Leapfrog Faces a Challenging Holiday Season

The holiday season usually marks a good run for the toy industry. However, recent news reports suggest that all may not be well in Toyland. Analysts believe that continuing macroeconomic conditions may impact sales of toys during the season. Researcher NPD Group saw U.S. retail sales of toys drop in the low-to-mid-single digit in the first quarter and fall at a double-digit rate in the second quarter of this year. Last year, toy sales fell 2% to $21.2 billion. But that isn’t stopping the industry from delivering newer toys to the market.

Leapfrog’s Financials
Educational toy maker Leapfrog’s (NYSE:LF) Q2 revenues grew 31% over the year to $71.5 million, ahead of the market’s projections of $66.2 million. The loss for the quarter of $0.12 per share was also narrower than the market’s projected loss of $0.18 per share and the previous year’s loss of $0.21 per share. The quarter’s performance was driven by high demand for the company’s tablet, the LeapPad, and strong content sales. Net sales grew 26% in the U.S. market, and international market revenues grew 46% over the year.

For the current year, Leapfrog projects revenues to grow 13%-15% over the year, with a net income of $0.61-$0.66. It expects current quarter revenues to report 10%-15% growth over the previous year with a net income of $0.36-$0.41.

Toys ‘R Us Close on Leapfrog’s Heels
Last month, LeapFrog released LeapsterGS, an upgraded version of the original Leapster handheld game. The toy now comes with a digital camera, a video recorder, a microphone and an accelerometer that lets kids move or shake the device to do things in games. The new Leapster is priced at $70 but has more expensive digital content. New game cartridges will retail for nearly $25 a game. Downloadable content is priced cheaper at $5 a game.

After successful reviews of its kid-focused tablet, the LeapPad, last month, Leapfrog launched an upgraded version, the LeapPad 2. The new version comes with additional features, including a faster processor, double memory size, higher resolution, front and back cameras, video recorders, music player, energy-efficient operations, and a rechargeable battery option. The new tablet will sell for $99.99, and the older version will continue to be shipped at a price of $79.99.

However, competition for Leapfrog is on the rise. Recently toy store giant Toys ‘R Us announced the launch of its own tablet for kids. Priced at $149.99, the Tabeo may be more expensive than the LeapPad, but it comes with the ability to connect to the Internet through a Wi-Fi connection. Tabeo will operate on the Android OS and will come preloaded with 50 free game applications, including the very popular Angry Birds. Toys’ R Us will also sell up to 7,000 additional apps through its app store.

The market did not react well to Leapfrog’s stock following the announcement by Toys ‘R Us. Leapfrog’s stock is trading $8.44, with a market capitalization of $568.99 million. It touched a 52-week high of $12.28 in July 2012.