UPDATE 2-LeapFrog's Q1 flops, upbeat on Q3 retailers' stocks

Mon May 4, 2009 7:50pm EDT

* Q1 loss of 43 cents per share vs Wall St's 41 cent loss

* Q1 sales fell 49 percent to $29.9 million

* Sees "satisfactory" retailer inventory by early Q3

(Adds background, details on share performance, IPO, additional CEO comments)

LOS ANGELES, May 4 (Reuters) - Educational toy maker LeapFrog Enterprises Inc (LF.N) posted a wider-than-expected loss on Monday, with sales flopping after retailers slashed inventory amid the worst economic downturn in decades.

The poor results were yet another blow to the interactive toy company, once a Wall Street darling lauded for hyper growth, that has seen its share price plummet 78 percent from its 2008 high of $10.56 last September.

The Emeryville-based company, whose toys aim to teach children reading, spelling and math, recorded a first-quarter net loss of $27.1 million or 43 cents a share, versus a loss of $27.4 million or 43 cents per share a year earlier.

Analysts, on average, had expected the company to post a loss of 41 cents per share, according to Reuters Estimates.

Sales fell 49 percent to $29.9 million during the quarter, but Leapfrog saw revenue improving over the course of 2009.

The company forecast second-quarter net sales of between $35 million and $45 million and a gross margin of 30 percent to 33 percent. For the third quarter, it foresaw net sales of $100 million to $120 million and a gross margin of between 37 percent and 41 percent.

"Retailer inventory levels are expected to reach satisfactory levels by early in the third quarter, and we expect year-over-year sales growth to resume in the fourth quarter," Bill Chiasson, LeapFrog's Chief Financial Officer, said in a statement.

Toy companies have faced a tough time as the recession, job losses and tighter access to credit force even indulgent parents to cut spending on toys for their children.

As consumers clamp their wallets shut, retailers have also pared inventories to unload excess merchandise and resorted to deep discounting, exacerbating problems for toy manufacturers.

Backed by well-known banker Michael Milken, LeapFrog became a Wall Street darling after its 2002 initial public offering -- at $13 per share -- but a string of dismal reports from the company hurt its credibility with investors.

By 2003, the fast growth that attracted attention started to backfire, as high operating costs bit and the company admitted an over reliance on its LeapPad line of products -- a junior-sized laptop-shaped system that holds interactive workbooks teaching skills such as math.

In the following years, LeapFrog incurred a string of earnings misses and warned repeatedly it would fall short of targets, angering investors.

Leapfrog now has its work cut out trying to turn around its flagging business in the middle of a recession.

Chiasson said consumers were continuing to seek bargains and remained promotion-driven, adding the behavior was expected to continue through the second quarter.

But he said Leapfrog was on track to reduce inventory overhang.

LeapFrog shares rocketed 22.3 percent to $2.30 in regular trading on the New York Stock Exchange on Monday. (Reporting by Lisa Baertlein and Alexandria Sage; Editing by Edwin Chan)

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