LeapFrog 2005 Annual Report Download - page 48

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U.S. Consumer. The 12.0 percentage point decrease in our U.S. Consumer segment’s gross profit percentage
year-over-year was primarily the result of the following:
• Lower sales of products that carried a relatively high margin, such as LeapPad software and hardware,
offset by growing sales in new, lower margin products, such as the Leapster product line. We were
seeking to build a large base of installed Leapster platform users that would lead to the sale of higher
margin Leapster software. We estimated that the impact of this unfavorable product mix contributed to a
five percentage point decline in the gross profit percentage in 2004 versus 2003.
• Higher charges for excess and obsolete inventory of $14.6 million over 2003. Inventory reserves
increased due to obsolete and defective inventory comprised of raw materials and discontinued finished
goods. The increase in reserves was due, at least in part, to significantly lower sales in the fourth quarter
versus expectation for products to be discontinued in 2005. The increase in excess and obsolete
inventories resulted in three percentage points of the decline in gross profit percentage in 2004 versus
2003.
• Higher fixed expenses, in dollars and as a percentage of net sales, including higher warehousing and
freight resulting from higher inventory levels, and higher depreciation of capitalized tooling expenses
resulting from tooling write-offs associated with discontinued products. Increased expenses were
primarily attributed to operating inefficiencies incurred at our new distribution facility in Fontana,
California. We estimated that these expenses contributed two percentage points of the decline in gross
profit percentage in 2004 versus 2003.
• Price reductions on our established platforms, primarily our Classic LeapPad, which was implemented
to drive future sales of these platforms and their related software products. We estimated that these price
reductions resulted in one percentage point of the decline in gross profit percentage in 2004.
• Higher sales allowances granted to customers due to operational issues encountered during the start up
of our new distribution facility. We estimated that these allowances resulted in one percentage point of
the decline in gross profit percentage in 2004.
International. The 10.4 percentage point decrease in our International segment’s gross profit percentage
year-over-year was primarily due to:
• A higher percentage of sales derived from lower margin platforms.
• Larger mix of lower margin sales to distributors as compared to higher-margin sales direct to retailers.
• Higher fixed expenses, including warehousing and freight expenses resulting from higher levels of
inventory.
Education and Training. The three percentage point increase in our Education and Training segment’s gross
profit percentage year-over-year was primarily due to better net sales leverage achieved as the segment’s fixed
expenses represent a lower percentage of those sales, partially offset by lower margin ancillary services sold in
conjunction with the LeapTrack learning system.
41