full year internationally, so it is doing extremely -- it has been well referred internationally, but no, we think we have such a good penetration on it, we don't think either of them will erode. They're different items.

Sean, I would say overall, in these uncertain times, and recession, or whatever label you want to put on it, JAKKS is having a good year. I think if we didn't have these economic uncertainties, and things going on, we would be having a great year. That's the best way I can describe it as we see our situation.

If I can ask Stephen to elaborate on something you said earlier, if you're expecting Hannah to be slightly up and you have sales in the first half where you didn't last year, does that imply that you're expecting the second half to be down?

Say the question again, Sean? I'm sorry.

I think Stephen, you said earlier that you're expecting a slight increase in Hannah Montana for the year, and given that you had it in the first half, and you didn't a year ago, does that imply that you are expecting the second half to be down year on year?

Yes.

Okay.

Slightly.

All right. Thank you.

In closing, everybody, we are very excited about our business and product lines for this year. We have a very good handle and control on our costs. And we appreciate everybody today. And thank you very much.

Thank you for participating in today's conference. You may disconnect at this time.