JAKKS Pacific Inc (JAKK) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the www.jakkspacific.com third quarter 2010 earnings conference call. Today's call is being recorded. You will have the opportunity to ask questions at the end of the presentation. (Operator Instructions). I would now like to introduce Miss Genna Rosenberg, Senior Vice-President of Investor Relations. Please go ahead, Miss Rosenberg.

Thank you, operator. Good morning, ladies and gentlemen. This is Genna Rosenberg, Senior Vice-President of Investor Relations for JAKKS Pacific. Thank you for joining our teleconference today with management of JAKKS Pacific to review the results for the third quarter and first nine months ended September 30, 2010, which we released earlier this morning. Also, on the call today are Stephen Berman, President and Chief Executive Officer and Joel Bennett, Executive Vice-President and Chief Financial Officer.

Mr. Berman will first provide an overview of the quarter and our operational results and then Mr. Bennett will provide detailed comments regarding our financial results. Mr. Berman 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 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 2010, as well as any other forward-looking statements are subject to 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 our company's other reports subsequently filed with the SEC from time-to-time. And with that, I will turn the call over to Mr. Berman.

Good morning, everyone, and thank you for joining us today. I'm very happy to report that we had robust sales in the third quarter that exceeded our expectations, and we are ahead of plan for the first nine months of this year. We are just about one month into the fourth quarter, and so far we are pleased with the momentum we are seeing on a number on our items at retail. We believe we will continue to do well as we close in on the holiday season, with contributions coming from a broad range of toys and electronics from the entire JAKKS family.

We have been working extremely hard to regain ground following our restructuring, and we believe that JAKKS Pacific is absolutely back on track, due in large part to keen focus that we have on our businesses. We challenge our worldwide employees to do more with less, to be more cognizant of every dollar being spent, to make meaningful reductions in the number of SKUs in our lines, to make better and more cost effective tooling and to manage our supply chain with tight controls.

We at JAKKS Pacific are focusing on our strongest A and B licenses and our own proprietary brands, and we began to eliminate C licenses and less performing product lines. We are putting our efforts into areas that we believe will bring us the strongest returns and those which will lead to more consistent growth and more profitable future for JAKKS Pacific and our shareholders. Now with regards to the supply chain, we are still mindful of the concerns effecting the global economy, but so far we have been able to secure the containers and labor needed to keep shipments on track, although we did experience higher shipping and duty costs, which contributed to slightly lower margins in the quarter.

We continue to manage the supply chain closely, and barring any extreme adverse circumstances, we believe we will end the year ahead of our original forecast. If so, we are increasing our 2010 guidance for net sales to be in the range of $710 million to $720 million and earnings in the range of $1.19 to $1.25 per diluted share, which excludes tax benefits of $10.7 million or $0.31 per diluted share and the Friedman benefit payment of $2.8 million or $0.06 per diluted share.

Halloween is just days away, and selling during the third quarter was extremely strong. And early reads on Halloween sell-throughs are quite positive. Kids of all ages and adults nationwide will be dressed in our Toy Story 3, Hasbro Games, Disney princess, Sesame Street, and Ironman Costumes, just to name a few. For the holidays, several toys from the portfolio of products such as our My First Disney Princess, Princess and Me, and Disney Fairy Dolls, Binet Electronics and Real Construction Activity Toys are getting great attention, and earning coveted positions on many retailers and media hot holiday toy lists in the US and abroad. We are feeling great as we approach the peak selling season. I'll get into more product detail, but first I will turn the call over to Joel Bennett to review our financial results for the third quarter and the first nine months of 2010. Joel.

Thank you, Stephen, and good morning, everyone. We had robust volumes this quarter with net sales of $348.7 million compared to $351.4 million reported in 2009. And net sales for the current nine months were $549.3 million compared to $604.9 million in 2009.

