JAKKS Pacific, Inc. Aktie

Good afternoon, everyone. Welcome to the JAKKS Pacific First Quarter Earnings Conference Call with management. who will review financial results for the first quarter ended March 31, 2026. JAKKS issued its earnings press release earlier today. The earnings release and presentation slides related to today's call are available on the company's website in the Investors section.

On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer; and John Kimball, Chief Financial Officer. Stephen will first provide an overview of the quarter and full fiscal year, along with highlights of recent performance and current business trends. Then Jeff will provision from a focus surround Jack specifics financials and operational results.

Mr. Berman will then return with additional comments and some closing remarks prior to opening up the call for questions. [Operator Instructions] 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, margins, earnings and/or adjusted EBITDA in 2026 and as well as any other forward-looking statements concerning 2026 and beyond are subject to safe harbor protection under federal security laws.

These statements reflect the company's 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 forward-looking statements.

For details concerning these and other such risks and uncertainties, you should consult JAKKS 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.

In addition, today's comments by management will refer to non-GAAP financial measures, such as adjusted EBITDA and adjusted earnings per share. Unless stated otherwise, the most directly comparable GAAP financial metric has been reconciled to the action associated non-GAAP financial measure within the company's earnings press release issued today or previously. As a reminder, this call is being recorded.

And with that, I would now like to turn the call over to Stephen Berman.

Good afternoon, and thank you for joining us today. Our Q1 financial results were roughly in line with our expectations and comparable to our strong Q1 2025 results. And our near-term outlook is better than it was 12 months ago. We continue to see a degree of caution from U.S. accounts. I would characterize many of them as somewhat tentative about the year, many becoming more accustomed to the volatility we've been experiencing. .

They are, among other things, trying to forecast consumer health. Our industry continues to closely monitor higher oil prices given the implications for resins and transportation costs. As I said before, these are dynamics that come with running a global company.

We have dealt with these sort of challenges before, and I'm confident we will successfully navigate our way forward in 2026 and beyond. We continue to invest significantly time, effort and financially on some exciting new initiatives coming together for 2027 and '28 while also executing in the year on our plan and pursuing late incremental opportunities.

Globally, our net sales finished at $107 million in Q1, comparable to our first quarter results over the past several years, but down 6% from prior year. Toy and Consumer Products net sales were down 7%, with costumes up in 1 of the smaller quarters. The decline was caused by lower results in North America at $78 million.

It was down $15 million or 16% and with both our domestic and FOB business decreasing for the quarter. Roughly 1/4 of that decline was due to reduction in low-margin closeout sales related to our lower level of U.S. imports last year. Demand for our FRB model remains extremely strong with over 70% of our Q1 North American business shipped FOB. As betted above, we see the U.S. retailers remaining somewhat cautious to to recalibrate cost pressures, pricing resilience and ultimately, consumer behavior.

Our international business grew nicely in the quarter, reaching $29 million, a 38% increase versus the prior year. We saw healthy growth in both our domestic business as well as our FOB orders, Latin America declined slightly in the quarter but grew margin dollars. Although slightly down from last year, we finished the quarter with a very strong gross margin of 33.4% and reflective of our robust product margins from new product introductions and reduced closeout sales in the quarter.

SG&A expenses were down 4% in the quarter, offsetting some of the drop in margin dollars but not enough to avoid a quarterly adjusted EBITDA loss of $371,000 versus a gain of $354,000 recorded at the end of Q1 2025. I will now pass it over to John for some comments, after which I will come back and discuss some product initiatives and areas of focus moving forward. John?

Thank you, Stephen, and hi, everybody. The first quarter did not distinguish itself dramatically to the positive or the negative, which is all that 1 can really ask for in the first quarter in the toy industry. .

Some of our drop in revenues was attributable to a new dress-up initiative last year, not carrying forward in addition to some softness in our private label business. We're happy to see our gross margin percentage holding up at 33.4% and in it is down 100 basis points from the exuberant 34.4% from this time last year.

Deconstructing gross margin prompts the issue of tariffs. Your accounting teaser of the day, U.S. domestic products sold in the quarter would have reflected tariff expense related to when the product entered the country when those sales in the year ago quarter did not have that issue.

As to whether Q1 2026 product was imported in Q1 or in previous quarters is a level of precision that we don't aspire to. I can tell you we paid $1 million to $2 million in U.S. tariffs in the quarter where we paid less than $100,000 in the year ago quarter. That gives you a sense for order of magnitude of the numbers here in the quarter and as they relate to prior year.

This is also a fine place to mention that we have filed for tariff refunds that we feel are eligible for reclaiming as a result of the relevant Supreme Court decision. We do not intend to go deeper on that topic until we have a much higher degree of confidence the refunds are forthcoming and have figured out any related implications. It would be nice to get some of this money back, but frankly, it's 1 of the least interesting things to talk about in the business today.

So we're moving on. Back to the numbers in Q1 gross profit, although down 9% from last year, but it's still a very robust number for our business. So we're happy to have that on the scoreboard as we exit the quarter. Our selling expenses were flat from a margin perspective in the quarter, primarily due to favorable timing.

On a full year basis, we would expect this area to grow at minimum in tandem with sales particularly as we restricted spending against some marketing initiatives last year given revenue shortfalls. That projection does not anticipate downside scenarios reflective of higher shipping costs due to higher diesel costs.

G&A delevered slightly but also benefited from some timing elements. We are aiming to hold G&A spending to no more than revenue growth on a full year basis while also making the necessary expenditures to support new 2027 launches. Slightly softer results reduced our trailing 12-month adjusted EBITDA down by 2% to $34.6 million. On an adjusted per share basis, the quarterly loss of $0.17 is lower than the loss of $0.03 per share from this time last year.

The diluted share count is based on roughly 11.4 million shares. Turning to the balance sheet. We finished the quarter with $64 million in cash, up a bit from $59 million last year. Inventory was flattish at $53 million, essentially unchanged from last year. As mentioned in our release, the Board approved a Q2 payment of $0.25 per common share payable at the end of Q1.

The record date for the dividend is May 29, and the payable date will be June 29. And back to Stephen for some more comments about the year ahead.

Thank you, John. As first quarter is always the quietest quarter for us. I'd like to update you on what we see as some of our big drivers from a product and revenue perspective on the year. We are certainly thrilled with the positive reaction theatric release of the Supra Morial Galaxy movie has received. .

The success of the first film took some retailers by surprise. But this time, all accounts are ready and on board, allowing us to secure significant out-of-aisle and promotional space starting in early March. The film has created a lot of excitement in Europe as well with Smith being a big supporter. The excitement continues with the Mario product line, and we look forward to the streaming announcement and launch later this year.

The Sonic DC crossover product has been expanded to all accounts this spring after being an account exclusive at launch. A new comic book in the series is dropping this quarter to keep the energy around this initiative fresh and then top of mind. As we mentioned last quarter, SEG is recreating a lot of excitement around Sonic 35th year anniversary, and we continue to work with them very closely as their anchor toy partner worldwide.

One example of a new collaboration we are doing with Saga is adding the Sonic into our outdoor seasonal business as we reposition that segment into our active and early play segment which is really a better description of what that team focuses on and the products we market there.

The speed and energy central to Sonic DNA makes it a natural choice for products in this area and we've been excited to share this range with customers this month during our spring 2027 line reviews. We'll have more details about some of the key items launching in this segment in the months to come.

We are seeing nice support for our Disney Princess Style Collection, Ely and frozen lines, with sell-throughs in these segments continue to be very strong. These are evergreen brands and play patterns for young children. We nonetheless are constantly introducing new items to the line and ensure we are earning our place in retail assortments every season.

Our 6-inch doll line has been to refresh this spring and is selling extremely well. We've also seen positive reaction to some of our new roleplay introductions in the style collection line. We have strong coverage here at both the below $10 and below $20 retail prices, which are great values and also work especially well given the time of the year. We continue to steadily expand our ActionSports portfolio where we see additional opportunities.

We are happy to share with you that we recently have added the almost darker and duster brands to our skateboard portfolio. In our Disguise business, we announced our launch of K-Pop Demon Hunter during the past quarter. We're happy to be able to deliver authentic customers for that enthusiastic fan base.

The success of the Mario Galaxy film is generating more demand for these costumes. We're also seeing a lot of energy behind Pokemon, which is celebrating its 30-year anniversary this year with significant marketing programs. Our European business for costumes continues to grow steadily. We are shipping several new customers in the U.K. as we have transitioned in as a vendor for some accounts who were previously relying on their in-house sourcing teams.

And at last but not certainly least, since our last call, we have announced our new initiative to capitalize on what we see as a significant opportunity in the world of anime. As we expressed earlier this quarter, JAKKS Pacific is launching a large-scale next-generation anime, manga and digital creator cultural platform, one of our company's most ambitious strategically significant initiatives. Developed more than 2 years, this multifaceted investment positions JAKKS at the forefront of 1 of the fastest-growing segments in global entertainment.

Anchored by Premier Anime partners and top-tier collaborators, the platform creates a strong foundation for sustained global growth, enhanced monetization and long-term shareholder value. Through this initiative, JAKs will design, manufacture, and market a broad portfolio of premium collectibles, figures, plush, tech accessories, costumes and roleplay products while expanding into high-growth live event and influencer-driven merchandise opportunities.

Supporting this effort is a next-generation global distribution infrastructure spending to direct-to-consumer, specialty and experiential retail and promotional channels designed to accelerate speed to market and deepen consumer reach worldwide.

The objective is clear, to lead this category at scale. This platform expands our global footprint, accelerates revenue opportunities and strengthens our connection with highly engaged fans that are shaping the future of pop culture. We're not simply entering a category. We are building a durable, repeatable platform designed to deliver sustained multiyear value.

Building on its legacy of successfully commercializing leading entertainment properties. JAKKS will continue to roll out our partnerships and product lines through 2026 with the initial loss expected in 2027. We are only 1/3 of the way through the year. And although it continues to be very dynamic, we feel confident we are still on track to achieve our goals for this year, inclusive of setting up for an even better and stronger 2027 and beyond. And with that, we will take a couple of questions. Operator?

[Operator Instructions] Our first question comes from the line of Thomas Forte of Maxim Group.

Steve and I'll limit myself to 3, and I'll go 1 at a time. So Stephen, the Anime product line sounds amazing. Can you give just high-level comments on what success could look like, including the relative gross margin and contribution margin for that product versus your other efforts? .

So firstly, this initiative that we undertook has been well over 2 years working with many of these companies that are in Japan. And the way that the companies oversee their IP is very stringent and very strict. So we went to them to various large enterprises, Aniplex, which is Demonslayer, Viz media, Naruto, Codanta, which is a tactive Titans and several others from Cover Corp and Crucerole.

It's been a long process of making sure that when you create products in this genre, it has a very strong fan base that you got to really focus on and cannot bear from. So we have put together a plan. We hired across the board, a very young passionate group in the anime Manga and called digital marketers. And we put together a plan of products from collectibles to kid adults, which is very strong to somewhat of some of the other properties to tech accessories areas that the fan base really likes.

And in fact, for the V tubers and digital marketers, we created light sticks for them to use that concerts, but all with the at authenticity of the actual IP and directed towards the fan. So the launch itself is starting in 2027, we will get some of it shipped in '26. And it's a very broad launch to various initiatives. -- of retail basis. So think of mini, so GameStop, independent retailers as well as venue sales.

A lot of these concerts, movies and initiatives are done in venues and there's never been real authentic merchandise at the venue. So we have structured and working with several different partners to do the venue sales. That's what you would see at concerts like at a Taylor Swift concert or a Kenema where you have the merchandise that go straight to the consumer.

