JAKKS Pacific - Earnings Call - Q1 2014

Transcript

Speaker 0

Good morning, ladies and gentlemen. Thank you for joining the JAKKS Pacific First Quarter twenty fourteen Earnings Call with Management. Today, JAKKS will review the results for the first quarter ended March 3134, which the company released earlier today. 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, then Mr. Bennett will provide detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Berman will then conclude the prepared portion of the call with highlights of the product lines and current business trends prior to opening up the questions. Your line will be placed on mute for the first portion of the call.

Before we begin, the company would like to point out that any comments made about JAKKS Pacific's future performance, events or circumstances, including the estimates of sales and earnings per share of 2014 as well as any forward looking statements concerning 2014 and beyond our project subject to Safe Harbor protection under federal security laws. These statements reflect the company's best judgments based on current market trends and conditions today and are subject to certain risks uncertainties, which could cause actual results to differ materially from those projected. Risks and uncertainties, you should consult JAKKS' most recent 10 ks and 10 Q filings with the SEC as well as the company other reports filed with the SEC from time to time. With that, I would like to turn the call over to Mr. Berman.

Speaker 1

Good morning, and thank you for joining us today. We are pleased with our sales and earnings results for the first quarter of twenty fourteen. We've exceeded our sales forecast for the quarter and believe strongly we are on track to achieving our previously announced sales and earnings forecast for the full year. Highlights of our first quarter sales include Disney Princess, Toddler and Baby Dolls and Dress Up, including from the hit theatrical release Frozen, also Sofia the First Dress Up and Role Play toys, Disney Fairy Fashion Dolls and dress up and preschool toys such as our Fisher Price foot to floor ride ons, licensed activity tables and our Maui Sky Bouncers were some of the strong sellers for the first quarter of the year. Later this year, we are looking forward to growing our My World line of miniature playsets and our large scale action figure lines with new licenses and expanded retailer distribution.

We are launching our new HERO PORTAL TV game system and Max Tow Truck line. Exciting new Disney Princess products, including many, many new additions to the Frozen franchise and Sofia the First will also hit shelves later this fall. New Dreamplay and technology apps and toys as well as updates to our current apps are also slated for release later this year. These are just a few of the brands and categories in our portfolio this year, which is comprised of brand new initiatives and innovation and the hottest licensed properties along with our evergreen categories and play patterns. I will give a further update of our business this year and beyond, but now I'd like to turn the call over to Mr.

Joel Bennett to review our financial results for the first quarter of twenty fourteen. Joel? Thank you, Stephen, and good morning, everyone. Net sales for the first quarter of twenty fourteen increased to $82,500,000 up 5.7% from $78,100,000 reported in 2013. The reported net loss for the first quarter was $16,200,000 or $0.76 per diluted share.

This compares to a net loss of $27,600,000 or $1.26 per diluted share reported in the comparable period in 2013. Worldwide sales of products in our traditional toys and electronics segment, which includes dolls, action figures, vehicles, electronics, plush and pet products were $35,700,000 for the first quarter of twenty fourteen compared to $38,400,000 for the first quarter in twenty thirteen. Sales this quarter in this segment were led by our Disney Princess Dolls, Disney Fairies Dolls, Cabbage Patch Kids and Foot to Floor Ride Ons, though sales overall was down this quarter due to declines in our Monsoon, Flywheels, Pokemon and Spinet product lines. Worldwide sales from our role play novelty and seasonal toys segment, which includes role play products, novelty toys, Halloween costumes, indoor and outdoor kids furniture and outdoor activity and pool toys were $46,800,000 in the first quarter of twenty fourteen compared to $39,600,000 in 2013. Disney Princess, Sofia the First and Frozen dress up and role play products along with Maui Toys outdoor seasonal products dominated sales in the category this quarter, driving the category to an overall increase this quarter and offsetting declines in Black Decker and Winx Role Play and Activity Tables and Kids Furniture.

