Can Fitness Tracker, Console Save a Limping LeapFrog?

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Innovation is at the heart of LeapFrog Enterprises (LF). Dating all the way back to 1995's debut of its first product -- the Phonics Desk that helped young children improve their reading skills -- LeapFrog has strived to make learning fun through technology.

%VIRTUAL-WSSCourseInline-1023%The leading maker of electronic learning toys doesn't always get it right. Sometimes it's just ahead of its time, as it was in 2005 with the Fly "Pentop" Computer, which, true to its name, was a smart pen that used pattern-decoding technology and digital paper to detect what was being written. It flopped and was discontinued five years ago.

When LeapFrog has a lull, it seems as if new technology arrives to save the day. It happened three years ago with the LeapPad learning tablet, and given the toy maker's recent sorry state, it seems as if innovation is going to have to save the day again.

LeapFrog Is More Frog Than Leap

Monday's earnings report revealed another brutal quarter for LeapFrog. For the second quarter in a row, LeapFrog posted a 43 percent year-over-year plunge in consolidated net sales. Retailers are still overstocked with LeapPad tablets, slowing replenishment orders.

The LeapPad was a hot product when it hit the market ahead of the 2011 holiday shopping season. LeapFrog couldn't make the tablets fast enough, leading to a healthy market for resellers that would mark them up to satisfy the demand of desperate parents. The second generation a year later also was a big winner. However, consumer appetite cooled in 2013. It's been hard for LeapFrog to stand out given the glut of cheap tablet.

LeapFrog can point to the safety of its device. The LeapPad features LeapSearch, a proprietary browser that limits access to age-appropriate content in a safe environment. Limiting the breadth of the World Wide Web would be a deal breaker for older kids, but the LeapPad's limited access to vetted destinations should be ideal for families with young ones. For now, it's not working.

It was a rough quarter for LeapFrog, which posted a larger-than-expected quarterly loss to go along with that 43 percent drop in sales. The stock went on to hit a two-year low on Tuesday.

Fitness Bracelets and Gaming Consoles to the Rescue

LeapFrog has previously turned to new product categories to get out of its fiscal slumps, and it's hoping to do that again. Despite kicking off fiscal 2015 with back-to-back horrendous quarters, it sees double-digit year-over-year growth for the fiscal third and fourth quarters.

A lot of that growth is riding on the success of LeapBand and LeapTV, two products that LeapFrog recently introduced. LeapBand is a fitness tracker for kids. Parents are donning Fitbit, Jawbone UP, and other wristbands that track movements, and LeapFrog now has a product for young children who want to follow suit. The LeapBand is just $40, and it adds colorful games and exercises to the wearable experience.

LeapTV is a bigger gamble. It's a motion-based kid-friendly video game console. At $150 it may be cheaper than traditional Xbox One and PS4 consoles, but LeapFrog's lack of success near that price point with its high-end LeapPad is problematic. Parents may not want to commit that much of their holiday shopping budget to an unproven gaming platform.

It's still early. The LeapTV just came out late last month. The LeapBand's been out a bit longer, but the upcoming holiday shopping season will be the ultimate test. LeapFrog needs at least one of the two new gadgets to be a hit if it wants to retain its crown as an innovator in electronic learning.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of LeapFrog Enterprises. Try any of our Foolish newsletter services free for 30 days. Want to invest in Apple's latest gadget? Check out our free report on the Apple Watch to learn where the real money is to be made for early investors.