So all these initiatives are all being really launched together at one time at various segmentations and with various collective initiatives with each of the IP holders, but inclusive, you will see a broad array of product of totality of all the strong anime, Manga and B2P and on segmentation at retail instead of having one license or do on IP and another one, we've collectively worked with these IP holders to make sure that they were present and they were present and focused together so the consumer knows where to buy them.

On the part of margin enhancement, because they're somewhat more focused on kid adult, the price print will be slightly higher and the margin in our area for JAK specific will be slightly higher.

Excellent. All right. So then second of 3, I recognize a lot of your product releases are coinciding with movie premieres, but was wondering for your other SKUs, how should we think about the timing of new product rollouts and if you're holding anything back given the current market challenges.

First, the market challenges, as we mentioned in our prerecorded is we're used to these challenges. It happens is happening JAKKS has been public 30 years. We've been around 31 years. So you have to kind of work through them, work with manufacturers, container companies work with the retailers and work very closely and very entrepreneurial to get through these different times.

But with these different times, there's also a very strong opportunity. So as we mentioned in our call, the Super Mario movie itself has done phenomenally well. The product line as expansive as the sell-throughs are great. We will have the forthcoming or upcoming streaming release whenever Nintendo and Universal announced it.

So that will have its legs and continue with big tailwinds behind it. Then there's a lot of different initiatives that happened in our called the Skis business. You have the Super Mario movie, Toy Story 5, Descendants 5, PAW Patrol movie, Minions movie, and Demons, which is the anime that we mentioned, which is from Aniplex.

So in each of our segments, we have great excitement, but at the same time, some of our basic evergreen business is what's doing extremely well. At our Disney area, our Disney Darling, our Disney Style Collection, our Disney business has seen sell-through strong and profit dollars up.

So that's exciting. Then you go into going into the year, we also have various other movies that are coming out that we have a nice product behind, which is Bojana Live Action, Commins and other IP that's coming out. But that on top of our Evergreen business is really what's keeping us going and strong.

And we start building throughout the year and going into '27 and '28, our lineup, I couldn't be more proud of as CEO, a co-founder, it is so strong in the majority of all of our categories from our seasonal business with ABG, which we have elements and Roxy Quicksilver, which is now just starting to take some drill traction getting out to the spring and summer retailers.

It's a really exciting time. But at the same time, it's a cautious time because of oil prices and things that are just unknowns. But those unknowns to us is just part and parcel of our business. But we're really excited. I'm really excited to get through the year. This is a quiet first quarter, I even mentioned that John -- it's a very quiet period to talk about because there are so many things that are happened through the year. But as the year goes by, we will be going on the road speaking with retailers, investors. It's really an exciting time at JAKKS.

Excellent. All right. And then last one. So another high-level question. So there are some people who believe that AI will lead to an explosion in video content, which could materially increase your opportunity set for licensing I would appreciate your thoughts on that.

With our IP holders, our licensors, many of them are obviously very strong and very focused in the, call it, what AI could do in the, call it the production, the, call it, the quickest to market for digital animetion and various initiatives. So I think it's going to be very much pick and choose by each of the, call it, large-scale entertainment companies, whether it's the Walt Disney Company, Netflix, Amazon, we're there to help them out in what they do. .

And the one thing that we've seen because these things are coming quick to market now because of the time it takes to develop is much less than in the past. The one thing that JAKKS as great as to go to market and doing things very quickly. And I think that's where we're going to be hit working with these companies to get things into the market quicker than a normal company can just based on our scale and what our DNA is.

Our next question comes from the line of Eric Beder of Small Cap Consumer Research.

When you look at it in terms of a consumer in terms of normalizing in the U.S., how should we think about kind of how the flows are going to happen here, when will we know kind of what is going to be the new market? Or what is the market we're going to see post all the disruptions we had last year in the U.S.

I think at the end of the day, product is king. So if you have the right product and you have the right price points, the consumer will be there, especially in our area of business to where -- whether it's a holiday, whether it's a birthday, people and parents and grandparents are relative spend on children spend on toys.

But in this environment, I think price points are very much a focus during the first 9 months of the year and then ensuring that we have the right price points and the majority of our products are in the $10 to $30 range. And then during the fall period in the holiday period, you need to have that the WOW IP, the WOW item, the WOW product to get that bigger purchase.

And I think we have all that a custom in the majority of our divisions. Remember, primarily, we are an FOB company, so we planned very far ahead differently than a real domestic company. So we have things in line with all of our major retailers worldwide to enhance whether it's exclusivity on products and categories so they could actually enhance their margin dollars and also market those products directly to consumers, at the same time, not having price comparisons done by other retailers.

So that's a very big enhancement. I don't know if I mentioned earlier, but we had our best EMA quarter since 2015. And and our best ups in France and Spain at over 15 years. So we're talking in the U.S., and I'm talking worldwide, we see growth international as we're expanding with more IP that goes appropriately in specific territories and countries both in EMEA, Latin America and now really focused on Asia Pacific for the next few years.

So that's great. And in the U.S., you just have to make sure you have the right product for the consumer at the right price point, and we monitor that very, very closely on a week-by-week basis.

You kind of hinted at this, how do you look upon this animeting thing too in terms of international? Are you getting worldwide rights for most of these players how can that help drive international even further?

So for the -- IP is really selective by each territory in country. So in the animeted I'm speaking broadly and Manga and then the tubers and digital entertainers. Each country is vastly different.

So for instance, in EMEA, France is #1 for anime. It's known throughout the world as they have such a huge fan base in France. So then it goes in Italy and then goes U.K. And after France, actually, it's Latin America. Mexico is very big. So you have to really pick and choose.

You can't just think that each of these IPs are going to work in all these territories. So we look at the fan base, we speak to the content holder, the IP holder, and we work closely with them as they have such decades and decades of information of where their fans are, where they're growing.

And we follow what they say is they know their IP better than anyone and then we take our team and really cultivate it per the market and what's appropriate, price point-wise, itemize and content-wise because some of the items that we make for America may not be appropriate for Europe or for Latin America and vice versa.

So we really are focused in each of these areas and segmentations the right product, the right territory, the right IP.

Great. And when you look at international, it keeps it growing as a percentage of the business. I believe Q1 it was about 30%. Longer term, what should we be thinking of the goal for international versus U.S. penetration?

Well, the goal is growth, but the growth is -- it won't keep up at that 30%, 40% always going. It's growing for each of the areas. The reason why EMA has grown significantly. We opened up 5 different distribution centers in various territories to allow us to hit much more and penetrate into the retail market. It's much smaller accounts throughout Europe than it is in America.

So you need this distribution platform. Our domestic business has grown internationally because we have to have backup inventory for all these smaller customers. So we are looking for growth. We're looking for growth in market share. also garnishing, new IP that's appropriate for the marketplace.

So it's a combination and each of these countries will have different growth than the others because of certain IPs work great in the U.K. For instance, France is very, very strong and anime. U.K. is strong, but not as strong. So you'll see a much faster growth in Anmein France, and you'll see a much stronger growth in our general toy business in U.K. versus France just because of the size and shape.

So it's a really dissected approach by each of the countries, territories and the correct IP. But you'll see that enhance the growth, but not all throughout Europe because some of the IP does not work in Europe.

Okay. And last question. You paid out a dollar day last year and cash continues to rise. How do you leverage that? And how do we should look upon that as you may take competitive advantage in being able to spend capital when you want to?

So with capital allocation, we bring this up during our Board meeting, in fact, we just had 1 and something that we review. And based on the environment where cash is king right now in this kind of environment.

And we are investing capital more than normal in -- with regards to the anime initiatives, the tooling, all these new initiatives, it's costing us capital, not material but it does cost us capital.

And with that, we're going to be doing much more marketing, more influential marketing to the consumer in some of these areas. And we have some very surprising new initiatives that we'll announce later in the year that will cost capital, but nothing to where it's a huge expenditure, but it's more than we normally spend in tooling, marketing and overhead for these areas and new initiatives.

That being said, we will look at what we generate in cash through the year and look at what's appropriate. We are seeing opportunities on the acquisition front. We're getting more inbound calls of companies that are looking to sell. So there's a really nice good opportunity out there. We just want to make sure when we utilize our cash, we utilize it on an accretive basis and not just to use the cash to use it.

This concludes the question-and-answer session. I would now like to turn it back to Stephen Berman for closing remarks.

Thank you very much. I'm sorry for the brief call and also my voice during the prerecorded I had a cold but we're looking forward to speaking shortly and getting on the road and seeing some of the investors throughout the summer and going right into fall. So thank you very much. .

Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.

Good afternoon, everyone. Welcome to the JAKKS Pacific Fourth Quarter and Full Year 2025 Earnings Conference Call with management, who will review financial results for the quarter ended December 31, 2025. JAKKS issued its earnings press release earlier today. The earnings release and presentation slides related to today's call are available on the company's website in the Investors section.

On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer; and John Kimble, Chief Financial Officer. Stephen will first provide an overview of the quarter and full fiscal year, along with highlights of recent performance and current business trends. Then John will provide some additional comments around JAKKS Pacific's financial and operational results. Mr. Berman will then return with additional comments and some closing remarks prior to opening up the call for questions. [Operator Instructions]

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, margins, earnings and/or adjusted EBITDA in 2026 as well as any other forward-looking statements concerning 2026 and beyond are subject to safe harbor protection under federal securities laws. These statements reflect the company's 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 forward-looking statements.

For details concerning these and other such risks and uncertainties, you should consult JAKKS' 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.

In addition, today's comments by management will refer to non-GAAP financial measures such as adjusted EBITDA and adjusted earnings per share. Unless stated otherwise, the most directly comparable GAAP financial metrics has been reconciled to the associated non-GAAP financial measure within the company's earnings press release issued today or previously. As a reminder, this call is being recorded.

With that, I would now like to turn the call over to Stephen Berman.

Good afternoon, and thank you for joining us. As 2025 draws to a close, we were proud of what the organization has accomplished and what we ultimately viewed as a defining year in our company's history. While tariff policy created visible pressure on near-term financial performance, we remain disciplined and focused on long-term value creation. Beneath the surface volatility, we made meaningful progress across the areas that matter most, deepening and broadening our relationships with the key factories, licensors and retail partners through a truly global lens while also expanding our strategic relationship portfolio in preparation for a significant new initiatives launching in 2027.

Importantly, we maintain transparency with our shareholders regarding market dynamics and the challenges we faced, and we delivered on our commitments, refusing to pursue short-term top line growth at the expense of bottom line margin integrity. At the same time, we completed our first full year as a cash dividend payer returning $1 per share back to shareholders while preserving our debt-free balance sheet. We exit 2025 stronger, more resilient and better positioned than we entered it, and we are energized by the opportunities ahead in 2026 and beyond.

Globally, our toy and consumer product net sales were roughly flat in fourth quarter and $118 million, down 0.2% from the prior year and down 0.7% from 2023. Costs were down, although in one of its smaller quarters of the year, but have to bring the total company sales down 2.8% from prior year to $127.1 million or roughly flat to our 2023 fourth quarter sales of $127.4 million. Our fourth quarter U.S. business in total was down 7.8% to $86.2 million. Our domestic sales were down, which we attribute to higher tariff burden retail prices resulted in slower second half sell-throughs and by extension, lower fourth quarter replenishment.

Fourth quarter FOB sales to the U.S. were positive versus prior year to somewhat offset the downside. In the rest of the world, our fourth quarter sales were up 9.9% to $41 million. Europe was roughly flat in the quarter, and Latin America was up significantly making up the lost ground from Q3. On a full year basis, our total Rest of World business was $154.1 million, up 5.5% from prior year and slightly ahead of 2023, led by a 14% increase in Europe to $81.4 million.