Included in the category numbers are international sales of approximately $18,200,000 for the first quarter of twenty fourteen compared to $16,700,000 in 2013. Disney Princess Dolls and Role Play, Disney Fairies Dolls, Rio two and Slug Terra drove first quarter sales in the international markets more than offsetting the decline in the Monsoon product line. Gross margin for the first quarter in 2014 and 2013 was 28.529.9% of net sales respectively. The decrease as a percentage of net sales 14 is primarily due to product mix and higher royalty expense. SG and A expenses in the first quarter of twenty fourteen were $38,400,000 or 46.5% of net sales as compared to $47,200,000 or 60.5% of net sales in 2013.

The decrease in SG and A in dollars and as a percentage of net sales is a result of the benefits achieved as part of the restructuring and cost savings initiatives commenced in the second half of twenty thirteen as well as a shift in media buys due to Easter falling later in the year. Consistent with the seasonality of our business, operations used cash of $10,700,000 for the first quarter of twenty fourteen compared to using cash of $5,700,000 in 2013. As of March 3134, the company's working capital was $120,400,000 including cash and equivalents and marketable securities of approximately $113,600,000 Capital expenditures were $1,200,000 for the first quarter of twenty fourteen compared to $2,000,000 for the first quarter of twenty thirteen. For the full year, we expect capital expenditures to be approximately $12,000,000 Depreciation and amortization was approximately $3,000,000 in the first quarter of twenty fourteen compared to $2,600,000 in 2013. As for our tax rate, our effective tax rate for 2014 is expected to be approximately 19% before any FIN This may change if there is a shift in sales and therefore taxable income between The U.

S. And Hong Kong territories. Accounts receivable as of March 3134 were $65,400,000 compared to the $65,000,000 at the end of the first quarter of twenty thirteen resulting in DSOs in 2014 of seventy one days, a decrease of four days from the seventy five days in 2013. Inventory as of March 3134 was $42,200,000 down from the March 3133 level of $52,100,000 as we continue to manage inventory levels. This resulted in lower DSIs of seventy seven days in 2014, down from one hundred and one days in 2013.

Turning to our 2014 guidance, we continue to anticipate net sales for the full year in the range of $633,000,000 to $640,000,000 with earnings in the range of $0.30 to $0.40 per diluted share and EBITDA in the range of $41,000,000 to $43,000,000 Lastly, recently closed on a three year senior secured credit facility with GE Capital to provide us up to $75,000,000 subject to availability and certain financial covenants, which coupled with our expected cash flow will give the company financial flexibility to execute on our strategy. And with that, I will return the call back to Stephen Berman. We are extremely pleased with our performance in the first quarter of twenty fourteen despite the challenging retail environment and colder than usual weather. Highlights in our girls division this quarter include our Disney Princess products, which are once again stellar performers in our portfolio. The breakaway hit Frozen has caused a buying frenzy with consumers at retail for our toddler and baby dolls and dress up and role play products.

We have been working closely with our factories to increase capacities in addition to working closely with our retail partners around the globe to get more products in the stores immediately. We have an exciting slate of year round offerings for Frozen including activity tables, soft play environments, Halloween costumes and a brand new line of exciting interactive products for fall including new categories that we have added to our license. Our Sofia the First Dress Up and Role Play line continues to perform extremely well at retail. The show's ratings continue to be strong as the number one rated cable TV show among girls ages two to five and rated number two with kids ages two to five, which has positively impacted the sell through of our products at retail. The Disney Fairies, Pirate Fairies DVD hit on April 1 and combined with promotional activity from Disney, our products are performing extremely well at retail including the nine inch Deluxe and Classic Dolls.

We expect to see an upward trend on this business. Our Dreamplay, MyWorld line of many play environments based on top girl brands did extremely well at Toys R Us and Walmart. We are expanding our retail distribution in the fall into our other retailers as well as adding new licenses including Skechers, Justice and Mrs. Fields just to name a few. We are updating our Dreamplay MyWorld Mall app to include the new licenses for fall as well as adding new gameplay and integrating in app purchases.

