Despite the contraction in the U.S. toy market in 2012 , educational toymaker LeapFrog Enterprises, Inc. (NYSE:LF) leapfrogged over its rivals, and beat Wall Street’s fourth quarter earnings expectations by tying in to the popularity of electronic gadgets for kids.
LeapFrog’s LeapPad 2 tablet proved to be a formidable competitor to the slew of tablets aimed at kids from Toys ‘R’ Us, Polaroid, and even One Laptop Per Child during the Christmas season, not to mention the low-cost options from Amazon.com, Inc. (NASDAQ:AMZN) and Google Inc (NASDAQ:GOOG). It was likely fortunate that Apple Inc. (NASDAQ:AAPL) mispriced its iPad mini, and lost out on what may have been a stampede of demand, had it been cheaper.
In particular, the LeapPad 2’s rugged construction and kid-friendly design that protected them from a full-frontal assault by the Internet led me to think LeapFrog would outpace its rivals last November by appealing to their parents. Indeed, it ended up having more products among NPD Group’s list of U.S. 2012 Top 10 selling toys than any other manufacturer, with three of the top four, and four of the Top 10 .
Source: LeapFrog Enterprises investor presentation
LeapFrog separates itself from toymakers Hasbro, Inc. (NASDAQ:HAS) and Mattel, Inc. (NASDAQ:MAT) by focusing on electronic toys that also have an educational component. The LeapPad 2, for example, is not just a tablet, but was recently recognized as the Educational Toy of the Year by the Toy Industry Association. (It also won the “People’s Choice Toy of the Year” award. )
Hollywood Walk of Fame
In contrast, Hasbro’s business has become highly dependent over the years on the success of movies based on the characters it licenses, such as the Transformers franchise, which made billions of dollars at the box office, and generated a huge influx of cash into the toymaker’s coffers through toys, tie-ins, and cartoons. But when Hasbro doesn’t have a strong lineup of movies to look forward to, to prop up its top-line numbers, business typically plunges.
It may very well have been the success of Transformers that led Hasbro to get into the movie-making business itself, though Marvel Entertainment’s ability to mint gold from its deep character portfolio prior to being acquired by The Walt Disney Company (NYSE:DIS) may have lured it in, too. Yet, after witnessing blunders at the box office like Battleship, the jury is still out on whether Hasbro can replicate that model.
For its part Mattel focuses more on traditional toys, led by the ever-youthful Barbie, Matchbox cars, and Fisher-Price toddler toys division. While it saw sales rise 5% this past quarter, results still came up short of expectations, and show why investors ought to look to LeapFrog for true innovation.
Plugged in
LeapFrog is cashing in on what Hasbro has called the “children getting older younger ” phenomenon. The industry analysts at Nielsen conducted a survey before Christmas, and found that the most desired gift of 6 to 12 year olds was an iPad. In fact, the Touch, mini, and iPhone rounded out four of the top five gifts on the list.