For the full year, our toy and consumer products business was down 19% as our Evergreen action play, Dolls and Role Play business, in particular, suffered from tariff impacts on customer order patterns and higher consumer prices. All 3 of our Toy and Consumer Products division were down ranging 9% to 23% on a full year basis.

Our custom business was down 10% for the full year with a slight increase in international offsetting the U.S. results. Syndicated data suggests both retail dollars and units were down compared to the prior year, while average prices increased for both children's and adult costumes. Although Halloween is always a holiday with a surge of the last-minute shoppers, we felt that the surge was even later this year to the benefit of brick-and-mortar customers more than online. We did maintain and, in fact, extended our market leadership position for the season.

This past month, we proudly debuted our first fully integrated JAKKS and showroom at the Nuremberg Toy Fair, marked a significant milestone in how we present our global portfolio to the marketplace. The response from customers and partners was overwhelmingly positive as they experience firsthand the full breadth, depth and quality of our offerings, powered by best-in-class licensing relationships from around the world. This successful debut reinforces our confidence in the strength of our strategy and our ability to win across multiple categories and regions.

We see a substantial runway for integrated growth across Europe with particularly strong momentum as we expand further into Eastern Europe and the Middle East. With a unified go-to-market approach, deep retail partnerships and a world-class product pipeline, we are well positioned to build sustained leadership and capture meaningful share in these high-growth markets throughout the season and beyond.

2025 has certainly been a disappointing year when we think of what could have been but I remain pleased by how we adapted, evaluated and reacted without overreacting to a volatile operating environment. We executed in a year and perhaps more importantly, at the same time, remain focused on creating new growth opportunities for the company.

We protected our core business by not chasing top line at the expense of margin, while prudently controlling discretionary spending. We finished the full fiscal year with a gross margin of 32.4%, our highest full year level in over 15 years. Our gross margin dollars were up in fourth quarter year-over-year through a combination of better costing from our factories and improved inventory management. On a full year basis, our SG&A expenses were down 1%.

This is a business where upfront investments are made over 12 to 18 months with the goal of future sales volumes and scaling driving larger profits. Although volumes were not as originally planned for the year, we nonetheless managed to reduce our fourth quarter adjusted EBITDA loss to $3.8 million versus $10.2 million in the same quarter last year. That increased our trailing 12 months EBITDA to $35.4 million for the full year of 2025, down from $59.3 million in the prior year when we generated $120 million more in sales.

I will now pass it over to John for some comments, after which I will come back and share a bit more about where we're focused moving forward. John?

Thank you, Stephen, and hello, everyone. A decent quarter here to wrap up a mostly in decent year from a financial perspective. As Stephen mentioned, sales stabilized a bit with the tariff shocks of Q2 and Q3 behind us. Q4 benefited from FOB shipment of our product for the Super Mario Galaxy film, which led our action play and collectibles business to a 19% year-over-year increase with growth from both North America and international. Beyond that, I'd say that most of Q4 sales results ended up being the squeeze from whatever happened or didn't happen in Q3 and didn't really suggest any meaningful change in trend or customer behavior.

Gross margin dollars grew by 11% versus prior year, driven by a slightly better margin percentage. This result is a good outcome and generally consistent with prior quarters in 2025. Full year gross margin ended at 32.4%, better than last year's 30.8% and a bit more consistent with 2023's 31.4%.

Product costs were held in check through persistent and consistent collaboration with our long-term factory network, along with tighter management of inventory, reducing our obsolescence expense. Royalty expenses crept up a bit. Significant sales reductions have driven some minimum unearned royalty payments along with some mix impact. We paid roughly $12 million in U.S. tariffs in 2025, which we feel we recovered through increased pricing. Higher price accompanied by a 1:1 cost addition has the math impact of a lower margin percentage, but that amount was not really material on an enterprise level.

Tariffs were far more impactful in reducing sales. We estimate that our U.S. FOB customers paid nearly $50 million in tariffs on JAKKS product in 2025. We feel that $50 million would have otherwise been allocated towards more actual product and by extension, generate more JAKs revenue in any other year. That amount would be in addition to the additional reduction in units sold compared with our original plans as customers understandably derisk their year. That gives you a bit of insight into the financial implications of last year's actions on our company, although it may not be readily apparent simply looking at the financial statements.

Moving on to more controllable parts of the P&L. Q4 benefited from our actions taken earlier in the year to keep SG&A spending on a tighter leash. Selling expense ended the year down 8% and G&A roughly flat. With the strength and flexibility of our balance sheet, we did this without handicapping any of the product development or new initiatives we have been working on for 2026 and 2027.

Our operating loss and adjusted EBITDA for the quarter were both improvements versus prior year, but not enough to overcome the financial carnage of Q2 and Q3. Full year operating margin dropped to 2.5%, down from 5.7% last year. Adjusted EBITDA margin was 6.2%, down from 8.6%. It is a significant focus as we start the new year to revisit our processes to continue gross margin expansion while containing SG&A. We know we have the potential to do better from a margin perspective without relying on top line improvement. The ambition would be to do both, which would, by extension, generate meaningful value.

A moral, if not economic victory of note, to offset our margin challenges, calendar year 2025 was the first year our interest income exceeded our interest expense for a very long time. Remembering that in 2020, we paid $21.6 million in interest expense with a full year adjusted EBITDA of $28.1 million helps to put 2025 in context a bit. These results all tally to an adjusted quarterly loss of $0.18 per share, an improvement from a $0.67 loss in Q4 2024, but nonetheless, still dragging down our full year adjusted EPS to $1.62, down from $3.79 for full year 2024. The diluted share count is based on roughly 11.5 million shares.

Turning to the balance sheet. We finished the year with $54 million in cash, down from $70 million last year, obviously impacted by the drop in sales. Our inventory was up slightly at a bit less than $60 million, up from $53 million last year. That change is driven by our expanded distribution footprint in Europe and Mexico. Our U.S. held inventory was actually down 18% year-over-year to the lowest level we finished a year in over 10 years.

Inventory management remains a focus and opportunity for us. Broadly speaking, we feel we read the second half of the year in the U.S. about as well as we could have hoped in terms of forecasting consumer and customer behavior. The hottest of product continue to move fast as hot products do with the bar essentially raised for everything else with more loop warm results. We don't feel we missed sales in Q4, and we feel good about our U.S. inventory on hand. We also obviously feel good that imported product from China is now taxed to 20% compared to the 30% we were paying for a lot of the year, and we didn't have to import any more of that higher cost than we did.

The company remains committed to the path of being a meaningful and consistent dividend payer. Despite a somewhat soft year financially, we did manage to generate over $8 million in cash flow from operations while also funding $11.2 million in common dividend payments. As mentioned in our release, the Board approved a Q1 payment of $0.25 per common share, payable at the end of Q1. The record date is February 27, and the payable date will be March 30.

I think the pressures of the past year have pushed us to find new areas for incremental improvement, and that will be a lot of our focus this year to see what we can figure out. In a company of our size, we have the ability to make decisions faster and by extension capture opportunities sooner, so that's what I hope we can do.

And now back to Stephen for some more comments about the year ahead.

Thank you, John. The biggest story for us at the start of this year is certainly the lease of the Super Mario Galaxy movie from illumination. We are extremely excited for this new product launch, which will be available for purchase late February. The best-selling 5 and scale figures are back in line along with new scale of many figures, new play sets, plush and more. The film releases April 1, and our line gives fans of all ages the chance to recreate their favorite film moments in the movie. This is a follow-up to the Super Mario Brothers movie, which went on to generate the largest theatrical box office of 2023. So you could imagine we're beyond thrilled to be back in the mix again here supporting this launch. .

Our Sonic DC crossover product launch received a great response in fourth quarter with exclusive retailer launches in both the U.S. and in Europe. Distribution of that line is going wide in the new year with new items like the DC Sonic Batmobile being added at key retailers. Sega is celebrating the 35th anniversary of Sonic all year with various activations. We are participating by launching special packaging, commemorating this event along with some exclusive items. We have other exciting news and plans around Sonic in 2026, but we're not ready to share those today, but stay tuned.

Moving over to our Disney doll business, we'll leave the holiday season and toy first season with solid momentum behind Disney darlings, our latest homegrown Disney IP and the strong position of Style Collection and Disney's Eli. For those of you unfamiliar with Disney Darling, our launch in the Nutrien doll category, similar to our Ilyline, these are caricatures in figural form, but an approach we've developed in a partnership with Disney to bring new and innovative ways for our consumers to engage with the Disney brand. The intent is to spark the emotional response consumers feel when engaging with Disney. The joy and happiness with engaging experiences a bit of the Disney magic.

These are truly beautiful dollars delivered with premium quality. And what's even more magical is that unlike other baby dolls, they are 100% joyful and happy, and there's no tears and no crying. Our soft launch of this line sold through well in fall, leading us to expand listings in the U.S. this year as well as a lot of interest and commitments internationally coming out of this past month, Toy Fair. We've seen enough positive feedback to feel that we have a winner here that can steadily build this year and into the next and to being another solid foundational piece of business for us. Congratulations to the team on this one.

We're also supporting the live-action theatrical release of Moana in early July this year. Moana has been a steady part of our business for over the past 10 years going back to the original animated release in 2026. We're happy to be able to bring back some of the most popular toys we've created over the years as a new audience engages with the story this summer. Our focus items include Moana's necklace, all the more aspirational with The Rock repricing his role to the film, our the screaming chicken and our super popular Moana large dolls. We also have a couple of additional exciting developments coming on our Disney Doll front later this year.

In the other part of our doll division, we continually steady build our private label business with major retailers in the U.S. and expanding into Europe. It's an extremely broad array of dolls, Role Play toys and related subcategories that allow the retailers to make additional margin while the consumers get a high-quality, on-trend design product at a much lower price. In this area, we have several new launches that we will discuss in the following quarters that will be launched during the fall holiday season.

In 2025, the company saw momentum across its action sports portfolio with Element emerging as a powerful growth engine in the second half of the year, expanded distribution and deepened retail partnerships most notably with Walmart, Amazon and Academy Sports and outdoors, significantly increased brand visibility, strengthened shelf presence, and drove meaningful gains in sell-through during the critical holiday period. These results reflect the company's disciplined execution, strategic product innovation, and unwavering focus on aligning with leading retail partners to deliver compelling value within the active and early play category.

Looking ahead, we are highly encouraged by rising retail confidence and growing consumer engagement across acesports as the industry builds towards the 2028 Summer Olympic Games. Skateboard sales trends are once again approaching elevated levels seen in 2020 and '21, figuring the renewed demand and sustained category momentum. This strengthening trajectory across skateboards and the adjacent Action Sports segment positions the company to further accelerate investment in innovation, expand strategic partnerships and drive durable long-term brand growth and shareholder value.

With our Disguise business we supported a wide range of new theatrical releases, we're excited to support Toy Story 5, which debuts in late June as each installment of this franchise has been great for the costume business. Also from Disney will be the Moana release and the latest Essendant's installment, Wicked Wonderland.

The second half of this year also has new movies coming from Minions as well as PAW Patrol. We will have some exciting new additions to the lineup coming from some new licensor relationships we've been busy establishing. So keep an eye out for these announcements coming soon.

Finally, Halloween is once again on the weekend in 2026, Saturday, to be specific. So ideally that drives more energy and activity beyond traditional tricker treating.

