LeapFrog Is Not Green

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Let's see if we can get LeapFrog (NYSE: LF) to change its corporate moniker. Moribund results over the past few years find the shares doing anything but leaping. Frogs are also green, and it's been awhile since the company's income statements have looked that way.

The company's fourth-quarter report last night was abysmal. A loss of $0.73 a share. Net sales plunged 26% lower to hit $182.8 million. The bad news was expected. Investors know they are looking at a turnaround situation here.

The poor showing was simply the rotten cherry on top of the melted sundae that was 2006. Net sales fell. Operating expenses surged. Gross margins shrank.

A major reason for the margin shrinkage is that LeapFrog was busy clearing out dust-collecting toys like its disappointing FLY pentop computer. The company is bragging about reducing its inventory levels to their lowest point since 2001. That's nice, but I'll let you in on a little secret that the company didn't bring up last night: Net sales are also at their lowest point since 2001.

But it's easy to bash LeapFrog when it's down. Now let me tell you why I think things are going to get better: I like CEO Jeffrey Katz. He came aboard last summer, so it's not as if we can blame him for last year's malaise.

I can appreciate someone who knows how to handle a mop, be blunt about the dirty floor he has to mop, and point out that wet floors can be slippery after he's done.

New products are on the way later this year, including a second shot at redemption for the FLY with the FLY Fusion PenTop Computer. Net sales will dip again in 2007, but at least operating overhead will be kept in check and gross margins should improve.

If you want a safe toy company, you don't belong here. Mattel (NYSE: MAT) and Hasbro (NYSE: HAS) are the best fits for your portfolio. If you like your toy makers small, at least JAKKS Pacific (Nasdaq: JAKK) is profitable.

However, LeapFrog should be tempting to turnaround investors. It may just take one more hit product to send shares climbing again, and the pipeline is never dry at LeapFrog. The new FLY Fusion looks sleeker than the original. It has more storage capacity and a lower price tag, too. ClickStart My First Computer is a $60 educational toy that will train toddlers to master QWERTY keyboards and mouse clicks with entertaining learning exercises. With fickle kids passing over their older siblings' LeapPads lately, innovation holds the key to a rebirth at LeapFrog.

A rebirth? Why not? Instead of LeapFrog, how about CrawlTadpole?

Hasbro is a recommendation for Motley Fool Stock Advisor subscribers. Mattel is a former Inside Value pick.

Longtime Fool contributor Rick Munarriz can't recall the last time his youngest son took to his LeapPad. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.