Educational toy manufacturer LeapFrog posts disappointing fourth quarter earnings

(Image courtesy of LeapFrog Enterprises, Inc.)
(Image courtesy of LeapFrog Enterprises, Inc.)

Citing a difficult retail climate, Emeryville-based educational toy manufacturer, LeapFrog Enterprises, Inc., (NYSE: LF) posted disappointing results Wednesday for its fourth quarter earnings. The toymaker, known for its educational entertainment products reported that the company’s consolidated net sales were down 5 percent, U.S. segment net sales were down 9 percent and net income per diluted share was down 4 percent.

“2013 was a challenging year to be in the kid business, especially in the U.S.,” LeapFrog’s Chief Executive Officer John Barbour, said during the company’s fourth quarter earnings call on Feb 12.

“I’ve been in the kid business for over 25 years and 2013 was one of the toughest holiday seasons I’ve been through,” he added.

For its fourth quarter earnings, LeapFrog had projected revenues between $203 million and $223.1 million — not even close to the market’s projections of $259.9 million. The actual earnings were even lower, with fourth quarter sales at $186.7 million, down 24 percent compared to $244.7 million last year. Net income came in at $63.9 million, or 90 cents per share, compared to $62.3 million, or 89 cents per share year-over-year.

The company expected to end 2013 with revenues of between $570 million and $590 million, or earnings per share between 36 cents and 46 cents.

Instead, consolidated net sales for 2013 came in at $553.6 million, nearly $20 million below projections. Earnings per share for the year were $1.19 compared to $1.24 for 2012. On a non-GAPP basis the company reported earnings per share of 30 cents compared to 56 cents for 2012. The adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the full-year 2013 was $65.8 million, down 29 percent compared to $93.1 million a year ago.

With more than two-thirds of the company’s sales coming from the U.S. market, LeapFrog felt more of an impact than competitors who do a larger share of business in the international markets, Barbour said.

In the U.S., net sales were $123.7 million, down 30 percent from 2012.

“We’re disappointed with our financial performance,” he said. Barbour added that a number of factors influenced the decrease in sales, including the lack of having a LeapPad for less than $99 on the market until August, firmware issues with the LeapPad Ultra and the delayed launch of the company’s new app store.

“We were unable to build on the 28 percent full-year net sales growth that we achieved in 2012,” Barbour said. He added that despite the substantial market challenges, the company delivered its second-most profitable year in the last 10 years.

On the company’s third quarter earnings call, he stated that the company would perform well during the holiday shopping season, but cautioned that 2013 wouldn’t be akin to successful shopping seasons of the past.

LeapPad2 (Image courtesy of LeapFrog Enterprises, Inc.)

That caution turned out to ring true for the toy manufacturer.

Running up to the fourth quarter, Barbour had been optimistic. LeapFrog’s sales were up 9 percent for the year with quality inventory, more retail shelf space and additional promotional support, Barbour said. However, aggressive price promotions driven by the soft market caused the company to take a hit in sales, he noted.

Overall slow retail sales in the U.S., led to deep discounts from retailers, including on the company’s top-selling tablet — the LeapPad 2 — which underwent a price cut from $79 to $39. This was a 60 percent reduction from its holiday 2012 price of $99, Barbour said.

Other factors contributing to the drop in sales included a compressed holiday period — six fewer shopping days between Thanksgiving and Christmas — and a more competitive tablet market.

Many retailers expanded their tablet sections for 2013 with some entrants aimed at younger children, the very demographic that LeapFrog targets, which negatively impacted a portion of sales, Barbour said.

Even with all the retail and competitive challenges, the company sold a record number of its popular LeapPad tablets in 2013. Sales grew 11 percent and LeapFrog was the market leader in children’s learning tablets in most of their major markets for the third year in a row, including the U.S. and the U.K., Barbour added.

The company’s products also received 18 awards in 2013, including the Toy Industry Association’s People’s Choice Toy of the Year award and Educational Toy of the Year. In total, LeapFrog’s products have received more than 1,250 awards and inclusions on top toy lists in the company’s nearly 20-year history. In 2014, the company plans to expand and refresh its content libraries, adding new cartridges, books and apps.

There was a small silver lining to the company’s fourth quarter woes. Compound annual net sales growth rate for the last four years was 10 percent, and the company generated $78.9 million in operating cash flow.

“(We) ended 2013 with more cash on hand than we’ve ever had at that time of year and with no debt,” said Ray Arthur, the company’s chief financial officer.

In March 2013, the company launched a new multimedia line and continued to expand into international markets, which have proven to be profitable. The international share of LeapFrog increased from 27 percent to 30 percent. Net sales were up 6 percent and grew in every key international market, Barbour said.

The company’s latest international expansion in France did particularly well, as its sales there were up over 40 percent.

Drawing on France’s success, the international team is working on market expansion opportunities for 2015 and beyond, Barbour said.

“Many countries around the world are focused on improving education for their children and we believe this opens significant opportunities for LeapFrog,” Barbour added.

Strategic priorities for LeapFrog’s 2014 outlook include diversifying their portfolio of products, innovating current categories, geographical expansion and significant infrastructure investments to help the company become more efficient, Barbour noted.

“Despite a disappointing performance in 2013, I believe we’ve made strong progress over the last few years on our journey to transform LeapFrog into an educational entertainment company,” Barbour said. “And we have lots of exciting opportunities to help children achieve their potential ahead of us.”

Looking ahead, the company said it expected sales for the first quarter of 2014 to fall in the $45 million to $50 million range, compared to $83 million in the first quarter of 2013. The company anticipates losses of 20 cents to 23 cents per share, or 5 cents on a non-GAAP basis.

For the year, the company expects sales to come in between $554 million or $580 million, and earnings per share of 18 cents to 25 cents, or 30 cents on a non-GAAP basis.

At the 4 p.m. close of trading on the New York Stock Exchange, shares of Leapfrog were down 8.95 percent to close at $6.41.

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