Have the days of growth at LeapFrog (NYSE: LF) run out? Last night, the educational toy maker posted a wider first-quarter loss as net sales dipped by 7% to $71.6 million.
While a toy maker can usually be afforded a good quarter's sleep after the pivotal holiday season, things are different in this case. After last year's debacle, Wall Street was looking to see if this one-trick pony could regain its stride; however, with consumer sales dipping by 22% and gross margins falling from 53% to 44.6% over the past year, it's not looking good.
The beauty of LeapFrog's product lines was that successful hardware sales would spawn a perpetual stream of software sales. The company claims that the number of software purchases per system sold continues to grow. It also claims that sales at the retail level were up 20% at its four largest customers.
But why do the March results paint a much grimmer picture? The only explanation is that retailers have held back on their orders because they were overstocked after the holiday rush. That's not a very comforting thought -- especially if this pent-up demand isn't rewarded with huge top-line hikes through the rest of 2004.
LeapFrog is looking to earn between $1.18 and $1.28 a share this year. Net sales should come in between $770 million and $800 million. And, yes, gross margins will improve. Since net sales clocked in at $680 million in 2003, the expected improvement seems to bear out the company's case for this past quarter being a fluke. However, after last quarter's $1.20-a-share earnings, growth investors might be wincing -- especially since the company had forecast as much as $1.51 per share back in February.
Meanwhile, the company's expansion into lower-margin toys is a mixed blessing. Yes, it's a good way to grow sales and teach this pony some new tricks. However, shareholders will need to temper their growth expectations accordingly.
That's why the traditional toy makers like Mattel (NYSE: MAT) and Hasbro (NYSE: HAS) have to be given some serious consideration. Their wider toy lines provide them with a less risky way to invest in the industry. Hasbro has been a solid recommendation of both Motley Fool Stock Advisor and Tom Gardner's Hidden Gems.
Sure, when an upstart with a hot toy like LeapFrog enters the scene, it's going to be a speedy jumper, but you know how the fairy tale about the hare and the turtle goes. If you don't, let me clue you in on the fact that there is no frog near the finish line -- much less a LeapFrog.
Are LeapFrog toys really educational? Can a child be stimulated to the point where it becomes counter-productive? All this and more -- in the Parents and Expecting Parents discussion board. Only on Fool.com.
Longtime Fool contributor Rick Munarriz has a 5-year-old son who loves his LeapFrog toys. However, Munarriz does not own shares in any of the companies mentioned in this story.
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