Leapfrog reported a very nice quarter last night. Virtually all key metrics turned positive or confirmed a positive trend. Revenues grew for the first time since Q2 2005 and average inventory days outstanding shrunk for the 3rd straight quarter. The margin picture looks good as well. Gross margin expanded 310bps in Q2 and the SG&A ratio declined 11.5%. EBIT margin increased for the 3rd straight quarter, up 22%.
- Clearly, management’s long-term strategy and implementation is finally paying off. We introduced LF on our portal in our 6/26/08 posting “LF: A HOP BACK IN ITS STEP” and the company hasn’t disappointed. New products (with higher margins) are off to a great start, impacting revenues about a quarter earlier than expected. Tie ratios should improve gradually, driving gross margins higher. After years of heavy SG&A spend, the company can now dial that down a bit with the exception of advertising. Consistent with Q2, accelerating sales will leverage SG&A nicely.
- Despite the strength of the quarter, management left its guidance unchanged for the year. The bears will say that sales were just pulled forward into Q2. I disagree. Management is being appropriately conservative given the consumer environment. Don’t be surprised if they continue to beat their guidance though. LF is probably less dependent on the economy given the fully revamped and reloaded product offering. They’ve barely scratched the surface with their new products internationally. That’ll change in the back half of 2008. Domestically new products are still being rolled out with significant advertising support.
- Concentrating the long side of your consumer portfolio on names less tied to near term economic factors like LF seems to make a lot of sense in this environment.