That said, I am going to pack my arguments into compact Pokeballs, challenge my nemesis, and hurl my best shots his way.
History, I choose you!
I'm hearing the bears chanting out "fad" in unison. It's understandable on the surface. It's hard to tell the everlasting Barbie from an in-and-out Furby. But even that's not right. A Furby, and even a Barbie despite recent CD-Rom efforts, is a stagnant plaything. Pokemon comes with textured animated story lines. We can roll with that. Branded entertainment has its long-term winners (Star Wars, Disney) and losers (Teenage Mutant Ninja Turtles, Power Rangers). Will this end badly?
With Pokemon we have a historical cheat sheet -- Japan. Pokemon was introduced there in 1996. Today it is still going strong. Stateside, we are two years behind. Europe, freshly smitten, is lagging by three years. The Pokemon Gold and Pokemon Silver cartridges that will add another hundred new pocket monsters to 150 existing ones won't be released here until next year, but it is selling briskly in Japan today.
So 4Kids has another two holiday seasons to cash in on Pokemon here, and another one after that overseas. At least. Let's not fill ourselves with patriotic bravado by thinking that we're more finicky than the Japanese consumer. The only three feasible video game console platforms (Nintendo, Sega, and Sony) all hail from Japan. In this genre, we follow.
Last month's big screen debut also bodes well for the Pokemon franchise. It has grossed just over $82 million at the box office. A fresh shipment of promotional cards being sent to movie theaters this week should give the flick a decent showing over the school-free holidays. Still, even if the release fades from here until its huge video market push next year, it clearly has proven to be a bigger draw than the Mighty Morphin' Power Rangers movie, which grossed just $37.8 million back in 1995. It's just $19 million shy of becoming the biggest non-Disney animated feature of all time. Not too shabby for a no-frills, low-budget release.
Financials, I choose you!
As the licensing agency for Nintendo outside of Japan, and Pokemon outside of Asia, it is important to have sober expectations of 4Kids' potential. Pokemon has grown into a $6-billion-a-year business, but 4Kids is naturally relegated to thin slices of the action. However, that's a lot of action. In the U.S. alone more than 90 companies have signed on to roll out everything from Pokemon marbles to vitamins to linens. A lot of these deals won't even begin to kick in until next year, but the upside is already beginning to build.
For the September quarter, 4Kids reported sales of just $16.8 million. Peanuts, right? Wrong. 4Kids has minimal overhead. It's a dealmaker. It's a fiscal Cupid. The company's ability to shave expenses to the bare minimum finds a lot on the top line making it all the way to the bottom line. Net margins -- yes, net -- were a stunning 40.5% on the quarter. You thought Microsoft's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> margins were good, didn't you?
But the real beauty here is that 4Kids is still a small company. Even after a pair of stock splits this past year, there are only 12.7 million shares outstanding. Huge profit margins squeezed into a small base of shares outstanding make for a cozy one-two punch. That is why the company earned a stunning $0.54 a share on only $16.8 million in sales in the third quarter. That produces a run-rate of $2.16 a share. So, if things continue at the September pace, you will find a dynamic, high-margin company selling at less than 17 times earnings.
But we all know nothing remains constant. Actually, things will get even better.
Tomorrow, I choose you!
Since September, how many times do you think the Pokemon wares have been sold out and restocked? How many new deals have been signed? The holiday-rich December season is going to be a stunner on the upside.
While the company has already booked many minimal royalty guarantees, it should be obvious to any toy shopper that Pokemon wares have probably lapped the minimums many times over. The royalties are piling up on the "In" box right now.
Then we have Y2K. Pokemon is the top-rated children's television show, and that won't fade anytime soon. With Silver and Gold for the Nintendo Color GameBoy and Pokemon Stadium for Nintendo 64, next year is going to be amazing for Pokemon on the gaming front.
The card trading "frenzy" that began this year also has more legs than many might expect. The Wizards of the Coast Pokemon cards have evolved into sanitized role playing not too different from the Magic and Dungeons and Dragons games that have been popular over the past few decades.
But let's consider the trading aspect itself. When I was young, I traded and collected baseball and football cards. The players were my heroes. Nowadays, athletes have become suspect role models. Heinous deeds and flat-out snobbery are commonplace. I prefer that my sons collect fictional characters who have a righteous message.
I know, I just lost some points for taking to the soapbox. Still, it's refreshing to see an entity attract kids with the promise of action where the combat is actually sanitized and used as a platform to preach important lessons on teamwork, loyalty, and perseverance.
But if that doesn't matter, and you'd prefer more abrupt fare like wrestling, no problem. 4Kids is the licensing agent for WCW worldwide too. Like Pokemon, WCW is a television and video gaming sensation. It provides 4Kids with an interesting cross-section of hot trends. As a kid grows out of Pokemon, WCW might be there to jar loose the innocence. Next step? James Bond -- another 4Kids licensing property.
Al Kahn, who probably knows the "fad" lifeline better than anyone, since he was the one behind the Cabbage Patch Dolls, heads up the company. He has assembled a wonderful collection of characters. Last year, before Pokemon became a household word, 4Kids was still profitable. It's a tight, debt-free ship Kahn is running, and its newfound reputation as a success magnet is helping it land new properties that will grow the company further, ideally making it fad-proof down the road.
This Week's Duel
Related Links