All MyWorld product packaging will have callouts to download the Dreamplay app and we recently aired a MyWorld TV spot that highlighted the app resulting in more than doubling of its downloads that week. Now for highlights in our boys business in the first quarter, our Nintendo Plush, figures and play sets and battery operated ride on did exceedingly well at Toys R Us in the first quarter and we are expanding to other major retailers and secondary accounts for fall. Our spring launch was focused around Nintendo's number one character Mario and our fall launch will include products based upon Legend of Zelda, Donkey Kong, Mario Kart eight and others. Our large scale figures line is setting the stage for a great business in 2014. We launched Godzilla in the first quarter with Star Wars Rebels, DC Universe and Nintendo Super Mario Bros.

Following in the fall. We are also introducing new scales with 18 inches to 21 inches Star Wars Rebels figures and others as well as a whopping 48.5 inches Teenage Mutant Ninja Turtle, Michelangelo and Leonardo figures this fall. Also for fall, we are looking forward to launching our new line of HERO PORTAL plug it in and play game consoles, which capitalizes on the popular play pattern of collectible figures that interact with an all in one video game console. We have exclusive rights to keyboard properties like Teenage Mutant Ninja Turtles, DC Universe and Power Rangers Super Mega Force. Max Tow Truck is a Jack's owned brand launching this fall with wide placement at all of our major retailers.

A powerful motorized character driven toy truck, Max Tow can pull and push over 150 pounds and will feature compatibility with the MaxToy DreamPlay app, which allow kids to take their MaxTow truck on the go. The free app will include games and environments as well as in app purchases. The augmented reality experience will allow kids to create an obstacle course for their real Max Tow Truck right in their own room. Our Black and Decker line of boys role play is also looking strong for fall with an expanded line encompassing more project orientated sets along with season themed items. Retailer response has been very positive for this line.

In preschool, our Moose Mountain division, a leader in great evergreen preschool products such as foot to floor ride ons, inflatable ball pits, tents and wagons had another successful quarter with year over year growth, including sales. Our Fisher Price foot to floor ride on started the season very strong and sales of our new convertible ride ons have boosted sales and provided diversification with assortments at retail. Our license activity tables continue to be steady and strong and an evergreen business at all of our major retailers along with our kids indoor and outdoor furniture and licensed big wheels. We have completed the consolidation of our kids only business into our Moose Mountain division, resulting in more efficiencies and savings in our preschool and seasonal offerings. In seasonal, despite challenging weather, our Maui Toys Wave Hoops and Sky Vaults continue to be strong and our new Sky Bouncers is doing very well at retail.

The quarter started out slowly as retailers pushed back their set dates. However, the end of the quarter saw an increase in shipments as stores were setting and gearing up for the spring and summer. Our fun noodle business started to ship broadly at the end of first quarter. First quarter is traditionally a quiet quarter for our Disguise Halloween costume division. However, Disguise posted great selling numbers for Q1 of this year.

The sequel, The Winter Soldier, remains the domestic box office champ in its third weekend according to studio estimates released on Sunday. We are looking forward to launching our line of Captain America costumes this Halloween season for toddlers to adults. Additional top licenses include Marvel's Spider Man based on the movie, Iron Man, Hulk and our Superhero Squad line for preschoolers as well as Transformers. For girls, we expect our Disney's Frozen line to be one of the most popular Halloween licenses with the beloved characters such as Elsa, Anna and of course Olaf. Also, we are excited as well for the Halloween costumes based on Disney's movie Maleficent.

Now I'd like to turn to our international business. International this quarter showed strong sales Princess Toddler Dolls and Role Play, Disney Fairies, Rio two, Slugterra and our Moose Mountain preschool products just to name a few. We have launched Frozen toys with immediate success and will continue expanding distribution into the second quarter. Our continued long term focus is to build our business in emerging markets. We're proud that our U.

K. Office continues to beat year on year sales by quarter. Lastly, our Dreamplay offerings are continuing on plan. Updates to our MyWorld Mall app will continue to be included and integrated in all new licenses for fall, plus new gameplay and in app purchases. Updates to our Aerial Dreamplay app will include a spotlight on the interactive dance experience and will integrate our aerial shoes and tiaras into the experience in addition to the dress.

