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Why LeapFrog Enterprises, Inc. Shares Were Sinking

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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  • Report this Comment On February 13, 2014, at 4:06 PM, mdeamer wrote:

    Their guidance just made the stock overvalued from a future P/E standpoint. It can drop under $6 quickly.

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Jeremy Bowman

Fool since 2011. I write about consumer goods, the big picture, and whatever else piques my interest. Follow me on Twitter to see my latest articles, and for commentary on hot topics in retail and the broad market.

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Related Tickers

8/28/2015 4:02 PM
LF $0.92 Down +0.00 -0.31%
LeapFrog Enterpris… CAPS Rating: ***