Reported net income for the third quarter was $40.4 million or $1.23 per diluted share. This includes tax benefits of $5.8 million(Sic-see press release) or $0.17 per diluted share compared to $33.7 million or $1.06 per diluted share in the third quarter of 2009. Reported net income for the nine month period was $38.2 million or $1.26 per diluted share, which includes a one time pre-tax charge relating to the benefit payment of $2.8 million or $0.06 per diluted share to the estate of Jack Friedman pursuant to his employment agreement, as well as tax benefits totaling $10.7 million(Sic-see press release) or $0.31 per diluted share compared to a loss of $383.7 million or $14.11 per diluted share reported in 2009.

On a non-GAAP basis, which excludes certain one-time charges in 2009, which are detailed in our earnings release, net sales for the third quarter of 2010 were $348.7 million compared to $351.4 million, and $549.3 million for the current nine month period compared to $605.5 million reported in 2009. On a non-GAAP basis, net income for the third quarter was $40.4 million or $1.23 per diluted share compared to $35.9 million or $1.13 per diluted share in the third quarter of 2009. Non-GAAP earnings for the first nine months of 2010 were $38.2 million or $1.26 per diluted share compared to $24.3 million or $0.83 per diluted share reported in 2009.

Turning to a more detailed discussion of our results, we had worldwide sales of traditional toy products which include dolls, action figures, vehicles, electronics, plush, role play, including Halloween costumes, indoor and outdoor kids furniture, pool toys and pet products of $343.4 million for the third quarter of 2010, compared to $328 million in 2009. And sales of $540 million for the first nine months of 2010, versus $559.1 million for the first nine months of 2009. 2010 third quarter sales were led by our Disney Princess and Fairies Doll lines, assorted Halloween offerings, dressup and role play toys and electronics, offset primarily by declines on a year-over-year basis from WWE, Hannah Montana and vehicles.

Worldwide sales of craft, activity and writing products were $5.3 million in the third quarter of 2010 compared to $23.4 million in 2009, and sales of $9.3 million for the first nine months of 2010, versus $45.8 million for the first nine months of 2009. The declines in this category were from our Flying Colors Activities, Girl Gourmet Lines, as well as the exit from the low margin writing instrument business earlier in 2010. Included in the category numbers are international sales of $41.3 million for the third quarter of 2010, compared to $63.1 million for the third quarter of 2009.

And for the first nine months of 2010 and 2009, sales were $64.1 million and $106.1 million respectively. Our international expansion continues on track with ventures in the UK, Spain and France in full swing. And JAKKS staff selling in our 2011 portfolio direct to retail in the local territories, as we seek to maximize international opportunities for license, and especially JAKKS-owned content, and are pleased with the progress so far. Gross margin for the third quarter of 2010 was 31.8% of net sales compared to 33.6% of net sales in the third quarter of last year on a non-GAAP basis. Gross margin for the first nine months of 2010 was 32.7% of net sales compared to 34.1% of net sales in the first nine months of last year.

The 180 and 130 basis point decreases in 2010 are due to changes in our product mix, which included more sales of lower margin product, as well as air freight incurred to meet customer delivery windows and increased freight and duty charge in 2010. But we are on track to achieve overall modest margin expansion in 2010 as our new products continue to ship in quantity in the fourth quarter. SG&A expenses in the third quarter of 2010 were $59.4 million or 17% of net sales as compared to $63.4 million on a non-GAAP basis or 18% of net sales in 2009. For the first nine months of 2010, SG&A expenses were $140.2 million or 25.5% of net sales, compared to $169.4 million on a non-GAAP basis or 28% of net sales in the prior year.

The dollar and percentage of net sales decreases in 2010 are attributable to the effectiveness of our cost-saving initiatives, which commenced in the third quarter of 2009 and the restructuring plan implemented in the latter part of 2009. Regarding the video game joint venture with THQ, which was dissolved as of December 31, 2009, in 2010 we received our settlement payment from THQ of $6 million in the second quarter, which is being accounted for on a cash basis. In 2009, excluding the cumulative adjustment to our preferred return, we reported a loss in the third quarter of 2009 of $900,000 relating to legal fees and other joint venture costs offset in part by our preferred return.