As mentioned earlier, our Max Tow Truck will also be launching this fall in conjunction with a Dreamplay app experience. All of our Dreamplay app enhanced toys will feature a call to action on the packaging to download the app. TV commercials for My World and Max Tow will air this fall and also include a Dreamplay tag. Additional new Dreamplay apps and toy products in the works for later this year are expected to increase our offerings and presence in the digital play space as we work to build our strategy to monetize our offerings. With that, we will wrap up the prepared portion of the call and open it to Q and A.

We are optimistic about our year with our traditional toy business and with our Dreamplay offerings and new licenses. The year is shaping up positively for the company and we are looking forward to a profitable and successful JAKKS Pacific for our stockholders and employees. Thank you for your time.

Speaker 0

Thank you. We will now begin the question and answer session. And our first question comes from Linda Bolton from B. Riley. Linda, please go ahead.

Speaker 2

Hi. So congratulations on sales growth in the quarter. But do you think that the Easter shift actually caused any shift of sales from the first quarter to the second quarter?

Speaker 1

No. The Easter shift as it was three weeks later, I believe in 2014 to 2013, normally would have had the shift, but we actually had throughout the majority of our categories increased sales. Some of the areas in our seasonal business had a lower sales, but other areas of business increased. So we were fortunate the majority of our divisions had better than expected sell in and sell through, so it actually just added to the first quarter.

Speaker 2

Okay. And then I know you had said at the end of the calendar year that you were in pretty good shape at retail in terms of inventory levels. So other than those areas that are really hot like the Frozen toys, is the rest of everything kind of at pretty good levels? Are you feeling pretty good about where the inventory is at retail?

Speaker 1

Yes. Both inventory at our distribution center and at retailer are extremely low year over year. So I think we couldn't be more well positioned this year with the inventory at retail in the majority of all of our segments of businesses. So the rework and the restructure that we did last year, we were really focused on inventory management both at retail and in our domestic warehouse. And the sell throughs very surprisingly throughout The U.

S. And internationally have been well beyond our expectations. So we are scrambling not just with our frozen product, but many other areas to get product on shelf. But we're still going to keep a tight rein on inventories as we've had problems in the past.

Speaker 2

Okay, great. And then actually I didn't catch or maybe you didn't give it, but can you give operating cash flow number for the quarter? And also do you have a D and A, depreciation and amortization estimate for the full year?

Speaker 1

The cash flow from operations used cash of 10,800,000.0 and D and A for the year, if you'll bear with me. Actually, I'll come back to that later in the call.

Speaker 2

Okay. And just can I just follow-up a little on the gross margin? I guess that was the only area of the earnings report that was just a tiny, tiny bit less than what we had thought. And you said it was due to mix and royalties I think. Is that are those things that are going to play into the remaining quarters of the year too?

It something we should keep in mind? Or is that factor going to change a little bit as we go forward?

Speaker 1

No. Because Q1 is the lowest volume sales quarter, everything has that much bigger of an impact. And 190 basis point decline from our guidance was a result of closeout. So the guidance originally contemplate even though closeouts are a normal event, the timing of those is what affected us this quarter and we would have been 190 basis points higher if you strip out the closeout. So we're much closer to expectations without that.

Speaker 2

Okay. Thanks very much.

Speaker 1

Thank you, Linda.

Speaker 0

And our next question comes from Garrett Johnson from BMO Capital Markets. Garrett, please go ahead.

Speaker 1

Hey, Good morning, Eric.

Speaker 3

Good morning. I was wondering if you could just touch on what you just said, what the closeouts were that impacted you that much in the quarter. And then Joel, you could just go through the covenants on the credit agreement, particularly the minimum levels of EBITDA you need to maintain what they were for this quarter and going forward? And lastly, one question on product. Whatever happened to Spinet, I just don't see that out at retail anymore.

Is that done or is that still lingering somewhere? Thanks.

Speaker 1

While Joe is pulling up the other information, SpyNet we actually because there were other competitors coming after that area with SpyGear and so on, we created a whole new line called Covert Ops and that's what you'll see at retail this year. So stayed ahead of the game and staying into a military theme. We redirected the line, reshifted the play patterns and changed it into covert ops. If you were right now having spring twenty fifteen Toy Fair as we speak today, that's what you'll be seeing fall this year and then going into next year. We're So staying kind of ahead of the curve because it got saturated with other companies using the word spy on product.

