Kudos to Leap Frog on Turnaround

| About: LeapFrog Enterprises (LF)

LeapFrog (NYSE:LF) released Q4 and full year results on Monday and they show the path the company is on is the right one.

The Numbers:

  • 2007 sales totaled $442 million, a decline of about 12%.
  • Gross margin improved by 10 percentage points to 39% for 2007.
  • Net loss for the year was $1.60 per share, marking a significant improvement over the $2.31 loss for 2006.
  • Inventory reduced: own by 28% and retailer inventory by approximately 20% to $52 million.
  • Ended the year with over $100 million in cash and investments (currently at $130 million).
  • Excluding the impact of products being phased out, sales of all other products were up 6% for the year.
  • Debt remains at zero.
  • 2008 will be the largest product launch in history

CEO Jeffery Katz provided an outlook for 2008 during the earnings call:
As we’ve stated in our press release this afternoon, our current outlook for 2008 is as follows: new products introduced in 2007 and 2008 are expected to comprise approximately half of 2008 net sales; net sales are expected to grow at an annual percentage rate in the mid to high teens; gross margin is expected to continue to improve; selling, general, and administrative expenses and research and development expenses are expected to decrease approximately 10% to 15% year over year; cash is expected to be approximately $100 million at year-end; and we expect a nominal loss for the year.

The second half of 2008 results are expected to show substantial improvement over second half 2007, reflecting the impact of new product introductions, while first half ’08 financial results are expected to be weaker than first half ’07.

One has to give Katz and company kudos for these results. They are engineering a turnaround in a very difficult retail environment and the new products are getting rave reviews. The main thing to point to is their management of inventory not only with themselves but at retailers like Target (NYSE:TGT) and Wal-Mart (NYSE:WMT). A 10% margin increase year over year is also a sign of outstanding management. Cash levels are good and debt is non existent.

The turnaround will be a bit longer than expected and hoped for, simply because of the current environment, but the fact that they are expecting improved results does bode well. At $5 to $6 a share, a small speculative position is worth it, as to date Katz has delivered on all his stated plans since taking the helm at the company.

Disclosure: Long LF, WMT.

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