And we recognize profit of $1.6 million for the first nine months of 2009. Consistent with the seasonality of our business, operations used cash of $1.8 million for the first nine months of 2010, compared to providing cash of $11.4 million in 2009. And as of September 30, 2010, the company's working capital was $407.8 million including cash and equivalents of marketable securities of $218.8 million. Our cash flow and financial position remain very strong. We continue to actively evaluate potential targets and apply our disciplined approach to ensure that we secure the best deal for JAKKS Pacific and our stockholders.

We are also announcing that our board of directors has authorized the stock buy-back program under which we will opportunistically repurchase up to $30 million of the company's common stocks from time-to-time. Depreciation and amortization was approximately $5 million in the third quarter of 2010, compared to $7.4 million for the third quarter of 2009. For the first nine months, depreciation and amortization was approximately $10.2 million, compared to $12.9 million in 2009. As for our tax rate, it remains at an effective rate of 31.5% before any FIN 48 or other adjustments.

Capital expenditures were $3 million for the third quarter of 2010, down from $5.3 million for the third quarter of 2009. Capital expenditures for the first nine months of 2010 and 2009 were $9.6 million and $16.2 million respectively. And for the full year of 2010 capital expenditures are expected to be in the range of $12 to $13 million compared to $16.3 million for the full year of 2009. This reduction is being achieved through our SKU rationalization and refined production planning efforts.

Accounts Receivable as of September 30, 2010 were $287.4 million, compared to $251.6 million at the end of the third quarter of 2009. BSOs were 74 days compared to 64 days in the same period in 2009. The increases are due primarily to the timing of the sales within the quarter and the growth in our highly seasonal Halloween business. Inventory was $60.5 million as of September 30, 2010, down from $71.1 million at the end of the comparable period in 2009. The decrease is due primarily to the selloff of a significant portion of slow-moving inventory, and inventory of expiring and under performing licenses in 2009, and the ongoing supply chain management and inventory management efforts we've undertaken.

DSIs decreased to 28 days from 23 days at the end of the third quarter of 2009 due primarily to comparable sales and inventory levels in 2010. With that, I will return the call to Stephen Berman.

Thank you, Joel. So at the onset of 2010, we knew we had some serious challenges to overcome. We looked deep into our organization and made some painful but necessary changes. We set out with what we believed was a solid action plan, to do more with less, and focus our efforts on the strongest SKUs and our A and B licensing opportunities to strengthen our own brands, which also give us a stronger product portfolio for our international expansion. We are utilizing efficiencies, sharing resources companywide, and managing our supply chain with a new commitment for being more cost effective at every turn.

Our business depended on it. We owed it to our customers, our employees and our stockholders. As I sit here today, I believe that we are well on the way to achieve what we set out to do. And the future prospects, from our vantage point, look extremely promising. In the quarter, and for the remainder of this year, the contributions still are coming from a wide range of quality products based on both popular, well-known licenses and new JAKKS brands, which we believe are both exciting and right on trend. While there are several bright spots, there is no one single product that we are counting on to make our year.

As I mentioned earlier, Halloween sales from disguise were robust in the quarter, and we've been showing retailers our 2011 lineups, which features some new and really innovative designs and extensions. Also for next year, we are looking forward to selling costumes internationally to cater to the interest in Halloween and Carnival around the world. Beginning with 2011 season, we will seek out opportunities for new disguise customers in Europe, South America and elsewhere. Our Disney Princess and Fairy businesses are extremely strong, and they're an excellent example of our cross-divisional capabilities.

In the quarter we launched two new Disney Princess Doll initiatives that are performing nicely so far. My First Disney Princess baby and toddler dolls from our Tollytots Division and our Princess and Me large size friend dolls, role play, and accessories from our JAKKS Pacific and CDI teams, new Disney Princess puzzle furniture, activity tables and step stools from our Kids Only division, as well as a broad range of Disney costumes in our Halloween disguise divisions. This just reconfirms how JAKKS Pacific uses a license and spreads it across its many divisions, which span through such broad ranges of product and product categories.

