Friday, October 19, 2007

LeapFrog Pre-Announces: Still Waiting for Q4

LeapFrog (LF) announced preliminary results and, well, not much to be happy about and not much to be upset about

LeapFrog said it expects to report net sales for the third quarter ended September 30, 2007 of approximately $143 million and a net loss of approximately $(0.05) per share. The Company expects to report cash and investments of approximately $95 million and inventories, net of allowances, of approximately $110 million at September 30, 2007, consistent with LeapFrog's plan.

President and CEO Jeffrey G. Katz stated, "The sales performance of our portfolio overall was weaker than we expected during the third quarter, largely driven by declines in legacy products. Reported weakness in the retail economy and lingering bad news regarding the toy sector certainly hasn't helped. However, we are seeing good results with several new products, such as ClickStart(TM) My First Computer, and our Leapster(R) handheld educational gaming business continues to perform well. Our new FLY Fusion(TM) Pentop Computer performed at plan for the third quarter and shipments should increase during the fourth quarter driven by on-air advertising, which began in October. Inventory levels and gross margin continued to improve in the third quarter."

"Fourth quarter is typically our strongest and we expect to see sales improve from third quarter levels," Katz continued. "Nevertheless, due to third quarter weakness, we expect that full year 2007 revenues will be down by approximately 10% to 15% compared to 2006. As we've said before, 2007 is a 'Reload' year and we are on track to roll out a substantially new product line next year as planned. We will host our first-ever Investor and Analyst Day on Thursday, November 8 and we hope investors will see for themselves the progress we've made and the implications for next year and beyond."

Kinda of like eating a so-so meal at a cheap restaurant, when you leave you think "could have been better but at least I did not pay too much." That is the way I feel about LeapFrog. Shares make up .5% of the portfolio and are there for a little risk and adventure. If it works out, we do really well, if not, we don't lose much of anything. For this company, Q4 is the whole ball of wax. If things do not get better then, we cut and run. If they improve, we hold on more.

I have seen the new products and they are great. I think LeapFrog will come through this just fine. Their items are good quality and a little pricey (a good value though). My guess is folks are holding off making the more expensive purchases to see what types of bargains will be had closer to Christmas. Let's not forget Toys R'Us gave LeapFrog top billing for it's "Hot Toys For Christmas" list.

People may also be a little freaked out about the whole toy recall thing now and even though Leapfrog has not had a single toy recalled, when folks are worried, nobody is safe.

Stay tuned...

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