Those give you some highlights we're seeing coming into the market in the first half of the year. We remain very focused on some additional launches that we will have more in 2027 impact. Even if we can drop in some initial exclusives before the end of this year. Although a lot has changed in the past 12 months, we feel we are stronger in position today with more paths to grow than a year ago. Currently, we see this year as a low to mid-single-digit top line growth year with a continued focus on expanding margins, while we set up to maximize the potential of several potentially impactful new launches in 2027. There's still a lot of work to do, but I'm pleased with our progress to date and been able to share more publicly about some of the exciting things we've been working on.

And with that, we'll take a couple of questions. Operator?

[Operator Instructions] And our first question comes from Eric Beder of Small Cap Consumer Research LLC.

A lot going on here. Let's talk a little bit about the whole FOB model. When you look -- obviously, that got disrupted last year with the tariffs and other pieces and ramping it back up. When you look at that model and your retailers are seeing for '26 and beyond, is it back to the way the model was? And what kind of tweaks are you doing if not and it's not what kind of tweaks are there being done in the model in terms of how the retailers and yourselves are handling the FOB model?

Firstly, thank you, Eric. We're continuing to focus on an FOB first business that's been since inception. Last year, we stayed very focused on it as well, but we had to adapt based on where we manufactured, whether it was in China, Indonesia, so on and so forth in Southeast Asia. So we had a slight decrease in FOB, but not materially. Back into 2026 and '27, we will be moving forward again on an FOB first basis. At the same time, a lot of the major retailers in the U.S. have a first cost of sale program that we work with them to have the impact of the therapy, the less of an impact to them and ourselves at the same time. So we're working through some of the major customers and secondary customers on a first sale basis. So we've learned a lot through this tariff, call it, congestion and confusion throughout last year, but we have a pretty good handle on it with our retail partners who we've worked extremely closely with. And our sales teams that are really entwined with our major retailers have worked very hand-in-hand with the buyers as well as the financial side of our retailers. To make sure that we stay focused on an FOB basis because it behooves both the retail for them to make more margin, Balloons JAKKS as a sense of cost of capital, and it allows hopefully, the consumer to have a little bit lower price and bringing it in on a domestic basis.

How should we be thinking about the international opportunity with FOB? I know that you mentioned the inventory rose a little bit, primarily because of the international players. And some of them aren't, I guess, physically -- or physically big enough to do this. What's kind of the thought process there?

Again, as a company and whole, not just in, call it, North America, but worldwide, we are a primarily focused FOB company. But in order for us to expand and see the growth that we are achieving, both in Latin America, the EMEA and now new focuses -- additional focus is Southeast Asia. We do need to have distribution centers across strategic areas in order for us to achieve the customer base that is less the size of the major retailers that you see. In Europe, there's a lot of smaller customers that make up a lot of the business. So we have a mix on an FOB basis. First and then follow up with domestic inventory in order for us to achieve growth as required in those territories. Many of the customers are not large enough to do an FOB and order a container or so on and so forth. So we adapt to that and work with them by each of the segments in which we're in, whether it's the Disney segment, the boys segment, seasonal and so on. So where appropriate, we work correctly with the retailer on the size of the product, pricing of the product and the bulk of the item in order to have the best shipping cost for them and price points to them.

So we have warehouses of 5 different parts of the EMEA. We have been in Latin America. And we've now, as you see, at the end of this year, we brought in inventory to help us grow those areas with an FOB first basis as well as the backup inventory on a domestic basis.

Okay. Obviously, this year was tough for the entire toy industry. You guys managed to maintain your cash -- no debt basis, lots of cash. How have you -- have you been able to lever that? It sounds like you have based on '27, how are you able to deliver that in terms of adding new licenses, expanding the relationship and kind of moving up the ladder in terms of kind of the licensee of choice going forward?

Being healthy and clean and have a strong balance sheet. The licensors appreciate it very much. There are always in companies that have financial issues, and they don't want to take the risk of someone to ruining their opportunities within their owned IP. So we, with that, have been very focused, not giving away top line revenue and to erode our profit, we took what was the right approach with retail, retail inventory and our own inventory to not push for higher sales and have that erode margin. We focused on margin with healthy sales. And as you can see, I think we were up 380 basis points for the year -- for the quarter, as for -- I'll go back to give you the exact numbers. But we focused on the margin enhancement and retailers and licensors like that. At the same time, we've done an expansive amount of traveling worldwide, working on new initiatives, and we have some really exciting initiatives coming forward, and we'll be excited to talk about as soon as some of these deals get all accomplished. But during this period of time, we have focused on building 26 and 27 aggressively and licensors have all fallen in line with us and are very supportive.

Okay. I know you don't give financial guidance, but just conceptually, Q1 last year was an extremely strong quarter. It was also a quarter, I believe, where you had a significant amount of product that was shipped early because people wanted to get in front of tariffs. How should we be thinking given that the flows in the quarters are so up and down last year, just conceptually in terms of how this year is going to go?

Yes, I'll jump in on that a little bit. To your point, Q1 was a really robust quarter for us. this year -- this past year. And on 1 hand, we have some momentum, shipping product for Pemario/Galaxy as we pointed out in the call. But at the same time, too, is long-time listeners know, Q1 is always our smallest quarter. And so I've made the comment in the past. Q1 for us or maybe for everyone in the industry is like a Q1 of a basketball game, don't get 3 files at the end of the first quarter, and you'll kind of be okay. So really, we're probably thinking more first half, second half. And as to where the line gets drawn at the end of Q1, to be honest, we're not really overly fixating on it.

And our next question comes from Derek Johnson of Seaport Research Partners.

So one on POS. What was that in the quarter? How did a trend and evolve through the quarter? And then inventory at retail, what does yours look like? But also more broadly, the industry, is there any pockets of inventory that could clutter and you affect the industry that way?

Yes. So I'll take the first part of that, and Stephen can circle back on the inventory piece. From a POS point of view, you can read into the fact that we weren't bragging about it. It is that we weren't thrilled with it. But as we mentioned on the call, the super hot, like new launch items blew through in a way that we were happy to see and gave us confidence that broadly what we're doing. But I think broadly speaking, with where we saw higher retailer prices, that slowed down POS for those segments. So notwithstanding all the other kind of hair on the topic of POS in terms of what is the underlying margin for that POS I think that's kind of what we'd have on that. From a retail inventory point of view, Stephen is a little bit closer to that. I'll let him...

So I'll go through some of the two major retailers in the U.S. We're down. And one of them, down 21% year-over-year and down about 4% on another. So our inventory at retail is very tight for us, which is good. We did -- again, as I said earlier, in the Eric asked the question, is we did not want to chase top line and worry about the inventory levels after the holiday season. So we really focused on shipping what was appropriate and focusing on profitability.

And to answer what I did, I mentioned earlier, I just want to make sure I clarify. We were 380 basis points higher in margin for fourth quarter than the year prior. I just want to make sure I got that out there.

Yes. No, that's impressive. And so how would you describe the promotional activity and perhaps sales allowances in the fourth quarter?

For us, they were quite normal or a little bit less than normal for I think a lot of the major -- our competitors put a lot of heavy in discounting and promotional. But to me, looking at what we've seen throughout the year, it was a very cautionary year because of the tariffs and not knowing what the consumer kind of appetite was. So again, we're pretty close to what we do. We sit with the factories, we sit with the retailers. So we did hear there's a lot of promotion activity that was done heavily in November, December. But for us, there wasn't much.

This concludes our question-and-answer session. I'd like to turn it back to Stephen Berman for closing remarks.

Ladies and gentlemen, thank you for today and finalizing and finishing 2025, and we are extremely excited for '26 and '27 and look forward to our next call. Thank you again.

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

Good afternoon, everyone. And welcome to JAKKS Pacific Third Quarter 2025 Earnings Conference Call with Management, who will review financial results for the quarter ended September 30, 2025. JAKKS issued its earnings press release earlier today. The earnings release and presentation slides related to today's call are available on the company's website in the Investors section.

On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer; and John Kimble, Chief Financial Officer. Stephen will first provide an overview of the quarter and full fiscal year, along with highlights of recent performance and current business trends. Then John will provide some additional comments around JAKKS Pacific financial and operational results. Mr. Berman will then return with additional comments and some closing remarks prior to opening up the call for questions.

[Operator Instructions] Before we begin, the company would like to point out that any comments made about JAKKS Pacific future performance, events or circumstances, including the estimates of sales, margins, earnings and/or adjusted EBITDA in 2025 as well as any other forward-looking statements concerning 2025 and beyond are subject to safe harbor projection under federal securities law. These statements reflect the company's 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 forward-looking statements.

For details concerning these and other such risks and uncertainties, you should consult JAKKS' most recent 10-K and 10-Q filings with the SEC as well as the company's other reports subsequently filed with the SEC in time and time.

In addition, today's comments by management will refer to non-GAAP financial measures such as adjusted EBITDA and adjusted earnings per share. Unless stated otherwise, the most direct comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure within the company's earnings press release issued today or previously. As a reminder, this call is being recorded.

With that, I would now like to turn the call over to Stephen Berman, the floor is yours.

Good afternoon, and thank you for joining us today. As we reflect on our year-to-date results and think about the year coming to an end, the tariff levels have varied significantly, starting at 10% and then ranging from approximately 30% to over 140% depending on source and origin, creating added uncertainty for retailers and manufacturers alike. This has continued to delay holiday purchase orders with many seasonal programs shifting from August to October.

In response, we have taken a deliberate and conservative approach for the current fiscal year, prioritizing margins, applying careful pricing discipline, maintain tight cost controls and emphasize the most profitable product opportunities. Lean inventory management, target lower inventory levels and accelerate sell-through across markets to maintain balance sheet strength. Future forecast product strategy, invest in a robust and innovative 2026, '27 product pipeline designed to resonate with global consumers and support long-term brand growth across a broader category of assortments. Direct import FOB orders, the foundation of our business since inception. They are placed months in advance to ensure factory scheduling and retailer logistics.

However, major U.S. retailers pushed back their Halloween and fall toy set dates by nearly 2 months, effectively removing two of the most important selling months from the calendar. This shift combined sharply with higher product costs, drove a significant reduction in Q3 sales orders, extending the softness we saw in Q2.

The impact cascades across the full year. Without August and September sales, retailers lose the early read they traditionally rely on to chase winning products ahead of the holiday season. Now reorders will happen when retailers and wholesalers step in, commit inventory and bet confidently on the right products at the right price.

That has never been our approach to the business. We are not changing now. Although we always selectively support a limited number of high confidence SKUs for backup inventory, with product currently tariffed at 30% of cost upon import, we have chosen to be even more selective of how much of that we want to do.

Our worldwide inventory was around $72 million at the end of Q3, inclusive of some tariff expense. Although that number is higher than the $64 million from this time last year, the driver is our international expansion as our high U.S.-held inventory is actually lower compared with this time last year. We are not going to build domestic inventory in the U.S. this year on the premise that retailers will suddenly want the product they were unwilling to buy in Q3.

Year-to-date, net sales in our overall business are down 21% versus last year, 24% in Toys/Consumer Products and 8% in Costumes. For the quarter, Toys and Consumer Products was down 41% to $156.1 million, our lowest Q3 in a very long time. Costumes were only down 4% to $55.1 million as we scramble to recover some of the lost sales from Q2 while also continuing to steadily grow this business internationally.

We talked about this year being an exercise in patience, and I think that continues to be the case. We continue to partner closely with our China-based factory network, which I just returned from another trip to Asia to personally share growth initiatives we have in the works for 2026 and '27 and gain alignment around our shared businesses.

Many of our largest factories are continuing their expansion in other Southeast Asian countries, and we will continue to work with them to ensure we have the maximum flexibility to adapt changing conditions and restrictions. We are moving forward with the presumption that products will be burdened with a 30% cost upcharge from the levels we would normally expect. This is reflective of whether the product is coming from the established, efficient China supply chain and tariffed at 30% or whether it's coming from the more in-progress, higher cost, but currently approximately 20% in Southeast Asian territories.

