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LeapFrog pares losses despite sales declines

By Staff -- Gifts and Dec, 8/4/2009 10:14:00 AM

EMERYVILLE, Calif.—LeapFrog trimmed its losses in the second quarter even though the learning products company’s sales continued to suffer double-digit declines.

The company's net loss for the quarter ended on June 30 was $12.2 million, an improvement of 40.6 percent from the company’s $20.6 million loss a year ago, helped by a $6.2 million non-cash tax benefit. Net loss per share was $0.19, an improvement of $0.13 per share. Loss from operations for the quarter was $18.2 million, an improvement of 17.7 percent from a year ago.

Net sales for the quarter were $49.4 million, down 27.7 percent from a year ago. Excluding the impact of currency fluctuations, the decline in net sales would have been 25.8 percent. The decline was primarily attributed to lower product shipments to retailers due to high retailer inventory levels at the end of 2008. Net sales were also down due to lower sales to schools as a result of the strategic restructuring of the company’s school market business last year.

Net sales from the company’s US business were $38.8 million, down 30.8 percent from the year ago quarter. Exchange rate-impacted net sales from LeapFrog's international segment were $10.6 million, down 13.6 percent from a year ago. Excluding the impact of currency fluctuations, the decline in international sales would have been 3.0 percent.

Conversely, for the first six months of the year retail point-of-sale dollars were up 4 percent, reflecting an improvement in retail sell-through to consumers.

"While it continues to be a challenging, promotionally-driven consumer environment, I feel good about our work with retail partners on POS performance, market share gains and sales of higher-margin products,” said Jeffrey Katz, LeapFrog’s chairman and CEO. "Operationally, we have made great strides in bringing our cost structure down and reducing channel inventory to appropriate levels. We are well positioned to return to profitability as retail conditions improve," he added.

Gross profit for the quarter was $18.7 million, down 30.3 percent, as a result of lower sales in the quarter. Gross margin for the second quarter 2009 was 37.9 percent compared to 39.3 percent in the second quarter 2008. Gross margin declined year-over-year as a result of lower sales relative to a fixed cost base, partially offset by a higher-margin product mix.

The company lowered its operating expenses for the quarter by 24.6 percent to $37.0 million. Selling, general and administrative expenses were $20.5 million, down 21.4 percent from a year ago reflecting the impact of lower headcount. Research and development expenses were $9.5 million, down 25.9 percent from $12.9 million a year ago as a result of lower headcount and development costs. Advertising expenses were $4.3 million, down 44.4 percent from $7.8 million a year ago.

Looking ahead, LeapFrog expects net sales to be between $100 million and $120 million in the third quarter. For the fourth quarter of 2009, LeapFrog expects net sales and gross margin to be higher year-over-year and operating expenses to decline by more than 35 percent compared to the fourth quarter of 2008.

"While results of the second quarter were slightly above our expectations, we are not changing our outlook for the year given the challenging consumer environment and the importance of holiday sales to our business. We are carefully monitoring the environment and are prepared to ramp the business up or down as market conditions dictate. We continue to strive to improve our cash flow for the year. As the economy recovers, we believe our lower cost structure, leading brand, and strong product portfolio will position LeapFrog for profitable growth," said Bill Chiasson, chief financial officer.

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