LeapFrog Tumbles on Disappointing Outlook

EMERYVILLE, Calif. ( TheStreet) -- Shares of LeapFrog Enterprises ( LF) fell in after-hours action on Thursday after the company gave a disappointing fiscal 2011 outlook with net sales expected to be "flat or slightly down" because of high inventory levels.

The stock finished Thursday's regular session at $4.43, up 3%, on much heavier than usual volume ahead of its results following a Reuters report speculating Leapfrog could be a takeover target for rival toymakers Mattel ( MAT) or Hasbro ( HAS).

The shares were last quoted at $4.16, down 6.1%, on after-hours volume of around 130,000, according to Nasdaq.com.

LeapFrog's shares plummeted 22.3% on Jan. 12 after the company warned of slower 2010 sales. Since then it had climbed back less than 2% ahead of Thursday's session. Fund manager Robert Auer told Reuters the stock remains a bargain -- and potential takeover target -- ahead of its report. Auer says he divested his stake in LeapFrog following its guidance revision.

"You can make the case that LeapFrog can get an offer between $7.50 and $10 a share, depending on how the deal is priced," Auer, senior portfolio manager at SBAuer Funds, told Reuters.

A $10-per-share offer would value Leapfrog at more than twice its current market capitalization.

After the closing bell Thursday, LeapFrog reported a profit of $25.3 million, or 38 cents a share, for its fiscal fourth quarter, on revenue of $189.8 million. The bottom-line performance was 2 cents ahead of Wall Street's consensus view, but revenue fell short of the average analysts' estimate of $192.3 million.

LeapFrog said growth in its mobile learning line was offset by declines in its interactive reading and learning toy lines when sales slowed down in December.

For 2011, the company said it sees earnings of 15 to 20 cents a share, much lower than the 29 cents per share analysts are currently expecting.

"We have some exciting innovative products that we will be launching this year," said CFO Mark Etnyre. "However, we are planning more conservatively given the December 2010 sales slowdown relative to our expectations."

In January, LeapFrog lowered its sales guidance, saying it should book a revenue increase of 13% to 14% year-over-year, lower than its prior guidance for growth of 15% to 20%, citing softer demand for its interactive learning toys and games late in the holiday shopping season as adverse weather kept shoppers home. LeapFrog also said sales of interactive reading products slowed last quarter.

Earlier this week, Hasbro booked slower quarterly earnings and revenue but profits topped expectations , thanks in part to international sales and cost controls.

Hasbro's net earnings fell 15.4 % to $140 million, or 99 cents per share. Net revenue declined 7.2% in the recent quarter to $1.28 billion, attributed in part to a $23.5 million negative impact from foreign exchange.

Like Leapfrog, Hasbro previously warned investors it would book slower sales in the end-of-year shopping season. The cautionary statement was attributed to relative weakness in U.S. and Canadian markets, despite strength in emerging international markets.

Rival and toy-making industry leader Mattel beat fourth-quarter expectations and increased its dividend by 10.8%.

Mattel said improved sales in its core toy brands -- Barbie, Hot Wheels, Fisher-Price and American Girl -- helped drive the quarter's results.

Hasbro saw a 15% drop in its key action figure segment, as well as in games and puzzles. Hasbro said its games and puzzles segment reported a 22% decline last quarter, and sales in its boys segment fell 1%. Girls' toys and preschool toys saw improved demand.

Sterne Agee analysts expected Hasbro's first-quarter results to be soft, reflecting unfavorable timing issues in the entertainment industry, circumstances which should benefit the toymaker in its fiscal-second quarter.

The equity research firm lowered its full-year earnings expectations for 2011 and 2012 to $3.12 per share and $3.70 per share, down from $3.16 per share and $3.75 per share, respectively.


Even so, the 2011 entertainment line-up is expected to be promising, which should lead to growth and better margins. Sterne Agee maintained a buy rating and $56 price target on Hasbro shares.

The maker of Nerf foam toys, Monopoly board games and G.I. Joe action figures will sell toys and games based on "Sesame Street' characters Elmo and Cookie Monster this year. Toys based on motion picture Transformers: Dark of the Moon should also help boost sales this fiscal year, along with further expansion in emerging markets and the innovation with its The Hub television network.

The Hub is a multi-platform joint venture with Discovery Communications ( DISCA), launched on Oct. 10, 2010.

Hasbro said international sales rose 12% in the recent quarter.

The toymaker's 2011 outlook included higher sales and profits as recent investments begin to pay off.

Mattel shares fell 0.5% Thursday afternoon to $25.58 while Hasbro gained 0.3% to $45.63.

-- Written by Miriam Marcus Reimer in New York.

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