LeapFrog Is Still Learning Its Way
Once upon a time, this frog was a prince.
About three years ago, educational toy maker LeapFrog Enterprises Inc. was enjoying its status as an industry darling. Its stock was trading at about $47 a share, and its signature LeapPad electronic learning toys were gobbling up competitors’ formerly secure shelf space.
Today, the stock is down about 85% from its 2003 high.
Like the prince from the fairy tale, LeapFrog is suffering an identity crisis. It’s trying to figure out whether it’s an education company or a toy maker.
“I don’t think they know what they’re going to do when they grow up,” said BMO Capital Markets analyst Sean McGowan.
In LeapPad’s heyday, its concept was clear.
“They really did go about this as education first, toys second,” McGowan said. “So there was a lot of word of mouth among educated parents looking for the next Harvard graduate. They really did come up with the better mousetrap.”
The wild popularity of LeapPad, a series of interactive electronic books, made LeapFrog the top maker of preschool learning products, besting even Fisher-Price, a division of toy giant Mattel Inc.
But last quarter, because of sales declines in LeapPad products, revenue in the company’s U.S. consumer business decreased 26%, Chief Financial Officer Bill Chiasson said during LeapFrog’s Aug. 2 earnings conference call. Executives declined to comment further.
Up to now, LeapFrog has failed to replace LeapPad’s declining sales with another blockbuster. It had high hopes for the Fly, a pen-shaped computer for children 8 and older. But initial results were disappointing, although the Fly “shows a lot of promise,” new Chief Executive Jeffrey G. Katz said.
The Fly “is not up to what they needed to fill the revenue hole,” McGowan said. “It was never going to be the coolest thing that kids could get as a gift.”
The Emeryville, Calif.-based company missed Wall Street expectations in its last two earnings periods, posting a loss of 41 cents a share in the most recent quarter. Analysts on average had expected a loss of 25 cents, excluding one-time items, according to Reuters Estimates.
Also, resignations and consolidations have roiled LeapFrog’s management ranks.
Katz took the CEO job in July, just months after the company combined it with the president position. In 2004, the company hired a new CEO, a new president, a new chief financial officer and a vice president of marketing, according to a Crowell, Weedon & Co. report.
To make matters more challenging, electronics maker VTech Holdings Ltd. is rolling out cheaper look-alike products, said Wedbush Morgan Securities analyst Michael Pachter. For example, VTech’s Write & Learn Spellboard Advanced costs $10 less than LeapFrog’s LeapPad Plus Writing Learning System, at $49.99.
“We have our work cut out for us,” said Katz, adding that he intended to go back to basics with a new emphasis on the company’s SchoolHouse division, which sells directly to schools.
“The company had drifted too far from its education and technology mission and focused its attention on emulating the toy industry and its trends and practices,” he said.
That vision makes sense, but in the absence of more hits as big as LeapPad, it’s also potentially limiting, Pachter said.
“What LeapFrog has wrestled with is, can they grow the category with superior products or go into maintenance mode and keep the share that they’ve got?” he said.
