Why LeapFrog Enterprises, Inc. Shares Were Sinking

Is this meaningful or just another movement?

Feb 13, 2014 at 4:00PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of LeapFrog Enterprises (NYSE:LF) were getting left behind today, falling as much as 14% after the educational toy maker posted yet another disappointing earnings report.

So what: As many retailers had complained of earlier, LeapFrog CEO John Barbour called the holiday sales environment "very challenging." Sales plummeted 24% to $186.7 million against estimates of $215 million due to steep discounting by retailers, the shortened holiday shopping season, and retailers' inability to keep the right products in stock at the right time. Adjusted earnings in the key quarter likewise tumbled to just $0.2 million or breakeven per share, well short of estimates at $0.14 and down from $0.38 a year ago.

Now what: As if those numbers weren't bad enough, LeapFrog's guidance was equally disheartening. Because of weak fourth-quarter sales, inventory is much higher than expected, and CFO Ray Arthur said that that and current weak retail conditions "would continue to negatively impact sales in the first and second quarter and also for the full year." Management expects first-quarter sales to be 40% lower than a year ago and sees slight growth in full-year sales at a range of $554 million to $580 million against 2013 sales of $554 million. It also projects EPS to fall from $0.30 to $0.18-$0.25 for the year.

I'm a shareholder in LeapFrog and still believe the company offers compelling products that should eventually lead to meaningful profit growth. Still, this report is painful to absorb for investors. If LeapFrog cannot meet the dramatically lowered guidance it's provided for the year, it may be time to pull the plug on the tablet maker. 

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Jeremy Bowman owns shares of LeapFrog Enterprises. The Motley Fool recommends and owns shares of LeapFrog Enterprises. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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