Jakks Pacific tries to spur recovery with Monsuno toy franchise

At the headquarters of Jakks Pacific Inc. on Pacific Coast Highway in Malibu, Chief Executive Stephen Berman is busy playing with his toys.

"Look, this is an amazing, 'toyriffic' product. Just a really magical toy," Berman said, twirling around a small plastic cylinder that is part of a new line of toys for boys. "It's truly magical."

Jakks isn't as known to consumers as nearby rival Mattel Inc., which is nearly 10 times its size in sales, but it has built itself into one of the largest second-tier U.S. toy companies mainly by bulking up on products it makes under name brands such as Disney, Nickelodeon, Cabbage Patch Kids, Hannah Montana and Pokemon.

The toy maker, founded in 1995, has been struggling with largely declining sales for three years and lowered its forecast for annual sales last year nearly 15% to $660 million after a disappointing holiday season. It is expected to report fourth-quarter and annual results next week.

Jakks is trying to spur a recovery by launching a "magical" toy franchise created from scratch, along with an animated show to debut this month on Nickelodeon's Nicktoons channel. The company was expected to unveil the line at a New York media event Thursday.

The action figures, play sets and accessories hitting shelves in March are similar in concept to anime-based blockbusters such as Pokemon or Yu-Gi-Oh and feature a fictional world where youngsters battle the forces of evil using lab-created monsters called Monsuno.

There's a polar bear/gorilla Monsuno creature called Lock that is controlled by Chase Suno, the show's plucky but unpredictable protagonist. And the villainous Dr. Klipse controls Backslash, a wolf/gorilla Monsuno "as dark and aggressive as the evil intentions of its master."

Jakks could use a friendly Monsuno to help it navigate some treacherous waters. In October, the company fended off a $670-million hostile bid from Los Angeles investment firm Oaktree Capital Management, and analysts speculated that another takeover attempt was imminent.

About 70% of the company's sales typically come from toys sold under license from well-known brands, analysts said. The rest comes from its own proprietary and less popular brands, such as SpyNet and TV Games.

Jakks has grown also by buying 17 companies over the last 16 years. Its first hit was a line of action figures for the World Wrestling Federation. At its peak in 2008, Jakks raked in $903 million in revenue.

The company's problems began during the recession as once trendy toys such as Hannah Montana dolls lost steam.

Analysts said the company has been plagued with a lack of focus and tendency to jump into product categories beyond toys. Jakks already makes pet treats, for example, and will roll out baby monitors this fall.

"They have new-product ADD," said Gerrick Johnson, a toy industry analyst at BMO Capital Markets, using the acronym for attention deficit disorder. "They are in all different areas; there is no cohesion … and it's gotten worse over the last couple of years."

They lost valuable licenses, such as Care Bears, which went to rival Hasbro Inc. in Pawtucket, R.I., and World Wrestling Entertainment, which was awarded to Mattel in El Segundo. Johnson said the WWE license alone cost Jakks about $70 million in annual revenue. Sales of some licensed items also fell after television shows such as Pokemon waned in popularity.

"In the toy business, the right license will sell the product," said Arvind Bhatia, an analyst at Sterne Agee. "But licensed products ebb and flow in popularity, and that has an impact on their bottom line."

Berman defended Jakks as a company reliant not on runaway hits but on steady sales of evergreen products, such as kids' furniture and costumes. Any blockbuster toys are just a bonus, he said.

"Our true business is based off of singles and doubles," he said. "We have a great core business, and sometimes you get very lucky, like Hannah Montana, and some areas just don't pan out."

Almost three years ago, as part of an effort to expand sales internationally, Jakks set out to find a toy innovative enough to carry an entire entertainment property. An inventor showed them the concept of a cylinder that ejected a toy upon impact, and Berman said his immediate reaction was "wow."

That concept grew into Monsuno. Aimed at boys 6 to 11, the line revolves around little action figures modeled on the Monsuno monsters that pop into plastic cylinders, or cores, about the size of a lipstick tube. Cores can be spun with a flick of the finger, and after hitting something, the cores eject the Monsuno tucked inside.

Jakks also brought on partners Dentsu Entertainment to create the TV show, FremantleMedia Enterprises to distribute the show and Topps Co. to make trading cards, which boys can use to do mock battle with one another.

Analysts said they liked the innovative idea behind the toys but warned that the toys' success may be closely tied to the popularity of the weekly half-hour "Monsuno" TV show debuting Feb. 23.

"It's a risk that is not without rewards," said Sean McGowan, analyst at Needham & Co. "It can be several hundred million dollars in sales over a few years, or if it's a big failure, it will be $5 [million] to $10 million and then it's done. There's no way to tell until it gets out there if it's something kids want to play with."

The toy segment based on Japanese anime-inspired shows has been surprisingly robust for more than a decade, analyst Johnson said.

"It's been different products that have come and gone, like Pokemon and Yu-Gi-Oh and Bakugan, but the genre has been going strong for a really long time," he said.

On a recent weekday, Berman trotted out his son, Logan, 10, and Logan's friend Jesse Motavasselan, 11, to demonstrate how boys might play with the toys. The pair twirled, spun and threw cores, and then slowed down to watch a clip of the show.

"I think it's pretty cool. I like how it spins and pops out," said Jesse, dressed in a Monsuno T-shirt and expertly twirling a core with a flick of his finger. "I liked Bakugan, and this is exactly like that."

Logan said he also liked the Monsuno show but confessed that his favorite programming was of a more adult variety, such as "American Dad," "Blue Bloods" and the reality TV show "The Bachelor."


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