Let me now give some insight for 2011, which we have some very promising initiatives in the pipeline. Pokemon,Every four years we have observed a well-defined cycle of release of new games for Pokemon. And next year should be no exception for this power house brand that is on Cartoon Network 10 times per week. Pirates of the Caribbean, Johnny Depp and Penelope Cruz have both signed on for the next three movies in this block buster franchise that Disney will release over the next seven years. JAKKS Pacific has entered a master toy rights deal and plans on a killer lineup for the action figures, play sets, TV games and an original strategy-based board game. And speaking of board games, in 2011 we will launch our new JAKKS games and puzzle area with what we believe will be three strong titles.

Developed with some of the leading game creators around, we will launch a unique strategy-based board games based on Pokemon, Pirates of the Caribbean, and Phineas and Ferb, giving us a great entry into a popular and profitable category. And we will be expanding extremely strong in the area of our Phineas and Ferb toy offerings, which include figures, plush and TV games based on this very funny show, which is number one for boys 6 to 12 on Disney. Real Steel is expected to be another fantastic movie franchise for which we have the worldwide master toy rights.

Due out next fall, this is an action-packed Steven Spielberg production from DreamWorks and marketed by Disney starring Hugh Jackman. It combines giant human-controlled robots with the world of boxing in a very compelling toyetic way and we are very excited about this potential. Our new UFC and teenage action figures hit shelves in a number of our retailers in the quarter and we are cautiously optimistic about the potential of these two lines. From our electronics team, our Spy Net spy line is doing extremely well so far, and has been earning recognition on multiple lists including Good Housekeeping, Walmart, and the Toy Insider Hot Toys List, as well as supported at all of our top retailers.

We believe our Spy Net products innovate the spy category and have a great new line extension slated for 2011 as well. For our TV games, Big Buck Hunter and Core TV games have good placement for the holiday season. Ad for 2011 we are releasing Golden Tee Golf, the most successful arcade game of all-time. Real Construction is picking up momentum, and also racking up a few different toy of the year awards in the US, UK and France, and we're seeing some nice sell-throughs for this line.

In 2011 the line expansions will be dramatic, which is one of our initial homegrown IPs and expansion both in North America and international will be extremely strong. Kids Only has a fantastic portfolio of new product for next year, including indoor and outdoor kids' furniture, activity tables, based on the Crayola Brand, CarsTwo license, Thomas the Tank Engine license and many, many more.

Also, we could not be more thrilled with how our Tollytots division is doing since adding Disney Princess to their line, which also includes Fischer Price and Graco baby dolls and accessories. Something extremely exciting for JAKKS Pacific is the potential for our first television entertainment venture called Monsoono. We have aligned with the leading Japanese advertising and production company called Densu, and also global television distribution giant Free Mantle, and in the quarter we announced our trading card partner Tops.

JAKKS will do the toys, which on their own are phenomenal coupled with 52 animated episodes based on the Monsoono story line. We believe this is extremely promising for JAKKS Pacific and its partners. We also believe that Monsoono could be on air as early fall -- as fall 2011 or spring 2012. On the international front, we are ahead of our original goal of opening up offices in the UK, France, and Spain amongst others. Looking into 2011, the international area of our business will expand not only through its JAKKS core properties, but many various divisions that is have not had the opportunity to be sold directly through JAKKS to its retailers.

As we mentioned earlier, our balance sheet is extremely strong, and our initiative of seeking acquisitions that complement existing areas of our business, or allows us to enter a new area of business, still continues aggressively for JAKKS Pacific. So next year is shaping up extremely nicely, and once again we are relying on diversification and enough strong programs that give us confidence in our future. We will continue to maintain our tight reins on managing our business and remain unconditionally committed to growing our business for a profitable and successful JAKKS Pacific.

With that I will open up the call to questions. Thank you.

(Operator Instructions). We'll go first to Scott Hammond with Keybanc Capital Markets.

Hey, good morning, everyone. Joel, just a question on gross margin for the quarter. A little bit less than I think I was expecting. Can you talk about what some of the major drivers were, at least by order of magnitude for the third quarter? And then, obviously, looking for a bit of a turn around in the fourth quarter can you talk to those same buckets and how they're going to shift into the fourth quarter and drive some -- the upside that's implied in your guidance?

