LeapFrog 2008 Annual Report Download - page 39

International Segment
The International segment includes the net sales and related expenses directly associated with selling our
products to national and regional mass-market and specialty retailers and other outlets through the LeapFrog
offices in the United Kingdom, France, Canada and Mexico as well as through distributors in markets such as
Spain, Germany and Australia. Certain corporate-level costs, including expenses related to corporate operations
associated with broad-based sales and marketing, product support services, human resources, legal, finance,
information technology, corporate development and procurement activities, broad-based research and
development costs, legal settlements and other corporate costs are charged entirely to our U.S. Segment, rather
than being allocated between the U.S. and International segments.
2008 2007 2006
% Change
2008 vs.
2007
% Change
2007 vs.
2006
(Dollars in millions)
Net sales ..................................... $95.7 $103.4 $114.6 -7% -10%
Gross margin (1) ............................... 36% 37% 26% (1) 11(2)
Operating expenses ............................. 38.8 39.6 39.3 -2% 1%
Loss from operations ............................ $(4.4) $ (1.4) $ (9.3) -214% 85%
(1) Gross profit as a percentage of net sales
(2) Percentage point change in gross margin
Fiscal Year 2008 Compared to Fiscal Year 2007
International segment net sales constituted 21% of LeapFrog’s total 2008 net sales as compared to 23% in
2007. Net sales decreased 7%, primarily due to declining sales of our mature and retiring products, partially
offset by the launches of Tag in selected markets, and of Leapster2 during the third quarter of 2008. Excluding
the impact of foreign currency, our International segment’s sales would have decreased by 3% year-over-
year. The sales declines were broad-based. Declines in our European markets were attributable to lower sales of
older products, the effects of which were only partially offset by first year sales of Tag. Our Asian market sales
declined significantly in 2008 as our new products were not introduced in those markets in 2008. We experienced
only modest growth in the Mexico and Canadian markets.
Our gross margin percentage remained relatively constant, decreasing one percentage point in 2008.
Although during the second half of 2008 there was an increase in sales of higher gross margin products, this
improvement was offset by a weighted average decline in the value of the dollar during the fourth quarter of
approximately 20%. The most significant decline in the dollar was against certain Asian currencies.
The increase in our loss from operations reflected declining net sales.
Fiscal Year 2007 Compared to Fiscal Year 2006
International segment net sales constituted 23% of LeapFrog’s total net sales for both 2007 and 2006.
International net sales decreased as declining sales of products being phased out, primarily the LeapPad family,
more than offset the increase in sales of continuing products. Distributor net sales decreased significantly due to
high inventory levels at the end of 2006. On a constant currency basis, net sales declined 15%.
Gross margin improved by 11 percentage points, primarily due to lower charges for excess and obsolete
inventory and lower levels of retailer promotions and discounts.
Loss from operations decreased 85%, reflecting the gross margin improvement which offset the majority of
the net sales decline.
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