LeapFrog’s Turnaround Moving Along Nicely

A recent report by the NPD Group said that U.S. toy sales were retlatively flat over the year at $21.47 billion in 2009 compared to $21.65 billion in 2008, with overall unit sales falling 0.5% over the year. Toy makers launched promotional events during the holiday season, which helped keep the revenues flat despite a 4% fall in volumes sold. The educational toy maker, Leapfrog (NYSE:LF), also had latest quarter results that were better than the market’s expectations.

Q4 revenues grew 37% over the year to $188.6 million. EPS for the quarter came in at $0.46 compared with a loss of $0.69 suffered a year ago. The market was expecting revenues of $167.9 million with EPS of $0.24. United States sales grew 48% over the year to $155.6 million. International sales grew 2% to $33.0 million and included a 6.5% favorable impact from changes in currency exchange rates.

The company ended the year with revenues of $379.8 million and EPS grew by nearly a dollar to $0.13. Revenues for the year fell 17% primarily due to the lower sales in the first three quarters. Going forward, LeapFrog expects revenues to grow 10%-20% over the current year sales.

LeapFrog attributes its strong results in the latest quarter to the sales of Tag and Tag Junior reading systems, its software-based books and its new line of Scout toys. The strategy of developing toys that help parents and children connect with LeapFrog is helping the company to gain a stronger foothold: by the end of the year it had three million connected customers. It plans to expand that number to over six to seven million by the end of the current year. CEO Jeff Katz discussed this with me a couple of years ago as he was working on the turnaround strategy, and it is good to see the strategy working.

The Learning Path tool is also helping LeapFrog to communicate with and engage LeapFrog product users with customized playing experiences besides enabling customized marketing approaches. The company is already seeing significant results through these efforts and recorded 300 million marketing impressions and over 200,000 directly trackable transactions to retailers.

LeapFrog is focusing on two key high-growth segments. First, to address the growing hand held device market, it will be launching Leapster mobile applications in the current year. Second, it is addressing the growing e-reading market by adding to its existing library of over 100 titles.

The stock is trading at close to year-high levels of $6.67 with a market capitalization of $427 million. It touched a 52-week high of $7.14 earlier last month. Almost a year ago, it was trading at low levels of $1.29 and has been on the rise since. It is still significantly lower than the $10+ levels that it was trading at in 2007 when I first started to track it. But, now that the company has figured out the importance of the Internet to its turnaround strategy, it should touch newer highs soon.