Sure. Basically, when the quarter first started we had some capacity issues with the factories, and also some question as to whether we'd be able to get enough containers to ship our goods. As a result, in order to meet customer delivery timelines we incurred some air freight and some of the container costs were a bit higher in the quarter. The aggregate of which was about $6 million. So that was the biggest chunk of margin deterioration.

Okay. And then for the fourth quarter product mix, we know disguise and that business is a little bit lower, I think. So the fourth quarter is it mostly going to be product mix driving that?

Yeah. We have a lot of the new items, which tend to have higher margins, are shipping more in quantity in the fourth quarter. Disguise, as you mentioned it, was called out in the call earlier, that it was up within the quarter. And they have lower margins than our other JAKKS products. So that was part of the overall mix shift in the third quarter.

Can you about the upside in the disguise business in the quarter on a year-over-year basis?

Year-over-year it was up about 6.5%. For the quarter it was up a little over 11%. And what drives that business are the licenses. In addition, the channel's expanding somewhat between two pop-up stores -- so-called pop-up stores, which are these temporary stores that some of the big retailers have opened up. Two, in particular, increase the number of stores by over 600. So the channel's expanding somewhat, plus we have some excellent licenses and we're developing excellent products under those licenses. So we're really driving our business that way.

Okay. And then Stephen, on the buy back authorization announcement, is -- should we say -- take that as being indicative that the acquisition opportunities haven't really materialized and this is just a way to return some cash to shareholders in the near-term?

No. We have been aggressively looking at acquisitions for some time. But ourselves and our board of directors believe that JAKKS Pacific stock prices currently under value at the current prices. So that's the reason for the buyback.

Okay. And then just finally, Joel, the -- what's the length of the authorization on the buyback, and is there any activity included in your updated 2010 guidance?

No. It's open-ended. But I will say that all the other buybacks that we had announced we did fulfill them in total. At this point, there's a blackout having just released the earnings, but it's an ongoing assessment of valuation and evaluating opportunities.

And Scott, just to elaborate further, the -- we feel and we've said we're extremely strong about our business initiatives and the buyback was just another component of what we feel strong about our company and our stock.

Great. Thanks a lot.

We'll take our next question from Gerrick Johnson with BMO Capital Markets.

Hi. Good morning.

Good morning, Gerrick.

I think the first question, the first two questions might be the same answer. What was driving the increase in royalty expense in the quarter? And also what were you air freighting and why?

Royalties were higher because we had lower mar... -- higher proportion of lower margin product. But most of it was licensed goods. A lot of the new initiatives, which are JAKKS, what we'll call JAKKS content, which are the homegrown products, like Spy Net and Real Construction. So that pretty much drove margin there. Air freight, because of the production issues earlier in the year and in order to meet certain delivery timelines, especially with Halloween where it's all based on one day. So it was very critical to get the goods to the customer very timely. So we evaluate whether to ship on air freight, or fast boat or other methods. But it was needed in the quarter to get the goods out.

And Gerrick, in addition we've had such tight reins on tooling and components that orders came in that exceeded our expectations. Some of them we had to chase. I think I said earlier on a previous call that our focus is on the stable line of business.

And as things turns into something that becomes, I'll call it a triple or grand slam, we will have to chase it. And in that segment of disguise, the labor shortages across Asia in the real labor cut and sew has been a strain for many companies. And that was a difficult thing for us to work through. We did work through it, and we wanted to make sure that we were able to keep the same shelf space that we have, and the new shelf space that we are getting in order for us to go into 2011 with a broader range of product and that shelf space.

Okay. All right. That makes sense on the air freight. On the royalty expense, your royalty expense is up 4 million bucks and up about 130 basis points as a percent of sales. So what's driving that increase? I would think Spy Net and Real Construction would lower that rate.

No. It's just that the bulk of the products in terms of the overall shift had lower margins. And so the royalties are going to be higher as a percentage. In the quarter, in particular with the launch of the Disney Princesses, they tend to have higher royalty rates. My First Princess in the Tolly area in particular. So it's overall shift. Rates in general are not increasing, it's more a mix shift. And you'll see a decline in Q4 as Spy Net, Real Construction, and some of the other JAKKS owned content ship more in quantity.

