Jakks Pacific Said to Suspend Toy Sales to Kmart

Toy maker Jakks Pacific Inc. has suspended sales of its products to Sears Holding Corp.'s Kmart chain over worries about its financial health, according to people familiar with the matter.

Jakks Chief Executive Stephen Berman said on a conference call Thursday that the toy maker decided to stop shipments to a "major U.S. customer that is experiencing challenges" to minimize risks to the company.

"This decision was difficult, but we felt it was the right thing to do," said Mr. Berman, who didn't disclose the retailer's identity. People familiar with the matter identified the retailer as Kmart.

Mr. Berman said the decision hurt Jakks Pacific's performance during the recent quarter, when sales fell 10%. Jakks' shares fell 15% Thursday to $6.95.

Kmart said it has an active and ongoing relationship with Jakks, and that it continues to receive shipments of Jakks products and the products remain on its store shelves.

"We intend to continue working with them in 2017," Tricia Perrotti, Kmart director of brand management, said in a statement. "We want our customers and members to know that we plan to offer a wide variety of the hottest toys, games, and exclusive deals in our stores."

It could be a troubling sign for Kmart ahead of the all-important holiday season when about 50% of all toy sales are made. Kmart was once one of the top toy retailers in the U.S., but its share of the market has dwindled far below the top retailers, such as Wal-Mart Stores Inc., Toys "R" Us Inc. and Amazon.com Inc.

Santa Monica, Calif.-based Jakks, with nearly $750 million in sales last year, ranks as the fifth largest U.S. toy company by sales. Among its hot toys are collectible figures called Tsum Tsums based on Disney characters, a remote controlled Teenage Mutant Ninja Turtle toy being sold at Wal-Mart, and large-size Star Wars action figures.

The move comes as Sears Chief Executive Edward Lampert earlier this month had to tamp down concerns that the Kmart chain was about to close. He said in a blog post that there had "never been any plans to close the Kmart format," and said that the company's focus on profitability means that Kmart will end up with fewer stores than the 700 it operates now.

This year, the company has announced plans to shut 130 Kmart stores, adding to the more than 400 locations that have been closed in the last five years.

Other toy companies have also become hesitant to deal with Kmart, these people said. An executive at another U.S. toy company, who declined to be identified, said it would only sell to the chain now if Kmart pays cash upfront. "Everyone is extremely cautious with them," the executive said.

Gerrick Johnson, an analyst at BMO Capital Markets, estimates that Kmart's share of the U.S. toy industry is now around 2%. While the retailer's decline isn't a major concern to the global toy industry, he said it was a key concern among many toy manufacturers at a recent toy fair in Dallas. "The number one question I heard was: should we be shipping to Kmart?" Mr. Johnson said.

Sears Holdings which booked a net loss of $866 million on sales of $11.06 billion in its six months ended July 30, has been struggling with declining sales and traffic at its locations. The company had about $276 million in cash, and said it would get $300 million in additional debt financing from Mr. Lampert's hedge fund.

Last month, Moody's downgraded its rating on Sears' speculative grade liquidity rating, noting the company will continue to rely on external financing and selling assets to fund its operating losses. Moody's estimated the company's operating cash flow will be negative $1.5 billion this year.

Write to Paul Ziobro at [e-mail] and Suzanne Kapner at [e-mail]

(END) Dow Jones Newswires

October 20, 2016 20:45 ET (00:45 GMT)

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