So it was saturated and price points became low due to other companies closeouts. So we re reshifted and redirected the whole line and it looks wonderful. And it's been well accepted across the board both U. S. And abroad.

As far as the covenants on the line for Q1, we needed EBITDA of not more than negative $12,500,000 And then for the six months through Q2, it's I think $10,500,000 After that, Q3 and forward, it's based off a fixed charge coverage ratio 1.2.

Speaker 3

Okay. So I guess there's some nice improvement in 2Q to hit that six month number. I'm sorry, I think I missed. Did you talk about the impact of the closeouts what that was that hit gross margin by 190 basis points?

Speaker 1

Yeah. We had it was about $3,300,000 On a year over year basis, was somewhat consistent, but it was more relative to our plan that the timing affected us more so in Q1. All right. Thank you. Thank you, Garrett.

Speaker 0

And our next question comes from Ed Woo from Ascendant Capital. Ed, please go ahead.

Speaker 1

Yes. Thank you. I had a question. You said that because of the Easter shift you did some marketing costs shifting into or out of Q1. How much of that is going to be recovered in Q2?

You're talking marketing spend? Yeah. You guys did a very good job of having lower SG and A this quarter. And part of it was due to a shift in marketing costs. I'm just wondering how much of that is going to be reflected in the second quarter?

A larger percentage, but the prominent quarter. So it really will blend in normal to what we sold in. And based off of the specific items, it I don't have the exact dollars in front of us, but the marketing spend will be like half and half from Q1 to Q2. So it's really a split between both. Great.

And the other question I have is congratulations on the success you guys have with Frozen. There's a lot of press recently about just how strong the franchise the movie is continuing even through the holidays. How much do you think you left off the table just because of production issues? And also I want to know for the Frozen license, what do you guys have? And what's your geography for those licenses?

So the Frozen obviously took, I'd say, not just U. S. Wide, but almost worldwide. Everyone's quite surprised by how powerful the movie became. And I think that even from the Disney point that it's hard to create a princess per year or within a period of time and they really created a princess for our new generation, is Elsa and Anna.

And the products themselves go really across the board from I know everyone's heard a bunch about the dresses themselves, but the toddler dolls, the role play, the tiaras, from activities to flashlights. We've gone really broad. So what happened was we sold in strongly in December and we picked up at the March because we had to deal with capacity issues after Chinese New Year. So we were in Hong Kong dealing with Chinese manufacturers and we've, I'd say, almost quadrupled tools on many of the items. And now we're just getting the inventory in.

And as soon as we bring in the inventory, it really sells out within weeks. And we've extended our license to really some perennial items. So if you remember Mr. Potato Head that we grew up with, we came up with an item called it's a Switch them Up Olaf, which is the color for our era, next generation of a Mr. Potato Head conceptually doing it differently.

But as Olaf really relates itself to that type of play pattern, we've come up with a whole new line of Olaf Snow Cone Maker, which if everyone remembers this, there was a Stippy Snow Cone Maker. And we really are playing based off of the characters and play patterns. So we're not going outside the play patterns and we're using factories, our Halloween factory to catch up on the dress up for role play throughout the spring. And then Halloween, we've kicked into a couple other factories to pick up because we believe it's going to be one of the top, if not the top girls Halloween costume for fall and Olaf will be one of the fun costumes for fall. So we don't believe it's just a one year exciting license the way Disney is nurturing it and the way that we have been handling it.

We have a broad array of categories. This is a very long term project. We're actually doing pallet programs with Disney. So when you go to stores, you'll see toys in certain parts of a pallet program and you'll see their books on another side. So really going into different distribution channels and growing the presence of Frozen.

It's really just touching the tip of Frozen right now due to the sell throughs were so quick when it happened. Great. And your license for Frozen, the Role play and the toddler dolls is that international as well as The U. S? Yes.