Remember we had two new launches. One was the Tollytots Princess, and one was the JAKKS CBI Princess and Me launch that hit in third quarter.

Okay. So Disney -- and Disney Princess and Fairy were primarily the reason for that.

Disney Princess and Me and the My First Princess, which would be Tolly

Right. Okay. And then your inventory is down 15% year-over-year. If you expect late shipments into retail and reorders, do you have the ability to capitalize on a late-arriving orders or demand?

Gerrick, we were keeping really tight reins on our whole inventory and every part of our business. So we're forecasting better than we ever have in the past. So we're really right on track. We probably -- if we were to take a little bit of risk, which we're really not willing to do. So we'll take, I call it minor minor minor, or very minutia. But we have such, I believe, really, really strong forecasting and controls that the inventory that we have is appropriate to achieve our forecasts and, hopefully, we'll be able to go above and beyond.

But we're comfortable with our new forecast that we came out with today of the $710 million to $720 million and the $1.19 to $1.25. We still have, call it, three months left in sell-throughs, not just sell-ins. So we're extremely optimistic. But again, and we've said it in the past, we want to be consistent to the shareholders and to our retailers with what we have. In addition, in the back half, a lot more sales are done on a FOB basis that we don't hold inventory for. They'll be sales for which we're not currently holding inventory.

Okay. Can they get those on shelves that quickly on a FOB basis?

Yes. Yes. We also plan not just internally with our numbers or our inventory coming into JAKKS, but we also plan the manufacturing and shipments to the -- our customers freight forwarders, not just in North America but also worldwide. So there's different methods of fast boats. So yes, we've been planning this. This is nothing new to us.

But some of the fourth quarter sales are actually not for fourth quarter shelves, they're for spring.

Right. Okay. Sorry to monopolize the call, but you just piqued my interest on the FOB comment. What is the absolute latest that a FOB shipment could leave China or Hong Kong and make it to the shelves before Christmas?

Well, what we'd be shipping on a FOB basis wouldn't necessarily -- it's in the four to six-week range.

Okay.

Literally, right now, so you know, it will take anywhere from 30 -- it depends what part of the country, where it takes anywhere from an order 30 to 40 days to get it on shelf, to the customer's shelf.

Okay. And I just have one last more -- one more housekeeping. On the diluted EPS calculation, Joel, can you let us know what the interest add-back for the quarter was and the effect of the convert on a diluted share count?

As a matter of fact, we can. Actually, you know what, we're going to come back to that one. We'll make a note and we'll come back to that, Gerrick.

All right, sounds good. Thank you very much, guys.

Thank you, Gerrick.

(Operator Instructions). We'll go next to Ed Woo with Wedbush.

Yeah. Good quarter, guys. Looking into 2011, it's shaping up to be a lot more positive than this year, particularly with the movie properties. Is there any way you could quantify, or at least qualitatively tell us how you rank some of the movie opportunities?

I would say this year has been looking exciting for JAKKS, not just for our current licenses that we have, but a lot of our own initiative IPs that we've been launching. And not just launching, the success that we're having worldwide, Real Construction, Spy Net. So when we're looking into 2011, the -- not just movie properties, but let's talk just in general properties, are Pokemon where we know the cyclical nature of Pokemon has been every four years.

The rates of sales that we've done our due diligence on that it's already been launched in Japan has never been more successful for any launch of a Pokemon product line. Nintendo believes it will be their top-selling game for next year. So that's not a movie property but a television property that we are extremely excited about. The franchise of Pirates of the Caribbean that we're launching, which we'll be launching through the next I believe seven years. It always stays consistent in our disguise line. So the Halloween costumes of Pirates is very consistent through year in and year out. And then we also have that in various other lines. We have it in our boys action figures.

We have it in our CDI role play. So that itself is going to be an ongoing line, and a continuous line for us. We have the Real Steel that we're excited about. We're very cautiously optimistic on certain movie properties, just in general. We have Phineas and Ferb, which will be a full year of complete distribution, and launching it in other territories, whether it's Canada. We've launched it mid part of this year and it's -- the sell-throughs on Phineas and Ferb have been just tremendous.