This is now enhancing our product development decisions for 2026 and beyond. It is obviously something we couldn't plan for in 2025. In addition, we believe retailers will learn from the holiday selling season what level of price increases consumers are willing to bear, which should give them more confidence in placing orders that are consistent with the FOB product ordering time line.

Since this disruption started back in early February, we have been clear on our financial objective to avoid panic, preserve cash and navigate to safer clear waters. To that end, although our top line has dropped, we are pricing for tariffs, as we said we would, and our gross margin percentages has held reasonably well accordingly. At 32% in the quarter, it is down from last year, 33.8%, but we still feel is a strong result as inevitably, the addition of tariff costs erodes a percentage even if it's 100% recouped by higher selling prices.

Moving down the P&L, we have looked to reduce spending and delay or cancel projects and initiatives without clear near-term payback. Lower sales have also meant less work in our U.S. warehouse, providing additional savings. Overall, SG&A in the quarter was down 6% and is flat on a year-to-date basis.

The cumulative impact was an adjusted EBITDA of $36.5 million in the quarter, down from $74.4 million in the same quarter last year and reduced our trailing 12-month EBITDA to $29 million.

I will now pass it over to John for some more details on the financials, and then I will come back to further discuss some things we are doing this holiday season and have in the works for 2026 and beyond. John?

Thank you, Stephen, and hi, everybody. Starting with an additional bit of cleanup on sales. Stephen explained some of the details about how FOB sales were particularly challenged this quarter. To add a bit more context around that, 93% of the year-over-year drop in sales came from FOB shipments. That number was actually over 100% in Q2. Uncertainty really isn't the friend of buying larger quantities of product with a longer lead time.

Separately, as regular listeners know, our international business was booming earlier in the year, reflective of a multiyear effort to elevate our performance outside the U.S. As we mentioned last quarter, we knew that it would slow down a bit in Q3, and in fact, it did. As those in our industry know, the dividing line between Q2 and Q3 from an FOB sale perspective is always a bit arbitrary, yet another reason why we are always talking about full year results. So there's nothing material happening that changes the story when it comes to international. This is more the reality that looking at quarterly results in a seasonal business will often give you lumpy results.

Year-to-date, international as reported is roughly flat, minus 0.3%. If we liberated Canada from our North America reported numbers, we'd be up 4% year-to-date for the non-U.S. markets. Overall, we're still very bullish about what's happening with international. We are steadily dialing up the sophistication level of how we're approaching a wide range of markets, following a walk-before-you-run approach.

To make this a bit clearer, we see the U.K., Western Europe and Mexico at one level of maturity. Eastern Europe, Central and South America are beginning to take shape behind them. And from there, you can contemplate the Middle East and revisiting our approach across Asia. But we feel all these markets have a line of sight to grow faster than the U.S. in the years ahead, particularly when it comes to our core business. You can hopefully see why we continue to talk about the meaningful international opportunity for us.

From a forecasting perspective, the challenge is that the European business, in particular, is more domestic replenishment-centric as it scales up, which leaves us in the more traditional we'll-know-when-we-get-there camp, planning for weekly replenishment as we approach the holidays, with added complexity around inventory management.

Through the lens of the various product divisions, the macro situation is smothering most bursts of goodness that are trying to fight through and be heard. Sell-in for Disney's Moana 2 has been a favorable comparison year-to-date versus prior year. Saga's Sonic continues to do tremendous business and has had great weekly sell-through all year and the DC-Sonic mashup we teased last quarter is flying off the shelf this month as well.

We do not have any toy rights to significant second half of 2025 film releases, which always makes for a challenging comparison. Many of our newer owned brand or private label launches were derisked by the retailers and by extension, have suffered from delayed planogram sets. These are essentially downgraded to fall soft launches and ideally, we'll get enough traction to reset in the new year.

Touching briefly on POS and building on Stephen's comments on timing. Frankly, some of the key accounts in Q3 were representing a product line that looked more like a greatest hits of things from spring that didn't sell, more than a lineup that was particularly inspiring. Everyone has been pushing forward stock on hand that was landed prior to tariffs and customers have been scrambling to adapt their 6- to 12-month rolling outlook as the rules have moved around.

When it comes to pricing direct import product that shipped immediately after the 100-plus percent window closed, many customers had to deal with paying the tariff on top of their cost of product, which would include the profit margin for a company like us, and in the case of licensed goods, also include the licensor's royalty share. This snowballs the hurdle rate that the retailer is then looking to mark up from, which is why you've seen some retail prices out in the marketplace that are 20%, 30% or 40% more than what you might have seen pre-tariff regime.

Most retailers are trying to protect the lowest retail price points while balancing the product line architecture and feeling out where consumer price sensitivity reaches a breaking point. We feel it's a mixed bag as to how they're doing on this front with room for improvement.

We are continuing to work with all our U.S. accounts to make sure they understand the various Customs programs that exist to minimize their tariff exposure. Although these are tedious bureaucratic processes, we are supporting them to enable the lowest consumer prices and we can continue to support our retailers with the margins they expect from their direct import business.

We are also engaging licensors to recalibrate royalty rates for newly relevant selling methods especially where the customer is still buying FOB, but we are paying the tariff on their behalf. We need the licensors to recalibrate rates here to ensure we are not paying a royalty on the tariff value because if we are, we will have to further move up price which exacerbates the increase in consumer prices. That math is already unfortunately baked into any tariff-increased domestic prices and is another reason why we will continue to move customers away from domestic ordering whenever we can.

With that being said, in the quarter, U.S. POS at our top three accounts tended to be relatively subpar from a dollar perspective and worse from a unit perspective. On a year-to-date basis, in aggregate, we're down mid-single digits with retail inventory up mid-single digits. Keep in mind, however, when retail changes price on product, it revalues all the inventory in their system. So I can't really give you an apples-to-apples read on year-over-year retail inventory based on the information that flows back to us.

With a similar bit of logic, from an industry data perspective, we feel while there continue to be pockets of exuberance around trading cards and construction toys originating from Denmark. But for the most part, any other comments about dollars being up is more pricing than unit-driven consumer demand.

Turning back to our P&L. Gross margin was a respectable 32% in the quarter and is 32.8% year-to-date. Cash spent on tariffs this year totaled around $8 million through the end of the quarter. Some of that amount has flowed through the P&L and some is balance sheet inventory value. Belt-tightening SG&A resulted in a good quarter, but clearly, we have lost a lot of scale with this level of top line drop. Things like interest income year-to-date have been outpacing interest expense associated with tapping our credit line, which we did some of this quarter.

Adjusted diluted EPS for the quarter was $1.80, down from $4.79 this time last year. On a year-to-date basis, we're at $1.79 compared to $4.50 for the first 9 months of last year. We finished the quarter with $27.8 million in cash, up from $22.3 million last year. Understandably, our AR is down substantially. We are nonetheless comfortable with our flight path here on the cash front.

One final piece of housekeeping. This month, our S-3, also known as a shelf registration, was expiring as it is now 3 years old despite never having a reason to use it, in order to maintain as much flexibility as we can over the next 3 years, we renewed that registration, although we have no immediate plans for its use. I'm also happy to share that the Board has approved the Q4 cash dividend of $0.25 per share, payable on December 29 to shareholders of record as of November 28.

And now I'll pass things back to Stephen.

Thank you, John. Since tomorrow is Halloween, we want to give you a more detailed update there. As a reminder, the Costume business essentially stopped when tariffs surged to over 100% in Q2. The team did an excellent job weeks later trying to patch up volume back once the 100% tariff period had passed. And some of that business was recovered with a bit of it shipping this quarter. But ultimately, this is not the Costume year we envisioned when we started the year, although we were pleased with our progress outside the U.S.

At retail, we've seen larger accounts increasing retail prices significantly. Some opening price points are being held to pre-tariff levels, but we've seen a large portion of our line with retails increasing 15%, 20%, up to 40% in some accounts. Unfortunately, this has negatively impacted unit sell-throughs. Syndicated market data seems to confirm that this is widespread with all the leading manufacturers showing double-digit declines in dollars during the first 5 weeks of the season compared to last year with worse numbers in terms of units.

Although we are happy to maintain our market leadership position according to the same data, this is obviously troubling trend. We know this is a business that traditionally happens very late, so we hope that the accounts have a great week this week and of course, wish everyone a safe and fun Halloween weekend.

Looking forward, it's predictable and uninteresting for toy companies in October to reference that all-important holiday season. Nonetheless, we think it's appropriate to point out there is a much wider range of possible outcomes for the next 2 months than recent years. We could not know with any certainty what retailers would do from a pricing and promotional perspective or how consumers will respond. Retailers may be motivated to adjust their plans based off consumer behavior, and that loop will essentially continue every week through the end of the year.

Longer term, I would like to highlight two separate areas that teams have been swarming over this year and particularly over the past 10 months. The first area is partnership work we do with our global licensors to grow our mutual businesses, which often involves myself and leadership of all of our different areas to make these things happen and make them happen quickly. Market by market, property by property, customer by customer, we are steadily asking ourselves and our retail partners what we are missing. Where is the next opportunity for us to pursue.

The Disney Darling baby doll line we mentioned last quarter is an example of this type of work. There's no new entertainment driving that product line, but the collaboration by our two teams have brought a great product line to market to address an opportunity that we see. And so far, the initial sell-throughs and reaction has been terrific. We recently shared 2026 plans with retailers for how we see the product line expanding in the new year, and the feedback has been extremely positive.

It's difficult to get into the details of some of these projects for confidentiality and competitive reasons. But to paint a bit of a picture, there are markets in Europe where we're challenging the local teams to stretch to more outlandish goals for key items and recharacterizing what role JAKKS can play for some of the largest European toy retailers, 12 months per year, not just the peak holiday season, again, market by market, account by account.

In the U.S., we are redoubling our efforts in private label space, pitching for significant programs that could be meaningful value creators for us and the relevant retailers. Our Target role-play business, in particular, has continued to be an exceptional performer for us and Target this year and we look forward to that business continuing in the years ahead.

As a broader theme, we have been finalizing several extensions to our most substantial licensing agreements for the next several years. Inclusive of the new entertainment releases that licensors have slated during that time. We are often constrained about what we can say on that front and when we can say it. As an example, we are happy to begin our FOB shipping for some new movie tie-in product this quarter with on-shelf date in the middle of Q1, and we'll be excited to tell you more details about it ideally on our year-end conference call.

On a different note, we began making a concentrated effort to build out our new business pillar for us from a licensor and intellectual property perspective. Outside of what you've seen us do historically, but certainly informed by it, we aren't ready to get into the details, but we see this initiative as a meaningful market opportunity for us. We have been talking to a very wide range of companies to secure the necessary rights to get us started. This has been in the works for a very long time. We are not ready to get into the details yet, but we see this initiative as a meaningful market opportunity for us.

We've been talking to a very wide range of companies worldwide to secure the necessary rights. We see it leveraging most of our existing strengths but also extending our product line into other hardline and softline areas which aren't necessarily toys in the classic sense. But nonetheless, we feel the appeal is extremely passionate to a major fan base of consumers alike. We think this effort can extend our presence into other aisles at retail, in addition to opening different doors from a customer perspective. So we're extremely excited and plan to share more in the coming months ahead.

We would envision a small amount of this product to ship in the second half of 2026 with a much broader line launching for spring 2027. And again, we hope we can start talking about that more in bits and pieces in the weeks ahead and months ahead as soon as agreements and plans are finalized.

And with that, we'll take a couple of questions. Operator?

[Operator Instructions] Our first question comes from Eric Beder from Small Cap.