We have many parts internationally and are expanding the rights internationally as we speak. But we have quite a few broad parts of international territories. Great. Well, I don't think I'll look good in Anna or Elsa dress, but I think I can go as an Olaf for the So call we'll save one. I know you're high, so we'll save one for you.

Thank you, Anna. Good luck. Thank you, Ed.

Speaker 0

And our next question comes from Drew Crum from Stifel. Drew, please go ahead.

Speaker 1

Okay. Thanks. Good morning, everyone. So Stephen, in your prepared remarks, you made reference to increased distribution on a couple of occasions. I wonder if you could provide a little more detail there maybe break it down between domestic and international and any quantification in terms of increased distribution would be great.

Okay. There's two parts of increased distribution. What I'll talk about first domestically. We are expanding our distribution more with online retailers, but the online retailers are same as the brick and mortar. So we're talking the walmart.coms, targets.coms, Amazon of course, toysrus.com.

So we're expanding distribution there dramatically. We also are getting into different ancillary distribution channels like Skechers, think Journeys, more drug trade. So we're expanding our U. S. Distribution in that type of fashion.

Internationally, we're expanding to Eastern European territories. We've already been there. We're expanding further with different partnerships. Latin America, we've been expanding very quickly, inclusive of Mexico is a big expansion. And China, we have made different relationships, structuring partnerships to distribute.

We have a large broad license with Disney for China. We are both going with an online initiative with one of the largest online companies for China as well as selling direct to retail in China. So it's an ongoing long term process that we're doing overseas. Our U. K.

Office is having year on year quarter over quarter growth. So some areas are slow, specific areas I'll use like Germany, but we're picking up dramatically in other areas. Okay. Good. Very helpful, Steve.

And then can you talk about Disney Princess as a percentage of the business? And based on your comments, it sounds like you're expecting growth from Frozen and Disney Princess in 2014. Just want to get an understanding as to what your expectations are as part of the revenue guidance you've provided? We don't break out by license. One is our license agreements, two is for competitive reasons.

But the growth that we're seeing we definitely will be seeing based off of the retail meetings that we've had, we will have I would say, unexpected growth further than our expectations on Frozen. But we also are seeing expanded growth in many areas of our business. The Disney franchise is so broad. So a good example is we have Maleficent, which is a movie coming out in May that's part of the Disney license. It's not a it is a princess in a sense, but it's based off a movie.

There's the fairy movie DVD, was launched at April 1. So we're getting real strong momentum in a lot of these areas. We expected some of it. Some of it we planned for the year. And because our inventory levels were very low, it's helped us in a sense of maintaining the right amount of flow of each of the different princesses.

So we're not backed up on one versus the other. So Disney in itself is reacting extremely well. Their property is across the board. But another example is Godzilla, which is a movie coming out that it performed better than expected. Our Mario not Mario, our Nintendo category of product is doing exceptionally well and now it's been expanded worldwide.

And they've never granted a license for all their characters to one company and we're the first time, I believe, maybe off a little bit that we are able to have not just Mario, but all their characters and the sell throughs are better than expected. So it's across the board of great evergreen sales and Disney definitely is an exceptional part of the girls part of the business. Okay. And then one last housekeeping question Joel. The short term debt increased by $10,000,000 sequentially from 38,000,000 to $40,000,000 $48,000,000 excuse me.

What was that? What was the additional 10,000,000 We drew $10,000,000 on the close of the GE line. Okay. Got it. Yes.

Okay. Thanks guys. Thank you.

Speaker 0

And our next question comes from Steph Wissink from Piper Jaffray. Steph, please go ahead.

Speaker 1

Good morning, Steph.

Speaker 4

Thank you. Good morning. I'll add our congratulations around the Frozen success as well.

Speaker 1

Thank you.

Speaker 4

Just staying with the license team for a second, Joel, if you could just give us some sense of how to model that royalty expense as a percentage of sales based on the timing of some of the product sales for the balance of the year that'd be helpful. And Stephen, just remind us how long those licenses, those key licenses last once the kind of the end date or renegotiation point? And then if I could just throw in one question on the cost realignment. It seems like it was certainly focused on the back half of 2013, but a little bit of benefit here in the early part of twenty fourteen. Can you just give us an update on what's left to be recognized from a formal cost cutting standpoint?