We're not just launching the Phineas and Ferb additional SKUs, but we're also launching -- that's going to be the keyboard game property for us, with Pokemon being a key license for our border game category, as well as Pirates. So there's so many variations of things. Our Max Force, there's so much that we're excited about. The Monsoono. There is just a plethora of areas of content that we are excited about that we believe, again as we said this year, there's not one segment that we're relying on to make our year for 2011.

Again, it's early in the -- in this process, but we have never been further ahead in this process with the development, the previews to our retailers, our forecasting. So we are excited, extremely excited. We'll be, I say, cautiously looking into 2011. But we couldn't be more excited with the initiatives that we have undertaken in 2010 or 2011.

Well, personally, I'm looking forward to the Smurf movie. So I can't wait for that.

Well, I'm happy you're looking forward to Smurf. I'm hap... -- I'm just looking forward to the whole line in general. CPK, just there's -- which is Cabbage Patch, there's just so many delightful things that we're looking forward to.

Great. And then the last question is, is the Monsoono on TV shows already in production?

We are making the animated series currently right now. We are in negotiations with several different networks in the US and Canada, as well as starting next month we will be negotiating for different territories throughout Europe.

Thank you and good luck.

Thank you, Edward.

We'll go next to Jeff Blaeser with Morgan Joseph.

Good morning. Thanks for taking my question. A couple questions on the cost side. It certainly appears as if you're hitting your $40 million cost reduction target. Any additional savings that you could see down the line? And I know you mentioned in the past the 35% gross margin target. Is that something that we should look at for next year, or are added costs that industry's seeing that make that a little bit more difficult?

In general, we continue to monitor our spending level, head count and so forth so it's an ongoing process. But we do believe that we achieved our goals in terms of cost reduction. We're always looking at opportunities. We don't have set goals at this point. Earlier in the year we said we would approach 35% this year. But as we mentioned, with some of these opportunistic shipments we did incur some higher logistics costs, which drove the margins down a little bit.

But all the new products, which is where a lot of the growth is coming from have higher margins. So as the mix changes we should see continuing expansion of the gross margin. Interim targets would be in the 35% to 36% range, but until we conclude on this year's toy fair, which we just had in the last couple of weeks, and in January it will be in Hong Kong. But as the line solidifies we'll have a better sense of what our margin opportunities will be going forward.

And then on the international side category, you expect to grow going forward. How much would you say is the new mix, which certainly appears to be more internationally -- could have more of an international focus versus increased distribution opportunities from your end?

So for 2011, we believe the mix will be on our currently developed internal products call it Real Construction, Spy Net, Girl Gourmet, whether it's Monsoono, Creepy Crawlers, it will probably be anywhere from 40% to 47%.

Okay. Thank you very much.

We'll take a follow-up question from Scott Hammond with Keybanc Capital Markets.

Hey, guys. Just a follow-up on Monsoono. How do the production costs run through your P&L right now, and what should be the expectation as you continue to ramp up those costs?

Currently what's on our P&L are the development costs associated with the toy line. We are funding the joint venture and we're responsible for a certain portion of the overall development costs, which will be capitalized until the show hits the air. So we'll recognize that on an equity method basis so it will flow through other income and expense at the point in time that the operations commence.

Okay. And then just a follow-up on the retail channel, have you been able to get some of these products into expanded distribution? I know you talked about the construction business going into home improvement. And I thought there was another one, too, that was going into different channels.

Overall, we have continued to look at additional channels of distribution. For instance, the Real Construction and home improvement channels, like you just said. There are additional pop-up stores from our Halloween business. We're getting other categories into these pop-up stores. We have, call it, the Big Buck Hunter game going into the bass fishing stores, Cabelas. So we continue to look at new distribution channels. In fact, the kiosks at the malls that you're seeing, we are in the process of working throughout the seasonal part of the business from Easter, to summer to Halloween, till fall working with these kiosks companies to do the JAKKS Pacific kiosk with an array of products.

So we're always looking for new channels of distribution. And because we're so diverse in our product lines and our product segments, we really have an opportunity to go far and beyond what a typical toy company distributes.

Okay. Thanks a lot.