I want to kind of -- so there's so many things going on here. I just want to step it back a little bit. When we step back and look at what, in theory, the new normal is, and I know we're trying to figure that out right now in the midst of what is the biggest season for toys. What do you look at as the drivers, the key drivers for your business model that lets you move around this and lets you succeed to levels you've done in prior pieces?

I know the FOB piece is going to probably be, to some extent, problematic here given what some of the other retailers are doing, but I fully respect what you're doing with it. But how should we be thinking about longer term, pick whatever period you want and where you can kind of take it from where it...

Eric, Stephen Berman. Just so you know, I apologize in advance. I've had a brief cold, and my voice is a little bit here and there.

But to answer the question, first and foremost, [indiscernible] and certainly is what's required at retail. That's what they're looking for, and that's kind of where we stand today. Up until today, when we just heard the recent fentanyl tariff being dropped by 10%, which -- waiting for a Custom documentation, which would bring new tariffs in our world to approximately 20% from the China market. This is the new norm. So retailers are kind of just adjusting to it and adapting to it.

To jump into what you just said about the FOB topic, now going back to the FOB business, when this just occurred, retailers will be scrambling to jump back in on an FOB basis because they know what the tariff is now currently and where we stand today. So we're happy with that news.

The business itself, and again, I'm sorry, for my voice, now has more certainty because throughout this year, you've had retailers cancel orders because of the tariffs, retailers push their August set dates to October, and that's done now. So going into next year, the new norm -- it's the new norm, and I think it will be back to what it is the following years past.

So for JAKKS, we are so conservative in our approach and want to be reality to our shareholders, our retailers and licensors. That's why from what we've gone out to retail in North America and Asia, we see sales higher because of the higher sales price, but lower in unit dollars -- in unit volume, excuse me. And we don't see that really changing through the year, and we hear other commentary. So we're taking a very solid approach about building cash, keeping overhead low and building '26 and '27 aggressively.

There's no reason for us to try to be heroes this year and push out inventory to try to make numbers. We want to make sure that the retailers have low inventory of our product, and we want to be low in inventory for JAKKS going into 2026, so we can have a strong year across the board.

As I said, we have a lot of things that we haven't announced that we will be forward-looking to announcement. For competitive reasons, we need to hold off and [ wait until ] these agreements and plans are put in place. But that being said, this is a year that has had such uncertainty. And as JAKKS, we played it very much close to the vest and make sure that we ran our business like we should for our shareholders to make sure that we have the years to come with solid growth.

Okay. Switching gears, I guess, to the near term, you have the Super Mario Bros. movie coming out, how should we be thinking about that as an opportunity here, it's coming out -- I know it's coming out end of Q1 or early Q2. How should we be thinking about that as a potential kind of first time that shows a little bit of normalization going on here.

We're excited for it, the retailers are excited for it worldwide. Our factories across Southeast Asia have been prepared for it. There's been -- Nintendo itself has a great track record as a classic evergreen product line. And with the enhancement of the Super Mario movie that you mentioned, it will just bring much more excitement to an area that has not had much real excitement, a toyrific platform this year. There hasn't been really any major toyrific excitement that's happened this year.

So going into '26, it's one of the first major exciting initiatives that's going to be in theaters and for consumers and retailers. So we, our retailers, Nintendo and Universal are very excited about it.

Okay. And I want to conserve your voice, so I'll just throw one more in here. This DC collaboration, it's unique. I'm sure it's bringing toy excitement to people here even with all the things going on here. How -- this kind of, I guess, mash-up, how should we be thinking about this as opportunities going forward to do more of these kind of pieces that work great as toys, but they're also work great for the adult collector who does this kind of stuff.

Well, the Sonic team that sells Sonic itself has continued to outperform, I think, everyone's expectations worldwide. And when they worked with DC due to the cross collaboration, it just enhanced the awareness of Sonic and as well as DC. So what it did is brought the older age group from the DC era into the younger age group of Sonic, which actually has a young fan, a kidult fan and a collector fan.

So it's bringing a much larger collaboration and just bringing new eyeballs and new excitement without having any theatrical release behind it, it just brought two great iconic IPs together. And what we see with how Saga worked with DC and vice versa, the collaboration has been extremely strong and looking very much forward to more collaborations like that.

Our next question comes from Thomas Forte of Maxim Group.

So Stephen, I have a novel approach. I have three questions. And then I'll ask the question, answer the question, and then you can use as little voice as possible to see how I did with the answer.

So first on -- so the first one is, how should we think about normalization? Stated differently, can you briefly recap to help us compare and contrast your first quarter, second quarter and third quarter tariff-related impact?

Now my answer would be, if I oversimplify, it seems to me that the first quarter was a little-to-no impact, then the second quarter was a meaningful impact, but the third quarter is where it had the most impact.

Okay. Great. Tom, thank you. First off, you're correct. First quarter had nominal impact. It had a scare effect, but had no impact to what was shipped at retail at sell-throughs. Second quarter in Halloween was a debacle because we had material cancellations because of the impact going from Liberation Day to the 145% approximate tariff. We had more cancellations than I think in the history of our company in Halloween during that period. Then -- so that had the cancellations, not major impact of tariffs at retail yet with price points.

Going to third quarter, for Halloween, we retracted and scrambled and got more business. But at the same time, the tariff impact had a material impact on the sell-through and unit sales. So as I mentioned in the pre-recorded script, the product prices have gone from 15% up to 40% at retail, which truly affected the sell-throughs, and you're seeing it through the circular data that's out in the market.

That being said, we are still #1 leaders in that space, but all the people in our industry have been affected double digits. So we're not the only ones out there, but we are still in the best position.

Going to -- now to where we stand today, the impact of tariffs have gone across the board to all retailers in U.S. to where you've seen some retailers have kept prices to try to bring customers in and have them as loss leaders. But if you go out and you do store checks, and we've had all of our salespeople go out, the price points have risen quite substantially across the board.

So we -- what our approach is, is we don't want to take risks having inventory at the year-end and hurting our 2026 year. And we don't want to hurt ourselves having inventory in our warehouse waiting for orders to come. So we, collectively, as a management took an approach, let's build international, where things are going well, let's be conservative in America. We still have everything doing strong for us, but it's just not exciting. So Sonic, Nintendo, Disney Princess, ily, private label all these areas of businesses, these all are doing very nice, but it's just not an exciting year because of all the uncertainty.

That being said, uncertainly going into 2026 will be a lot less. And I think based off what we gather in road shows with retailers, we, JAKKS, because of the diversification and all the newness that we have coming out, are excited for next year and beyond excited for '27 as well. We have a tremendous amount of new IP for Halloween on top of our current great IP. We have a lot of theatrical releases happening. We have a lot of new announcements and extensions that we're working on. A lot of new private label initiatives. So we've gotten through the worst this year and are just looking forward to '26 and are gearing up.

I've been in Asia, I think, four times this year with our partners, working with them across Southeast Asia, primarily China as well as Indonesia, Vietnam and Cambodia. But that being said, China is still the main part of where we are going to manufacture for safety reasons, quality, quickness and partnerships. But the factories that we work with in China are also in these [ epic ] territories to where -- if and when we need to move, we move with them because they are our partners.

So we are just really getting through this year, keeping cash is king, inventory low, G&A low and getting prepared for just a great 2026 compared to what 2025 has been.

Excellent. And I failed in getting you to conserve your voice, right? So the second one is, when thinking about your sales in '25 versus '24, how should we think about the impact of tariffs versus the impact of tough licensing comparisons? Is it 50-50, 75-25, meaning 75% tariffs, 25% tough comparisons.

I don't know if we can answer that right now. It's a very good question. I'd like to spend time digesting it. I think the tariff result, let's call it, 20%, 30%, it is what it is, and that's the new norm. And everyone will take a hit from the factories to ourselves, to the retailers and the consumers. I just can't compare '24, I have not thought about what it was. We had Moana and some other theatrical initiatives. But we have so many new initiatives happening at '26, that it's too hard for me to compare them right now. And if you just give us time, we can go off-line, in a day or so and get back to you.

Okay. So last one, current thoughts on strategic M&A, including your opportunities for accretive acquisitions, seems like you would have a lot of great opportunities given company's potential desire to exit now that they've gone through both COVID and tariffs.

Great question. We're seeing quite a few various opportunities that are coming to us. I'm sure there's many other companies as well. But at this time, we just want to get through this year and see where these companies lie after the year-end because I think many of these companies that we've been reviewing, looking and discussing are having such a difficult time. I think things will be cheaper going into '26 because of cash needs, licenses. The licensors are very uncomfortable with companies that are not healthy.

So there's a lot of opportunities, not just acquiring companies, but they're acquiring areas of businesses, of licenses that the licensors don't want to work with because of uncertainty. So there's a lot of really good opportunities. But even with all that, we look at '26 as a strong year for JAKKS and '27. As where we stand today, we've gotten through the worst, and we're looking for the best now.

This concludes the question-and-answer session. I would now like to turn it back to Stephen Berman, CEO, for closing remarks.

Ladies and gentlemen, thank you for your time today. Looking forward to the year-end fourth quarter call to go through our 2026 year excitement and hope we'll have much more good and positive moves to come. Thank you very much.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good afternoon, everyone. Welcome to the JAKKS Pacific Second Quarter 2025 Earnings Conference Call with Management, who will review financial results for the quarter ended June 30, 2025. JAKKS issued its earnings press release earlier today. The earnings release and presentation slides related to today's call are available on the company's recently remodeled website in the Investors section.

On the call this afternoon are Stephen Berman, Chairman and Chief Executive Officer; and John Kimble, Chief Financial Officer. Stephen will first provide an overview of the quarter and full fiscal year along with highlights of recent performance and current business trends. Then John will provide some additional comments around JAKKS Pacific's financial and operational results.

Mr. Berman will then return with additional comments and some closing remarks prior to open up the call for questions. [Operator Instructions]

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, margins, earnings and/or adjusted EBITDA in 2025 and as well as any other forward-looking statements concerning 2025 and beyond are subject to safe harbor protection under federal securities laws.

And these statements reflect the company's best judgment based on current market trends and conditions today and are subject to certain risks and uncertainties, which would cause actual results to differ materially from those projected in forward-looking statements.

For details concerning these and other such risks and uncertainties, you should consult JAKKS' 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.

In addition, today's comments by management will refer to non-GAAP financial measures, such as adjusted EBITDA and adjusted earnings per share. Unless stated otherwise, the most directly comparable GAAP financial metric has been reconciled to the associated non-GAAP financial measure within the company's earnings press release issued today or previously. As a reminder, this call is being recorded. With that, I would now like to turn the call over to Stephen Berman.

Good afternoon, and thank you for joining us today. When you look at the big picture, we are pleased with our results this quarter, both in terms of our second quarter actuals, but also for what we've done in the past 90 days to adapt to unpredictable U.S. market. Our sales in the quarter were negatively impacted by a dramatic increase in the cost of doing business in the United States which ends up being a miscommercial opportunity for all involved.

Based on the disruption from the fluctuation and uncertainty around tariffs, although sales in the quarter were down 20% from the prior year, we leave the first half of the year down 3% overall as a total company. The first half sales in the U.S. were down 10% compared to the prior year, and all other markets were up 33% in total.

We've been working collaboratively with our vendors and customers to make the best of a bad situation and identify creative solutions to increase our ability to mitigate some of these costs. Amid ongoing and often unpredictable tariff changes, we have taken a proactive and balanced approach to our manufacturing strategy. While China remains our primary manufacturing hub due to its scale, efficiency and well-established infrastructure, we have built verified and reliable supply chains over the years across many markets to mitigate risk and ensure product continuity in these regions.

