Friday, November 2, 2007

LeapFrog Beats Estimates

The LeapFrog (LF) turnaround is shaping up nicely in a very challenging retail environment.

LeapFrog reported a Q3 net loss of $2.8 million, or 4 cents per share, compared with a net loss of $49.7 million, or 79 cents per share last year. Sales were $144 million, down from $184.7 million a year ago. Analysts had expected a loss of 5 cents per share on revenue of $143 million. The company said its gross margin improved to 42.2% of sales vs. 26.6%, helped by lower charges for excess and obsolete inventory and purchase-order cancellations. Looking ahead, Leapfrog said it 2007 revenue will be 10% to 15% below 2006 and it estimates a significant improvement in gross margin and net losses for the year.

Inventory management has also improved as inventories net of allowances, were $110.3 million at September 30, 2007, compared with $73.0 million at December 31, 2006 and $154.5 million at September 30, 2006.

The Outlook?
"We're positioned well to enter the "Grow" phase of our strategic plan with improved gross margins, a strong cash position, and prudent inventory levels. We expect continued improvements in our business fundamentals over the next 12 months," said Bill Chiasson, chief financial officer.

LeapFrog expectations for full year 2007 results are:

-- A revenue decrease of approximately 10% to 15% compared to 2006.
-- A significant improvement in gross margin compared with 29.3% for 2006.
-- A reduction in overall operating expenses from $271.7 million for 2006.
-- An improvement in net loss over 2006.
-- Cash and investments of approximately $100 million at December 31, 2007.

These results were far better than expected and Leapfrog may actually be benefiting from the recent lead filled recalls at Mattel (MAT). Last month I wondered "is anyone going to buy any toys from Mattel (MAT) this year given the recent problems they have had? If the answer is no, you eliminate 20% of the list. Not for nothing but I would rather not have my Christmas present to my sons cause them brain damage but, that is just me."

It may just be that other folks are thinking the same way as me to date. LF has been immune to the lead problems to date. Now, I know it is only a penny better that the estimates but, I was expecting worse not knowing how the consumer would react and one must be very happy with these results.

This is encouraging news to say the least.

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