Supply Chain Issues
Manugistics CEO Greg Owens, speaking at his companys user conference in Washington, D.C., says the LeapFrog implementation is on schedule and that LeapFrog is "very happy" with Manugistics work. The problem: Demand for the toys has "been outstripping [LeapFrogs] supply capability." Shareholders will watch LeapFrog closely in the fourth quarter and into 2004, to see if it can rectify its third-quarter miscues. If the Manugistics implementation goes well, the sales shortfall will be viewed as a hiccup. In the twelve months leading up to the third-quarter disappointment, LeapFrog sales had grown 55 percent over the prior 12-month period.That growth pushed shares to a high of $46.54 minutes before its earnings release, from $13, when it first went public in July 2002. Although LeapFrog is independent, Milken and Ellison retain majority voting rights on major corporate decisions."They are growing in terms of being an important toy company and vendors are holding them to a very high standard. The challenge for them now is to get their internal forecasting up to that standard," says Pacific Growths Walrond. With such demanding and high-volume customers as Wal-Mart, Target and Amazon.com, LeapFrog "is eventually going to have to tie into some of these retail goliaths with their supply-chain and demand-forecasting models," says Gartners Eschinger. "Its going to be the only way to do business going forward." LeapFrog appears confident it can recapture investor confidence and prove that it can deliver its popular toys to retail partners in a timely fashion. "Late-building demand from our key retailers resulted in lower net sales growth for the third quarter," Wood said in the companys third-quarter earnings release. "This resulted in a shift of deliveries from the third quarter to the benefit of the fourth quarter. Our underlying sell-through at the retail level remained very strong throughout the third quarter." Along with its third-quarter earnings, LeapFrog raised its sales forecast for the fourth quarter to a range of $316 million to $334 million, up from an original estimate of $277 million to $297 million. Will that optimism be enough to make LeapFrog a Wall Street darling again? "We really think most of the sales missed in the third quarter have already been shipped in the first week or two of the fourth quarter," Walrond says. "But anytime theres a miss with a company thats done nothing but impress, it does raise the issue of credibility."