In addition, we have implemented a duplicate tool initiatives in various regions, giving us the flexibility and operational readiness to shift production where it makes the most practical and economic sense.

We continue to explore and execute U.S. domestic manufacturing opportunities where feasible, recognizing both the strategic value and realistic limitations of U.S.-based production. This diversified and pragmatic approach enables us to remain agile, cost-effective and resilient in the face of evolving global trade dynamics.

Based on what we know today, all of these solutions ultimately result in a higher cost of doing business due to the loss of scale, logistical efficiency and manufacturing proficiency. That higher cost is creating hesitancy with many U.S. customers that we see persisting until everyone is aligned as to what the new cost of doing business will be.

At the same time, our customer list outside the U.S. is steadily growing as we cross-sell toys and costumes to open additional doors for both. We have begun to see some limited increases in consumer prices in the U.S. but we suspect there is a lot more to come on that front.

Currently, our point-of-sale results at the top 3 U.S. accounts are strong especially when adjusting for the private label program we mentioned earlier, exiting at the end of last year. With that view, we are up double digits at all 3 accounts in the first half of the year led by the success of our product supporting the Sonic the Hedgehog 3 movie which is now streaming across multiple platforms.

In areas where we've seen customer increase prices, more often than not, has been meaningful reductions in units sold, although admittedly, a handful of items have maintained their unit productivity despite higher retails.

At this time, however, we feel it's far too soon to speculate when or where the situation at retail reaches some degree of predictable stability. Given that context, we are doing everything to remain flexible and adaptable, we have the great fortune of having a fantastic product line appealing to a wide range of kids and parents across a very broad assortment of entertainment franchises and play patterns.

As mentioned, our sales were down 20% in the quarter versus prior year and unfortunately, down more substantially from our expectations at the beginning of the year. Our worldwide Toy and Consumer business was down 23% in the quarter and is roughly flat year-to-date, and our Costumes business was down 12% in the quarter and down 13% year-to-date.

For the first half, our international growth was led by Europe, which grew by 65% in the first half of the year. This reflects a major initiative to increase international sales while recognizing that the U.S. sales will remain somewhat unpredictable until the tariff landscape stabilizes and firms.

Territory-specific manufacturing percentages are clearly established. I will now pass it over to John for some more details on the financials, and then I will come back to elaborate a bit more about the second half. John?

Thank you, Stephen, and hi, everybody. All sorts of things are happening this quarter, so let's jump in. We felt at the beginning of the year that we were set up for a good first half, looking at our product lineup and comparing it to where we were in 2024, and that has proven itself out in many ways.

But unfortunately, that's about the end of easy predictability in the near term. The sudden increases in the cost of bringing product into the U.S. prompted most U.S. customers to reevaluate their orders as has been widely discussed with the immediate negative impact being on the FOB or direct import portion of the business.

Our efforts to refocus energies on other markets are working so far, as Stephen highlighted earlier. The fact that we're seeing all our businesses selling in favorably is a good validation of the current breadth and quality of our product assortment.

It was an excellent quarter for product margins. largely anticipated by mix but also reflective of some immediate efforts to monetize on-hand inventory and scrape pennies where we could. But broadly, the level of new higher-margin product compared favorably to the product portfolio during the same period last year as we anticipated it would.

How all these elements balance out for the second half very much remains to be seen that our comparisons with the previous year will get more difficult is a certainty. Customer and by extension consumer behavior remain a bit more than unknown. Customers' decisions about building inventory, how they price to the end consumer and what sort of rate of sale follows are the components to determine the ultimate margins earned by all involved and are essential to creating a degree of fact-based certainty around expectations.

We remain very focused on the interdependency of these issues. As we've said before, we are optimizing for margin dollars and not sales revenue, market share or other metrics that run the risk of distracting from bottom line results and/or burning up cash.

Ultimately, these dynamics remain pretty challenging to forecast. Royalty rates were slightly higher in the quarter as we saw in Q1. That's largely driven by higher rate content-led product and a modest reduction in our royalty-free private label business. But net-net, similar to Q1, we sustained strong gross margins in the second quarter at 32.8%.

There's not a lot of insightful things to be said about SG&A this quarter. Overall cost containment has been okay. If you look at the first half, we're up about $2 million in worldwide spending in the first half from a P&L perspective. Given that we're rolling through a rent increase in the U.S. warehouse this year coming off a relatively long lease, that's a good outcome. We are understandably taking a cautious view of anything that looks discretionary in the second half while being mindful not to handicap next year's planning and product development.

Moving to the balance sheet. Cash inclusive of restricted cash at the end of the quarter was $43 million, up significantly from the $18 million at this time last year. As you'll recall, the first half of 2024 included a $20 million cash payment as part of our preferred share redemption. So we're tracking well on this front. Cash as of last Friday was down to $27 million as we make payments customary for this time of the year, inclusive to our friends, the licensors.

Inventory is up a bit at about $72 million. That's inclusive of $17 million, which is in transit somewhere. To the extent that you're thinking it's reflective of the higher cost of importing product, that's not really a driver of that number as of June 30. It's more about our international growth.

Separately, we were happy to complete the refinancing of our credit facility this quarter with a new agreement with BMO Bank N.A. This new 5-year $70 million cash flow revolver provides us with a predictable source of funds throughout the year at very attractive borrowing rates.

Moving from an asset-based lending agreement to a cash flow finance facility is another endorsement for the quality of our business and where we see ourselves headed over the next few years. The slight improvement in gross margins helped drive a bottom line adjusted EBITDA of $2.3 million in the quarter and $2.7 million for the first half of the year. $2.3 million is down from $12.3 million in the same quarter last year. But for the first half, our $2.7 million is favorable to the loss of $4.9 million in the first half of last year.

Adjusted diluted EPS was $0.03 per share in the quarter, unfavorable to a gain of $0.65 per share last year. On a year-to-date basis, we are flat with essentially breakeven results on an adjusted basis compared to a loss of $0.38 per share at this time last year. As mentioned in our release, the Board has again approved a $0.25 per share dividend for the third quarter for shareholders of record as of August 29 to be paid on September 30. And now I'll pass things back to Stephen.

Thank you, John. At this point in the year, we usually are putting the finishing touches on promotional programs for the upcoming holiday season, we're also racing to polish the fall 2026 product line prior to customer previews in the next month or 2. Although both of these activities are still happening, we're nonetheless still dealing with the current economic uncertainty on a daily basis as it persists a overhang when it comes to understanding the shifting economics of our business.

We, at JAKKS view patience as a virtue in this climate. We continue to aggressively chase new product opportunities and the right licenses for our portfolios. We remain cautiously curious as more and more acquisition opportunities are surfacing given the current turbulence. We are increasingly, selective in terms of our inventory planning, maintaining our commitment to being an FOB focused working capital-efficient company first. We're also pleased with our continued steady progress in non-U.S. markets.

Our Canadian and Mexican customers now have an even clearer incentive to buy FOB product. Our non-U.S. sales were up 33% in the first half of the year. Although we don't think that is a sustainable rate of expansion, we are working to the same momentum and become a bigger part for our customers in the holiday planning season. The weaker U.S. dollar delivers more margin to many of our FOB customers as they buy from our U.S. dollar-denominated FOB price list.

In the U.S. we see some of our major customers delaying their traditional second half planogram resets from August to early October. This essentially is a result in 2 fewer months on shelf for our new fall product introductions which by extension is driving lower productivity from the fall product line than what we would have originally anticipated.

We also see Halloween setting later this year, given the delays of Q2, despite the shorter on-shelf window, there are reasons to be excited about U.S. retail in the second half, however, at least at JAKKS. We are launching a new baby doll nurturing brand called Disney Darlings which will soon be available online and is planned to be on shelf in Q4.

An international rollout is happily planned for 2026. Our Disney ily business continues to thrive and steadily expands its product breadth. We've received very positive consumer reaction to our Tote-ily Teenies segment this year, which will lead to further expansion there in 2026 as well. And all of our major U.S. customers are planning Q3 and Q4 programs to support our evergreen Disney Princess, Frozen and Moana businesses.

In our action play area, working with our friends at Sega, we have some new toys that tie in with the new console game, Sonic Racing: CrossWorlds, which is launching this fall, and we are especially excited to be supporting the DC Comics, Sonic Crossover comic book series. Our action figures let you recreate this unique storyline with Sonic as the Flash, Silver as the Green Lantern, Amy as Wonder Woman and Shadow as Batman. This product looks very, very cool.

And we have additional more great items coming from Action Play, but we're holding back the news for Comic-Con this weekend in San Diego. You will have to wait a few more days to find out about those. In a different aisle, 1 of the things I'm happiest about this year is our continued success expanding our private label offerings. We're always a bit sensitive about what we can share in this area for competitive reasons and these programs tend to start small with a lot of testing and learning but our success in recent years has opened a number of doors and we'll start to see more launches this fall.

Unfortunately, there have been approach with more caution given the current environment but as we look ahead to what we know is coming and further expansion plans in 2026, I and JAKKS remain both pleased and optimistic about our opportunities in this area.

Finally, our Costumes business is 1 that, in many ways, had suffered the most from recent events. A large portion of the decline in the quarter happened here as we had some of our large cancellations in Q2 when tariffs were 145%. This is a business where customers review product lines late in the calendar year and make and ultimately finalize their commitments early in the year. That is the time that allows for manufacturing to be scheduled and product to be shipped and sold in Q2 and Q3.

Although there was a period of time this quarter where this business essentially was put on pause, the team has done a remarkable job creating and reacted to changes and salvaging what ended up being a very solid year for the business, although, unfortunately, not what we hoped it would have been otherwise.

On a broader note, we know that a strong film slate is a benefit for this business. We've recently seen strong box office results for a range of kid-targeted movies, which is always something we're excited to see for our film studio partners.

Next year is shaping up to be a great 1 from the perspective of our Costumes business. We have the right to Toy Story 5, Disney Moana: Live Action film and the new Disney Descendants film which is always a great performer in Costumes. So we're hoping our Costumes business can come back stronger if we get some clarity about the product costing.

Finally, before taking some questions, I want to briefly acknowledge how Sorry, I and we at JAKKS were to learn of Alan Hassenfeld passing. I've known Alan for over 3 decades, personally going back to the early '90s and I've always looked forward to our past occasionally crossing the last of which was just a few months ago. Neither his importance to the toy industry nor his extraordinary level of thoughtfulness and demeanor can be overstated. He will be sorely missed. Alan, we miss you.

And with that, we will take a couple of questions. Operator?

[Operator Instructions] Our first question comes from the line of Tom Forte of Maxim.

Great. So Stephen and John, congrats on navigating a very challenging environment. It sounds like it's even more challenging than you described last quarter. I have 5 questions, and I apologize, usually I'm batting cleanup not lead off. So I'll go 1 at a time.

Do you have any short-term levers you can pull to mitigate the impact of tariffs? For example, last quarter you decided to hold inventory in Asia rather than ship it at even higher tariff rates.

So with that, we talked about the duplicate tool initiative that we implemented a while ago. What we decided to do instead of trying to shift manufacturing to Vietnam and Cambodia, which we already made products in Indonesia and Mexico. We decided to duplicate tool which would be a little bit more of a CapEx expenditure, but be able to pick and choose where we want to manufacture our goods to enable us to have a lower tariff impact to ourselves, the customer and to the consumer.

That being said, each time we made a move which we moved into Vietnam to ship a majority of manufacturer of our Halloween business, the tariff increased during that period of time which would not benefit us and we ended up having to take that impact of that tariff for those sales.

