Before you get all worked up about LeapFrog (NYSE:LF) posting a second-quarter loss last night, remember that we're talking about the June period here. The real money in the toy business is made in the second half of the calendar year.
But that doesn't mean that one can dismiss the results as inconsequential, not after the pain that the company's slumping financials has caused its shareholders over the past few quarters.
Look behind the seasonal deficit, and one might actually make out traces of the rainbow after the hard fiscal rain. Growing its sales by 19% may not seem like much, but it sure beats the 7% slide the educational toy specialist reported during its March quarter. If watching gross margins slip from 53% to 45% over the past year seems alarming, then consider that the showing is actually a slight sequential improvement.
You can sum up the rise and fall of LeapFrog in a paragraph. Not this one. The next one.
The company had a hit product with the classic razor and blades model of an adequate toy console buttered up by the fat margin software titles it fed off of. Rivals moved in. Popularity waned. LeapFrog chose to diversify its product line at the expense of its once-lofty markups.
It's a sad story, but condolences don't merit stock buy orders. That's why one has to consider that this fallen star may be bouncing back. It is looking to earn between $1.18 and $1.28 a share this year, with gross margins improving significantly in the second half of the year.
While its domestic consumer business made up just more than two-thirds of its sales a year ago, that's now down to 59%, as overseas markets are taking to the company's wares, and it is building a promising niche in the training and education market.
Traditional toy makers such as Mattel (NYSE:MAT) and Hasbro (NYSE:HAS) know the importance of diversification. They have broadened their offerings to the point where a drop in Barbie or Mr. Potato Head popularity won't sting as badly as it could. Perhaps that's why Hasbro has been one of the few stocks to earn recommendations in both Motley Fool Stock Advisor and Hidden Gems in the past.
While LeapFrog is nowhere near its larger rivals -- in many ways -- it's good to see it master the ability to leap from one pad to another.
What do you think of LeapFrog toys? Are they the ideal gifts for a young child? What would be a better choice? All this and more in the Parents and Expecting Parents discussion board. Only on Fool.com.Longtime Fool contributor Rick Munarriz thanks LeapFrog for teaching his 6-year-old the capitals of all 50 states. However, he does not own shares in any of the companies mentioned in this story.
