LeapFrog's Giant Leap of Faith

Changes are afoot at LeapFrogEnterprises (NYSE: LF  ) , but that isn't necessarily a good thing. Coming off a horrendous third quarter that saw sales plummeting by 24% and the posting of an uncharacteristic loss, the educational toy specialist is taking drastic measures of reinvention.

There will be reductions: Think layoffs and product eliminations. There will be additions: Think overseas expansion and web connectivity as a major component of enhanced product lines. Ultimately we're left with a new CEO who came from the airline industry and realizes that you need wings and a lack of heavy baggage to fly.

LeapFrog's report may come as a shock; the third quarter is usually a robust period for the toy industry, as retailers begin to stock up for the holidays. The company's report also came after JAKKS Pacific (Nasdaq: JAKK  ) , Inside Value pick Mattel (NYSE: MAT  ) , and Motley Fool Stock Advisor recommendation Hasbro (NYSE: HAS  ) all announced better than expected September quarter results.

Analysts expected LeapFrog to show a small profit and a more modest top-line dip. The company is now guiding investors to expect a loss of $2 per share for the quarter and warning that the favorable impact of its growth initiatives may not be felt until 2008 at the earliest.

Naturally, this isn't going to sit well with shareholders. Their patience has already been tried by LeapFrog's rocky performance as a public company. The makeover sounds good on paper, but this is the kind of misunderstood long-term approach that doesn't really resonate with investors. I would be surprised if the company wasn't taken private by insiders or a private equity firm in the coming months. It's just the thing that companies do when no one else wants to play.

Longtime Fool contributor Rick Munarriz does relish the way his youngest son takes to his LeapPad. However, he does not own shares in any of the companies mentioned in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.