We'll take our next question from Drew Crum with Stifel Nicolaus.

Okay, thanks. Good morning, everyone. A couple questions on costs. Could you comment on your plans for direct sell and spend in the fourth quarter given the sell-in you had in the third quarter? And just like to get your outlook for input costs for 2011.

In terms of the direct sell in Q4 is when we do the bulk of our media buys. And we do have a broad range of products. But we have a little tighter criteria on what we're spending on TV. We've also done some direct response, which also bolsters interest in product at retail. In general, we're expecting costs to be up about 40%. In Q3 it was about 5% of sales. Sales are expected to be lower since it is our second highest volume quarter. So it's disproportionately higher. It will be about 10% to 12% overall we're expecting.

Okay. And your thoughts on input costs for 2011? Stephen or Joel?

In general, we watch the commodity markets. I think the new twist this year that we've seen is the Chinese currency. So we're evaluating some hedging opportunities and structural changes to how we do business to keep a handle on that. But in general, we think that our development plans and the way we develop products and the margin criteria that we have set for new products that we'll be able to overcome any of those headwinds.

Okay. And if I could shift gears to products, can you comment on wrestling toys, what it was down year-on-year or if it was up year-on-year? I don't think you said WWE was a drag on numbers. Can you comment on that? And then there's been a kind of mixed results in the preschool category. Can you comment on your performance with your line there?

Okay. So on the wrestling, we don't have the numbers available, but wrestling would be down because we had wrestling for the full year last year. And we only launched T and A in the mid part of 2010. So we haven't had a full year of distribution. And UFC was we had a methodical way of launching it to the retailers. So overall would be down. But our actual sell-throughs and growth in our new launches of these two areas, T and A and UFC has picked up dramatically. But year-over-year the wrestling for JAKKS category would be down because WWE was a much bigger mature portion of our business since we had it for 10 plus years.

Stephen, is that true in the third quarter as well? You said it was year-to- date but has that also been true in the third quarter?

It's true in the third quarter, yes.

Okay, okay.

But on the -- and I'll make a comment before the preschool. Our overall business strategy and our overall categories, Drew, has I believe performed better than we expected. But we've been very cautious. We wanted to ensure that we would achieve what we set out to do. So as I said earlier, there's not one specific product that really makes our year. And if we're going to go into the preschool area of our business for JAKKS Pacific, which is the Tolly area of our business really the preschool, and some of CBI. CBI has preschool dressup.

We are growing, I would say, in leaps and bounds with distribution and product line. Our line of Graco products, our line of Fischer-Price products do extremely well. Our new Disney My First Princess I would say is a blockbuster, but we forecasted very cautiously. We did our tuning very cautiously. CPK, which is our Cabbage Patch Kids are relaunching next year. So we're seeing really strong, I would say, receptiveness from the retailer, as well as the consumer.

So overall, I wouldn't consider us just a -- the toy company. We're much more of a consumer kids product company. Because we're so diverse now. The areas that we're in from our novelty to Halloween. We're very fortunate a lot of these areas are working. Some products don't, but we've dropped those, call it, C and D licenses. And our Kids Only furniture line. We've had a very nice sell-through during the summer period.

So it's a feel-good business that we, I think, have true controls. And there's nothing that we're cautious about except the everyday part of our business with shipping, manufacturing, normal things. But on a product line basis, the categories in which we are, in the categories in which we are expanding, we couldn't feel more confident about.

Okay. Last question for me. Joel, what was the impact from foreign currency on top line in the quarter?

Actually, we had no impact. The -- currently the international sales are shipped on a FOB basis in US dollars. So as the international business grows, while we do have offices set up, it will be a bigger initiative in 2011 with local sales and local inventory.

Got it. Okay. Thanks, guys.

And ladies and gentlemen, we have no further questions at this time. I'd like to turn things back over to Mr. Berman for any additional or closing comments.

In closing, we are proud of our achievements in 2010. We feel strong for the remainder of this year. And we are extremely excited for 2011 and beyond. So we wanted to thank you for your continued confidence. And thank you very much.

Ladies and gentlemen, that does conclude today's conference call. We'd like to thank you all for your participation.