And additionally, that happened very similar to Mexico recently that we are moving some of our large plastic manufactured goods as well as our skateboard there, but the tariff went back up to 30%. So as I've said at the start, and I will continue to say that China is our hub of manufacturing. I think when it's all said and done, outside of whatever we can manufacture in the U.S. which we're trying to do, but it's cost prohibitive on many of our levers that we're trying to achieve.

But at that -- that being said, we will do our best to do as much as we can here in the U.S. But these tariff fluctuations and decisions that are ongoing, we've decided to just move forward with a tariff in mind, knowing that, that's going to be the way that business is going forward and bring back our business to the right initiative knowing that there will be an ample tariff that will affect our industry and we just have to work around it going forward.

Excellent. All right. So then so Stephen, in your prepared remarks and actually your answer to that last question, you touched upon this, but maybe you can expand a little more. So I wanted to ask you about the adjustments to your supply chain.

Are you suggesting that you're going to have the ability to manufacture the same items inside outside of China or your intent is to manufacture certain products outside of China. I'll give the example of Costumes just because you break out the sales of Costumes. But so is the idea duplicate, or something specifically made outside of China?

So a good example on the Disguise business, we -- firstly, the majority of these manufacturers that are in the other countries, i.e., Cambodia, Vietnam and so on our Chinese manufacturers that have set up and put their initiatives in these territories years ago. So it's not something new to JAKKS, it's where we feel the most efficient way and best way to have quality products manufactured.

We have that with -- in our Vietnam manufacturing of Halloween costumes. So we're able to go either/or in China or Vietnam but what's coming out to fruition is, in China it's a 30% tariff, in Vietnam it's approximately 20%, I believe. But the cost of goods of Vietnam are slightly higher and the cost of goods in China are slightly lower. So that extra 10% that we're saving in the sense of going to Vietnam is not really a savings. It really equals out.

And we're just being very fluid with this situation and moving forward. So we are being -- it's call -- for us, we're using the 80-20 world. Understanding is that you're taking 20% of your product that do 80% of the business. So we're really picking the top skewed items that do the majority of the business. Not every SKU will be done in all these different territories.

Okay. And then you touched on this again in the prepared remarks, but can you remind me of your upcoming license releases over the next 12 to 18 months?

That being said, first I'd like to -- but we have a lot of things that are in the midst or in the hopper that we're working on. And even though we have some great exciting things, I don't think it's exciting as a stakeholder/shareholder to hear about the things during this really disruptive period. Our goal for JAKKS is right now is to generate as much cash as we can, be extremely prudent with inventory, especially in the U.S. that you see were lower in inventory after the second half about 8% year-over-year and higher in international, as you see the international growth achieving higher ranges.

And domestically, we're just going to be very, very cognizant that we're running the business like it's our own money and not wasting on inventory and the what ifs. We rather take a conservative approach and make sure that the sell-throughs occur this year that are needed. When you listen to the competitors in the market, they're waiting for the second half of the year.

I don't think anyone knows what that's going to be, and we'd rather take a prudent stance on where we're going to be, build cash, look for opportunities. and jump on them. We did something that I don't believe many companies could do over the last 3 weeks, we came up with an idea in 3 weeks in the Halloween business spoke to 2 of our major customers, we're able to manufacture and start shipping within 3 weeks to achieve what they needed in the market.

So we're still being very opportunistic. We're still looking for opportunities but we want to be very cautious in this kind of climate right now when we don't know what's going to happen during the holiday period.

Okay. Last 2. So I know you don't guide, but can you give high-level comments on how you think about the third quarter of '25, as it relates to full year '25, given that historically, your third quarter is your biggest by far.

I'm sorry, I didn't hear it, Tom, we broke up...

Yes. So can you -- I know you don't give guidance, but can you provide high-level comments on how to think about your third quarter of 2025 as it relates to your full year 2025 given that historically, the third quarter is your biggest by far from a seasonal standpoint?

I'll jump in, and then if John would like to jump in as well. We are going to be taking outside of the international territories, just a cautious look and look at sell-throughs in our prerecorded part of the script, we discussed about sell-throughs are still extremely strong at our top 3 but we are seeing some areas where the prices have increased slowdown in unit sales, and we're seeing some areas not affected. And no one, I think, understands what the impact will be. The prices have gone up across the board. We're seeing it at the retail.

So I think for right now for -- again, John will jump in, just taking a very cautious look. Our goal is profitability, generate cash, a lot of cash, look for opportunities in this market. And if things get settled in that tariff world, we're ready to jump on anything and jump in any white space that retailers need. But what we won't do is build inventory to try to achieve a sales goal that we don't know if it's achievable based off all these unknowns.

Yes. And I think Stephen said most of that there. The thing to keep in mind with us, to the extent that Q3 is our biggest quarter every year, it's our biggest quarter every year because of our FOB business. And for the FOB business to really be flying at full tilt. It's going to require all the customers to have 100% confidence that they know what's going on in the marketplace.

So you can extrapolate back from there, I think as you listen to different retailers talk about how they're thinking about the consumer in the back half and transfer that over in terms of what that means for they're making commitments today to pick up FOB product months and months from now. So I think that gives you a little bit of a sense as to what you're asking about.

Last one, and I hate to end on such a potentially negative note but for the toy category, how should investors think about the potential for empty shelves in the holiday period, given the challenges in selling toys in the current environment?

I do think, again, an opinion, this is not a -- with statistics. I do think that retailers will jump heavily into toys in the later part of the year and really just look for picking the toys that are selling through well and not taking any risk on really big TV advertised items.

I think being cautious during this period and selling, they call it, the [ raise or erase ] products are things that everyone works with and play with and also have the right price point at a lower price point is where people will succeed.

Again, this is just an opinion, and I think we'll have a better understanding when you see Halloween come along and the sell-throughs on Halloween because we know the buy-ins on Halloween. We know where it was paused during the second quarter. We know where the cancellations are. We've seen everyone scramble aggressively to get right back on in more Halloween product knowing that the tariffs aren't the 145%.

So I think it's going to be kind of a wait and see during the Halloween period and that sell-through. And then JAKKS is 1 company that could react very quickly. In addition, remember, about 70% of our business is on an FOB basis. So things are planned much more in advance than what you would on a domestic basis.

Our next question comes from the line of Eric Beder of Small Cap Consumer Research.

I wanted to talk about the FOB situation. So where are -- I know, obviously, in the quarter, a large period where FOB didn't occur, how quickly did it ramp up at the end of Q2? And you talked about the potential to move more FOB internationally kind of where does the baseline there? And I know that there are a lot of smaller players, so it's not as easy to do as you do in the U.S. with kind of the big 3 players. How should we be thinking about that opportunity also.

So for the international side, as I stated earlier, and it was in our prerecorded materials, is international, we're both heavily, heavily FOB as well as domestic international in order for us to achieve upside that you've seen, I think it was about 40-plus percent growth for the first half of the year. With that, we are bringing in domestic goods on the top key items internationally, that's where you see the inventory higher year-over-year, lower in the U.S. by again, 8% higher internationally.

But the sell-throughs and our new distribution centers that we implemented over the last year have really achieved the growth that we needed because a lot more of the growth internationally is coming from the smaller customers than from larger customers by each of the territories. So we have managed this well.

As we told you, we have our COO that moved there a couple of years ago, and he's doing a terrific job. At the same time, keeping inventory lean, as again, cash is king. And I think with our new bank line and as well as building cash in this environment, there will be some other opportunities that instead of waiting to jump on, we could probably pounce on quickly.

And I think we're seeing a lot more activity with companies wanting to either move away from their business or put their hands up to the tariffs and all the uncertainties that are happening. So we're kind of excited about that. Again, could you touch on the first question?

He wants to know how it ramped.

The first question was how quickly did you reramp the FOB in Hong Kong after the period with the tariffs where a lot of the orders were pulled.

So we had some of the inventory that we were going to hold that we kept in a bonded warehouse or a free trade zone in order for us to wait for the tariff to diminish somewhat. We were able to do that. And then with our factories, as we've mentioned earlier, how close we are as a company to them, we were able to reach out to them both in China and Vietnam and so on and be able to implement immediate manufacturing with the way that the manufacturing plants work in Vietnam, it's different hours in what you can work in China. So you're able to have various shifts in Vietnam versus 1 shift in China.

So we just manage it as we did from inception with JAKKS very hands on, and works very quickly with our factories. The factories want the manufacturing as much as JAKKS wants the sales. So everyone is working hand in hand to get through this period of time to help on another. Remember, if we have slower sales, the factory has slower sales. They need to then redirect their resources and employees and do layoffs as everyone you've seen, many have done it in the U.S. So we're working hand-in-hand to help them, and they're helping us.

Let me give you a theoretical question. So we keep the tariff levels at the kind of where we are at 30%, 20%, how long does it take you and your partners in both manufacturing and retail are kind of normal -- how long do you think it takes to normalize this so that the consumer -- the impact is spread or further and you kind of maximize the ability to make higher margins and higher returns on that.

Eric, I think that's a terrific question because we are moving forward with knowing the tariffs where we see it today whether they go down, that would be lovely for everyone involved but we need to run our business moving forward without having uncertainty. The retailers want to have uncertainty as much as they can. And the manufacturers the factories want uncertainty -- they want certainty. So what we're doing now is planning ahead '26, '27 with the tariff, working out cost reductions where we can in the areas that we have our business, some of our legacy items. We'll have some of the cost reductions.

And then our new items will have the margin that we always see fit in order to achieve the right goals for our stockholders and shareholders alike. And the customer, the retailers are going to work with us as they see. We all take a little bit of a hit with some of the tariffs, price increases will take a hit to the consumer, but this may be the new norm, and we're not going to sit and dwell on it and wait and wait and wait. We are acting and reacting quite fast on this. We have teams in Hong Kong right now as we speak and we are just moving forward with the tariff in mind. That's the way -- that's the new norm. If it lowers, terrific. If not, that's the way JAKKS will be.

Great. Final question. You've done a tremendous job with the financials in terms of the debt, in terms of cash. When you look at it, I would assume that you are probably seeing a lot of people now look to your financial strength and say, "Hey, these guys should do our license or we should sell this brand here." I know that your -- every day is a new experience kind of here but how do you see that as a potential longer-term opportunity to continue to pick up a, either great licensed brands or potentially pick up your own brands?

The licensors we're seeing it now. They're getting quite nervous based on the forecast being lowered by the industry that holds licenses. And again, our licensors or the large entertainment companies and so on, they need to generate revenue and profitability for their company and their shareholders, and they see it with JAKKS. We don't just need IP from them. We work with them jointly and as a great joint relationship. We worked with them on a product line called ily, which i love you 4EVER. And it is a wonderful line of product, it's doing terrific. It's now built overseas, doesn't have a huge, huge amount of the actual IP involved at the caricatures. It has the clothing of the caricatures.

We did a line of -- called Style Collection, which is the Disney Princess Style Collection, which is Role Play for kids and it's doing extremely well both in the U.S. and in Europe. So we have that, and we have a lot of other licensors coming to us saying, "Hey, we're seeing some of our other companies having financial issues. Do you think you could jump into this category for next year?" But what we're doing is we're going to be very cautious of what we pick and choose based on the new environment with higher prices of tariffs.

So there's a lot of opportunities. It seems like a little bit too much right now. Again, as I mentioned, the best thing is we have, we have no debt, generating great cash. We have the dividend, and we have the ample time to look and see what's going to go on, the next direction we should go for JAKKS to enhance the business itself.

Thank you. I would now like to turn the conference back to Stephen Berman for closing remarks. Sir?

Ladies and gentlemen, thank you for the call today. We appreciate it. We're very direct and open about where we think JAKKS is going in our industry, and we're excited to get through this year and move into next. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.