Is It Time to Hop Off LeapFrog?

Is It Time to Hop Off LeapFrog?

LeapFrog doesn't have strong momentum heading into the critical holiday shopping season. The pioneer of electronic learning toys posted weaker-than-expected growth for its latest quarter after yesterday's market close.

Net sales climbed just 4% higher, held back by a mere 1% uptick in its stateside operations. That's a pretty big deal since domestic sales still make up 73% of LeapFrog's business. Analysts were holding out for 7% top-line growth. Adjusted earnings did beat Wall Street's profit targets, but that's not much of a consolation if customer demand isn't there.

LeapFrog had high hopes for its LeapPad Ultra and LeapPad2 Power to raise the bar in the realm of kid-friendly tablets, but it's just not happening. The competition is coming from some pretty unlikely places, as's entry-level Kindle Fire HD is now cheaper than the less state-of-the-art LeapPad Ultra. Tack on Amazon's FreeTime subscription service for young users and Amazon's probably the new name to beat in kid-friendly tablets. Making things even more interesting, Samsung has surprisingly jumped into this market. The Galaxy Tab 3 Kids costs more than Amazon's Kindle Fire or LeapFrog's LeapPad Ultra, but it gives parents one more reason to spring for a traditional tablet pre-built with parental controls and pre-loaded with kid-oriented apps and content.

It was a safe bet that this was going to be LeapFrog's most challenging holiday quarter. The first LeapPad tablet was a sleeper hit two years ago, but this has now become a crowded niche.

As bad as the third quarter was, the telltale holiday quarter is going to be even worse. LeapFrog's guidance now calls for $570 million to $590 million in net sales for all of 2013, essentially flat with last year's showing. That may not seem so horrible, but keep in mind that net sales were already up 9% through the first nine months of this year. Take that out and Santa's not as keen on LeapFrog as he was last year.

LeapFrog's refreshed guidance translates into just $203.1 million to $223.1 million in net sales for the fourth quarter. That's well short of the $259.9 million that Wall Street was forecasting. It's also a 9% to 17% decline over last year's final quarter.

Ouch! The stock had already sold off sharply ahead of the news, so a lot of this weakness is already priced in. However, analysts were still holding out for growth this holiday quarter, but now they'll be writing down its near-term prospects. That's not an easy place for investors to be unless they feel that LeapFrog can reverse the current quarter's deep slide in net sales. The market was intriguing when it was pitted against less capable toy makers, but now that it's butting heads against Samsung and Amazon, it's a dicier competitive environment. Samsung's the global leader in mobile. Amazon's the crazy one willing to sacrifice near-term margins for the sake of market share.

LeapFrog may make some snazzy learning toys, but now it's the company itself that has a lot to learn.

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Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of and LeapFrog Enterprises. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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