LeapFrog's Upside Trend Persists


LeapFrog Enterprises Inc. (LF) reported earnings of 60 cents per share in the third quarter of 2012, which breezed past the Zacks Consensus Estimate of 41 cents and the year-ago quarter earnings of 25 cents per share.

LeapFrog’s net revenue of $193.1 million jumped 28% year over year and also surpassed the Zacks Consensus Estimate of $174 million comfortably. Foreign exchange had an unfavorable impact of 1%. Revenue was mainly driven by a surge in demand for both LeapPad hardware platform, and content and introduction of new products like LeapPad2, LeapsterGS and the Touch Magic toy line. Shift in some sales of the fourth quarter to the third quarter also boosted sales.

Quarter Highlights

LeapFrog experienced net revenue growth on a worldwide basis. In the U.S. segment, net revenue leaped 26% to $116 million. The segment revenue was driven by robust growth in the U.S. Point-of-sale system and solid sales of LeapPad, LeapPad2 and content. While in the international segment, net revenue shot up 36% to $34.9 million, driven by double-digit growth in Point-of-sale system in core markets.

Net revenue from multimedia learning platforms and contents line soared 48% year over year. LeapPad's cartridges and accessories line enjoyed strong revenue growth, partially offset by lower revenue from the gaming platform. In contrast, sales of the learning toy line remain sluggish as the overall toy industry sales in the U.S are down by about 6%.

In the quarter under review, gross profit expanded 25% year over year to $77 million, whereas gross margin contracted 100 basis points to 40% year-over-year, due to higher inventory allowances, partially offset by lower trade allowances and discounts, coupled with higher sales volume. Operating expenses grew 10% on a year-over-year basis to $40 million as selling, general and administrative expenses, and research and development costs increased.

Financial Highlights

At quarter end, total assets were $400.5 million compared with $302.0 million at the end of the year-earlier quarter.

As of September 30, 2012, shareholders’ equity was $265.7 million versus $197.8 million as of September 30, 2011.

Based on strong third-quarter results, retail point of sale trends, and inventory position, management raised its outlook for 2012. The company now expects earnings per share between 75 cents and 81 cents from the previous expectation of 61 cents to 66 cents. Net sales are estimated to increase 18%–21%, up from the previous expectation of 13%–15%.

Our Take

We remain upbeat about the company’s performance in the holiday season with solid retail and marketing plans, good point-of-sale momentum and an optimistic outlook. The company plans to increase its advertising expenditure by 20% to 25% to attract customers during the holiday period. Moreover, with a record of nine consecutive quarter beats and increased guidance for 2012, we expect estimates to move up in the coming days. The Zacks Consensus Estimates for 2012 and 2013 are pegged at 78 cents and 79 cents, respectively. However, lower consumer spending amid a tepid economy and stiff competition remain causes of concern.

LeapFrog currently, retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are maintaining our long-term Outperform recommendation on the stock.

Mattel Inc. (MAT), one of LeapFrog’s peers, reported third-quarter 2012 earnings of $1.04 per share outpacing the Zacks Consensus Estimate of 99 cents as well as the year-ago quarter level of 86 cents. Solid performance in Other Girls brands and margin expansion led to the beat.

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