Analysis: LeapFrog may still bounce despite holiday sales warning

Thu Nov 7, 2013 3:21pm EST

(Reuters) - LeapFrog Enterprises Inc (LF.N) lost its bounce this week after the maker of electronic tablets for young children warned of weak holiday sales, but toy industry experts say the company has turned Grinch on investors too soon.

LeapFrog shares slid 11 percent this week after the maker of LeapPad Ultra devices said holiday-quarter sales would be much lower than expected because of increasing competition and weak consumer spending.

The comments fueled concerns about the tough environment for toymakers during the upcoming holiday season, which they depend on for more than a third of full-year sales.

Skeptics have questioned the business model for kiddie tablets. Are parents still willing to pay $150 for a tablet that their toddler will soon grow out of, or will they add a few free apps to their iPad and share?

But many analysts say LeapFrog's dour outlook, based on a weak October when uncertainty around the U.S. government shutdown hit consumer spending, is unlikely to be borne out.

"It's difficult to believe that (LeapFrog's) holiday sales in the U.S. will decline at a mid-teens rate," Piper Jaffray analyst Stephanie Wissink wrote in a note.

Yes, there is competition from Apple Inc's (AAPL.O) iPad and other tablet apps as well as rivals such as the Toys R Us TOYDL.UL Tabeo, Kurio 7s and Vtech's Innotab. But these are not new threats.

"I don't see the iPad this Christmas being a different threat than it had been during the back-to-school season," said Wissink.

Wissink called the severity of the outlook cut a surprise as her checks with retailers did not show a high degree of caution while placing orders.

Children's tablets such as the LeapPad have an advantage for parents of young children because of their specialist software and parental controls, the experts say, and at least some shoppers agree.

"The iPad is for everyone, this is specific for the child. The color scheme and size makes children feel like its more applicable to them," said Long Island resident Kwaku Boah, who bought a LeapPad for his 7-year old niece at a Toys R Us.

SPECIALIZED ENOUGH TO SURVIVE?

Tablets and their cheaper alternatives have proven severe competitors to makers of dedicated services ranging from GPS navigation to exercise and dieting programs.

But Laurie Schacht, co-publisher of industry publication The Toy Insider, says educational tablets have held their edge because of their specialist formats and controls that help parents monitor a child's activity.

Tablets such as the Kurio provide features such as allowing parents to create different profiles for each child, deciding which apps to download and controlling how long it is used.

The XO tablet from Vivitar lets children choose a dream profession and provides apps that give them experiences to play out that profession.

Schacht said the Ultra had impressive features for its $149.99 price tag, including front and rear facing cameras, hardened casing, educator-approved content and parental controls. That's half the price of the cheapest iPad Mini.

"Most (educational tablets) really have their finger on what consumers want. I think they all will do well during the holiday season," Schacht said.

LeapFrog forecast full-year sales of $570 million to $590 million. Analysts on average were expecting sales of $632.5 million before Monday's warning.

Even after the warning, the average analyst forecast for full-year sales was $607.8 million, according to StarMine data.

Ascendiant Capital Markets analyst Edward Woo was more cautious about the holiday quarter at a time when consumers are cutting back on discretionary spending on everything from jewelry to restaurant meals.

According to Woo's retailer checks, LeapFrog's new LeapPad 2 Power and Ultra tablets are facing lower demand compared to last year's LeapPad 2.

"The fact that they cut (the forecast) so much leads you to believe that the company is seeing a lot more bad news than we're seeing."

Of 10 analysts covering LeapFrog, three have a "buy" or the equivalent rating on its stock, while seven have a "hold," according to Thomson Reuters data.

Until Monday's warning, LeapFrog shares were little changed for the year. The stock closed at $7.73 on the New York Stock Exchange on Wednesday.

(Additional reporting by Marina Lopes in New York and Maria Ajit Thomas in Bangalore; Editing by Joyjeet Das)

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