LeapFrog Turnaround Still Ahead of Schedule

LeapFrog (LF) really is doing a nice job here, considering the headwinds in the economy. The company reiterated its current expectations for full year 2008 results:

• New products introduced in 2007 and 2008 are expected to comprise of 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%-15% year-over-year;
• The company expects a nominal loss for the year;
• The first half results are expected to be weaker than the first half of 2007, and the second half results are expected to show substantial improvement over the second half of 2007, reflecting the impact of new product introductions and cost reductions; and
• Cash and investments are expected to be approximately $100 million at year-end.

"We entered 2008 expecting the first half to be weak ahead of new product launches. First quarter results were slightly better than our expectations due primarily to the continued strength of our Educational Gaming business, led by our Leapster product," said Jeffrey G. Katz, president and chief executive officer of LeapFrog. "More importantly our 2008 product launches are on track. We begin shipments of our Tag reading system in less than two weeks and our new educational gaming systems, Leapster 2 and Didj, will ship this summer. We expect that these new products will contribute to significant sales growth and margin improvement in the back half of the year."

The key here is that the new products, which are awesome and have received excellent reviews, are not even fully in the sales channel yet.

I am sure that a certain part of this is that unlike the Mattel (MAT) and Hasbro (HAS) offerings, lead induced brain damage is not an issue for kids playing with them. That, and the fact that for a kid to actually break a Leapster takes a herculean effort.

Now LeapFrog is an insignificant portion of the portfolio and is there simply because of the great products they make and because people like Marty Whitman and Larry Ellison are investors. Eventually this will pay off...

Disclosure: Long LF.