LF is about to make the turn, and come down the home stretch of its 3 year turnaround. Timing is everything, and now we are staring at a potential horse that's right in the sweet spot of our investment model. The plan was formulated, significant progress achieved, and strong new products are in place. Management is focused but execution remains the outstanding risk. So far, per our sources and channel checks, brand strength among mothers and teachers is unmatched. New product reviews have been encouraging, and purchase orders for over 50% of expected sales volume have already been received. What's left? The big race: commercial success. However, by the time this horse comes to the finish line, big hitters such as Larry Ellison and Mike Milken (43% ownership combined) will have won the Derby - we want to be at the winners circle alongside them.
- The PlanIn mid-2006 new CEO Jeff Katz outlined his strategy for turning around this once powerful educational toy company. Mr. Katz was founding Chairman and CEO of Orbitz which was built from scratch and in four years generated $300m in revenues. Orbitz was sold to Cendant for $1.25bn. Not bad. Mr. Katz's plan for LF involved streamlining costs and SKU's and cleaning up inventories (phase 1) then implementing a comprehensive effort to develop new platforms and products while phasing out old product lines (phase 2).
- The ProgressManagement's phase 1 and 2 strategy and execution is quite evident from the first chart. Gross margin began its upward move by 2006 end, only 2Qs following the beginning of Mr. Katz's tenure. SGA ratio, on the contrary, continued to move higher as the LF reinvested heavily in its brand and new products. Both metrics are now moving in the right direction but still allow for significant improvement potential as the second chart displays.
- The ProductsLF reloaded with a significant arsenal of new products within its core competency of reading solutions, educational gaming and grade school products, and learning toys. The product output is impressive and initial feedback and reviews are positive. Some of products were introduced last year and performed well. Most, however, were released in June. Purchase orders representing 50% of expected new product revenue have already been received. While purchase orders are not necessarily an exact indicator of ultimate revenue, this is clearly a good start. New products could provide half of 2008 revenues.
- The PotentialThe Potential