LeapFrog Earnings Disappoint

LeapFrog (LF) saw its sales fall 17.8 percent in the second quarter, while its loss grew to $28 million vs. $25.7 million in the second quarter a year ago.

Sales fell to $56 million in the quarter, down from sales of $68.1 million in the same quarter last year. Low sales of discontinued products contributed to this drop, the company said.

LeapFrog is focused on the new products it will begin selling this holiday season, and feels they will rejuvenate its sales. They cut their advertising costs in half, down to $4.2 million for the quarter, since they plan to spend more on advertising in the fall when new products hit shelves.

"The first half of the year and the second quarter came in on plan," said Jeffrey G. Katz, president and chief executive officer of LeapFrog. "We continue to focus on better execution at retail while placing a big emphasis on our new product launches this fall and in 2008. We're on track with our plans to relaunch our once substantial reading business next year, grow our successful educational gaming business, and strengthen our infant business as well. We have also begun implementing a series of initiatives to ensure that our growth over the next few years translates into solid earnings. These initiatives, which are geared toward driving operational efficiencies and reducing costs, will begin to take effect immediately and will be realized over the next 12 months."

Wedbush Morgan Securities analyst Sean McGowan wrote in a note to investors on Monday that the recent decline in LeapFrog shares has made the stock more attractive. "We believe the recent price decline has eliminated much of the downside risk, and that even minor whiffs of encouraging news in the coming months could lead the stock higher."

As I have said before, this Christmas is make or break and LF is such a small part of the portfolio, we will wait and see what happens. The new products are very good and early reviews have been overwhelmingly positive. I think the main thing to be worried about is not necessarily are they are good or will they get accepted, but whether retail shoppers are in a position to spend the money for them.

Disclosure: Author is long LF.

LF 1-yr chart:

Comments

[Al Capital:]

Todd, one can learn a great deal about a company by tracking their job postings (all levels), and studying how they are strategically filling critical posts. Perhaps you already do that, as most investors should. In the case of Leap Frog, there has been significant hiring over the past few years, and the positions they are hiring for are truly critical for the success of the business. Did they hire the right people? Unfortunately, I was not there for the interviews, but one can make some deductions or inferences from the job descriptions. That way you can basically shadow the company's execution strategy, albeit through the veil of HR.

Bill Gates did the same with Google (and he should have because Google was hiring from the same Microsoft pool).

I don't want to do your homework for you Todd, suffice it to say that I was not surprised by the recent results. Can they adjust or correct? Maybe, but they have been trying to do that for some time now.

Disclosure: I do not hold any position in LF.

2007 Aug 02 11:56 PM

[Todd Sullivan:]

Al,

go to my blog and read my history on LF. I am very bullish on it long term and own shares in it..

2007 Aug 07 04:41 PM