LeapFrog still down, but looking up

LeapFrog has reaffirmed its downward forecast for 2009, but says sales of new products are on the up.
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The firm’s year-end report predicted that sales for the first nine-months of this year would be down. It’s latest statement reaffirms this, but the company believes it sees some green shoots of recovery going into Easter.

For the first quarter of 2009, LeapFrog expects net sales to be between $26 and $30 million, with gross margin between 25 and 27 per cent. The firm also hopes to lower operating expenses by 30 to 34 per cent to between $33 and $35 million.

For the second quarter the firm expects net sales between $35 and $45 million and gross margin between 30 and 33 per cent. Operating expenses are expected to be between $34 and $36 million, down approximately 27 to 31 per cent year-over-year.

“Last year was unusual, in historic terms,” said chairman and CEO Jeff Katz. “Rapidly deteriorating consumer sentiment in the fourth quarter of 2008 led to high year-end retailer inventory levels. As a result, in our year-end reports we provided full-year guidance that included sales to be down considerably in the first three quarters of the year as retailers drive down inventory levels.

“While these expectations remain unchanged, as we approach the end of the first quarter of 2009, we believe that more information on our outlook for the first half would be helpful to investors due to the combination of our starting inventory position, the continuing weak economic environment and the difficult forecasting situation this creates.

"To-date, our net sales results are as we expected. Point-of-sale results, on the other hand, are somewhat better than expected given the generally weak economic conditions at retail. LeapFrog's net sales results for the next few months are almost certain to continue to be substantially less than last year, but this is consistent with retailers reducing their inventories during this seasonally low traffic part of the year. As is always the case in our business, full-year results are highly dependent on the third and fourth quarters. Based on results to-date, there is no change to our full-year outlook. We still expect to achieve improved cash flow and are targeting break-even cash usage for the year,” continued Katz.

The firm says retail sales are healthy, however, and points to a six per cent year on year lift for the nine weeks ended March 7th, leading into Easter, with Tag and Leapster 2 performing particularly well.

"From what we're seeing, our new products…are selling better than anticipated at retail,” said Katz, “and many of our planned promotions are only just now launching.

“Didj retail sales are growing sharply now that price reductions have been implemented, and Didj is currently generating among the best tie ratio of all of our products. Conversely, our Learning Toy line remains somewhat soft prior to the introduction of our new additions later this year although here too we are beginning to see signs of increased sell-through from promotional activity. It's early in the year, but overall POS results and more specifically our platform business trends give us some cause for cautious optimism given the general negative consumer sentiment in the market."

"Some investors will no doubt ask whether the data on POS might cause us to increase our full year earnings or fourth quarter recovery expectations. Our view is that it is far too early to anticipate a market recovery that might stimulate such a change. Other investors will no doubt ask whether weak shipment estimates for the first half of 2009 create a concern about continuing weakness in the second half.

“Here, we would say that POS trends provide some indications that our products, particularly our Reading and Gaming products, are being well received even in this difficult retail environment and we think they'll do better should conditions improve. However, retailer purchases of our product in the second half will be dependent on sell-through performance during the peak shipment months of September and October," added Katz.

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