And then what we should assume as you kind of move forward in terms of leverage? Thank you.

Speaker 1

I'll go to the license component. We don't break out the length of licenses just because of confidentiality with our licensors, but they range from two years to three years to four years is the primary range and we're constantly there's so many licenses within just categories that we're constantly renegotiating licenses month by month. It's been our normal practice since inception. Okay. That answer the question that you needed on as I could?

Speaker 4

I think so. Yeah, I think we can come back to it offline. And maybe Joel, if you could just give us a sense on the expense, how should we think about that kind of quarter to quarter? I'm not sure if there are big pulse points in terms of inventory injection into retail.

Speaker 1

Really, again, the impact on Q1 on anything is amplified because it's a low volume quarter. In general, our expectation is to have expansion in 2014. So it's not that royalty expense, although it does flow differently, there are also cost factors that also come into play. So I think it's we look at it on a blended basis even though we developed the forecast on an individual item basis. But to give you guidance, it would would be easier to work with an overall blended number.

I don't if that makes sense to you.

Speaker 4

Yes. Would that be something you would provide for us just to help us think about just

Speaker 1

Well, mean it's built into the overall guidance. So from that perspective, unless we gave you sales by line by quarter, you wouldn't be able to build up to that number. So I guess it's more working back from the overall guidance.

Speaker 4

Okay. I think we can get there. That's helpful. And then maybe just the last question guys on the cost takeout. So is there anything more from a formal cost reduction plan standpoint that we should be thinking about as you kind of flow through the balance of this year?

Speaker 1

We anniversary the major cuts in the second I'm sorry in the third and fourth quarters. We did have a few expenses that carried into 2014, especially as it related to the transition of kids only. But we continue to pull the levers. I think that between managing continuing to manage headcount and to a lesser degree as we sublet some of the excess space that we've taken the abandonment charges on. But we're well on track and most of the big levers have already been pulled and we'll just see the benefit play out over the course of the year, which again has been built into the guidance.

Speaker 4

Okay. Thank you. Best of luck guys.

Speaker 1

Thank you very much.

Speaker 0

And our last question comes from Sean MacDonald from Needham and Company. Sean, please go ahead.

Speaker 1

Hi, guys. Good morning. Hi. Good morning, Sean.

Speaker 3

I have a couple of questions too. One is, it's not surprising that everybody would be get caught short of a plan on frozen stuff, but a lot of the stuff you sell is soft goods. I would have thought that that would have a much faster turnaround in terms of how quickly you could expand that capacity. Can you talk a little bit about that?

Speaker 1

Well, you're dealing with cut and

Speaker 3

So why is it taking so long?

Speaker 1

Because it's not just soft goods aren't just dealt with by labor of cut and sew. You also have to have the correct material, the correct components. Those all have to be ordered in advance. So the dresses have sparkles, have the diamonds, they're all little components. The material itself has to be approved because we're a long process.

So once we got through Chinese New Year and the labor force started coming back, we also had to get a dramatic amount of material that was needed that took time. That was primarily injection molding, funny enough, we were able to catch up a little bit quicker because you're dealing with resins and we had enough of the hair for the product and so on. So at the March is when we really got everything kicked in. We got more factories on board. You also when you get other factories on board, they have to be approved not only by ourselves, by Disney, but also the retailers.

So because of the stringent testing requirements, it just took a longer process to get all the different materials. We're very cautious on where we get them from. They have to be pre approved. So we moved from one of our largest Halloween manufacturers to shift it to get our role play. At the same time, we increased factories for Halloween.

So it just was a Chinese New Year, once it ends, it takes two to three weeks to get the labor forces back. And really the part of the dresses are just labor.

Speaker 3

And you

Speaker 1

know the business quite well, so I'm sure you understand it.

Speaker 3

And it's just frustrating because of so much demand and hopefully that's sustained.

