Despite beating analysts' expectations with its recent quarterly results, shares of interactive learning toy maker LeapFrog (NYSE:LF) recently took a single-session tumble, falling by more than 4%.
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The selloff appeared to have been prompted by disappointing guidance from management regarding the upcoming third quarter. While analysts had been expecting earnings per share to come in at about 30 cents for the period, the company shaved back its estimate of earnings to between 12 and 18 cents a share.
This was a major disappointment in that it implies that sales of the company's recently launched touch-screen device, the Leapster Explorer, may not be as robust as was previously thought despite the fact that its $70 price point puts it well within the budgets of today's cost-conscious parents.
No Fun In Weak Holiday Sales
Stubbornly high levels of unemployment have been eroding consumer confidence, pushing it to the lowest levels in five months as optimism about the strength of the recovery fades. As a result, consumers are less likely to spend, especially on discretionary items such as toys.
While better-than-expected earnings results have been realized by all the major toy manufacturers like Hasbro (Nasdaq:HAS), Mattel (NYSE:MAT) and Jakks Pacific (Nasdaq:JAKK), this positive trend may not continue for much longer. Recent indications are that retailers who sell toys are heading into the prime fourth-quarter holiday selling seasons with much leaner toy inventories than usual, suggesting that they don't expect sales to be as strong as originally anticipated.
iPad - "Children's Toy of the Year"
In LeapFrog's case, more company-specific factors may also be at work in undermining investor confidence in the company's prospects. New competition, in the form of a broad range of inexpensive applications targeting tots that can run on Apple's (Nasdaq:AAPL) iPhone, iPod and iPad products, could threaten the company's electronic toy franchise. Recently, widely read tech magazine PCWorld called the iPad the "children's toy of the year" based on its intuitive touch-screen's functionality and appeal for little fingers. (For more on the iPad, see iPad: Cool Toy Or Tech Market Game-Changer.)
The Bottom Line
After burying the smart phone competition with its iPhone, Apple may now be unintentionally taking over the children's electronic toy market as well. That's not good news for LeapFrog.
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