Speaker 1

If you think it's frustrating for you, the positive part of it is the demand is well beyond there and it's a good thing it's not a great thing to happen to not being able to get to the consumers who really want it. But we now have a supply chain that we could actually help throughout The U. S. And internationally. We're doing power programs with Disney to get into different distribution channels.

So we're really ramped up dramatically in the key areas where we need to be ramped up.

Speaker 3

Well, next time a reporter says that this is all a conspiracy to create demand and not be able to fill it, I'll just cut and paste the transcript and e mail those comments.

Speaker 1

Yes. Actually would like to let you know that's not a conspiracy. We would actually like to have been able to ship more. We had the good thing is we had a solid quarter without having huge Frozen benefit, but Frozen will be a dramatic, I would say, growth part for us this year and next year and hopefully for years to come.

Speaker 3

Okay. I'll I'll get back to that in a second. I did want to ask a question of Joel on your tax guidance. A little puzzled as to how the taxes will be treated on a quarter to quarter basis. Do you not show any real impact until you have a profitable quarter?

And you're expecting to for the year, so all of the tax impact will be shown in for the whole year will be shown only in those profitable quarters?

Speaker 1

Well, basically in The U. S. That is correct. In Hong Kong where we expect to be and have been a taxpayer, we will recognize the benefit as we did in Q1. A few years back, we put a full value allowance on our deferred tax asset in The U.

S. So basically from a practical standpoint, we don't take any benefits in interim quarters. So basically based off the guidance, most of the profit will be at in Hong Kong, which is in the guidance of the about 19% effective tax rate. So we have a number of different taxable activities that go on. We charge a management fee to the Hong Kong, which creates taxable income in The U.

S. We buy inventory plus Hong Kong sells a majority of the sales where they generate their profit. But in the first quarter, we recognized the tax benefit because the Hong Kong company had a taxable loss. So each quarter is based off of the relative taxable income primarily in The U. S.

And Hong Kong. We do have some local sales in Canada and The U. K, but to a much lesser degree, most of those sales are done on FOB basis.

Speaker 3

But I assume you are expecting The U. S. To be profitable for the year. So we'll really only see the impact of Yes.

Speaker 1

It's just that in the lost quarters, we won't recognize the benefit because of the prior valuation allowance on the So

Speaker 3

we'll have some weird rates.

Speaker 1

Correct.

Speaker 3

Okay. Then last question it circles back to not just the Frozen, but quite a number of things Stephen that you said were better than expected. Trying to reconcile that fact that you're sitting on one of the top properties right now in the industry. You said you didn't get much benefit in the first quarter, but you expect more later in the year. Why not take the guidance up, especially when I look at the recently disclosed employment bogeys that you need to get paid kind of any bonus.

It's a lot higher than the guidance. So can you talk about why the guidance isn't going up to reflect

Speaker 1

Juan, I wouldn't base I appreciate I wouldn't base my bonus on us for our company to raise guidance or not. It's what we think is prudent. What we're doing now is looking at the production levels, the flow of the actual product, any impact to other areas of business because frozen being so hot it's taken away from other grill areas not I would say just in ours but across the board. So it's so early on in the year in first quarter to make any appropriate changes positive or negative. We are looking things look extremely well.

I think we are extremely cautious and optimistic at the same time and then we'll feel better once we get through the second quarter and we see exactly how the retailer flows, the production flows across the board, not just frozen, but frozen is a big part of it of the excitement. But not just that, we have a lot of things that are exciting. And I think we just need to get through the period of time of second quarter to see how retailers are because retailers we don't just get affected by our own products doing well. If other companies are not doing well, retailers open to buys change and so on. So we believe it's prudent not to make any changes now and then we'll review it during second quarter.

And where we feel appropriate, I think it would be a time for us to reevaluate the forecast both in revenue and in earnings.

Speaker 3

Okay. Fair enough. Thank you.

Speaker 1

Thank you, Sean. If there's no further questions, so we appreciate everybody on the call. We look forward to our next earning call. We will be out actually speaking with investors and analysts throughout the next quarter. And feel free to give a call to the office speak with myself and Joel for any further follow-up questions.

Thank you very much.

Speaker 0

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.