LeapFrog 2010 Annual Report Download - page 22

We rely on three retailers that together accounted for the vast majority of the United States segment’s
gross sales each year, and our dependence upon a small group of retailers may increase.
Our top three retailers in 2010 were Wal-Mart, Toys “R” Us and Target, which accounted for the vast majority of
our gross sales. Sales invoiced to these three retailers, in the aggregate, accounted for approximately 65% of the
U.S. segment’s gross sales in both 2010 and 2009. For the foreseeable future, we expect to continue to rely on a
small number of large retailers for the majority of our sales.
We do not have long-term agreements with any of our retailers. As a result, agreements with respect to pricing,
shelf space, cooperative advertising or special promotions, among other things, are subject to periodic
negotiation with each retailer. Retailers are continually re-evaluating shelf space allocations to optimize store
traffic and financial returns. This process has placed increasing pressure on the toy aisle, which in some instances
has been or may, in the future, be reduced in size. In addition, retailers make no binding long-term commitments
to us regarding purchase volumes and make all purchases by delivering one-time purchase orders. If any of these
retailers reduce their purchases from us, change the terms on which we conduct business with them or experience
a downturn in their business or constraint on their credit and ability to pay their invoices as they become due, our
business and operating results could be harmed.
Our growing strategic focus on web-based products and customer relationship management may not yield
the returns we expect, and may limit the adoption of our products in some international markets.
We continue to build a marketing and sales model that relies more on linking directly to consumers through the
Internet and we cannot be sure whether we will realize our expected return on investment. Many of our current
and planned key products, such as the Tag reading system, Leapster2, Leapster Explorer and some of our recent
learning toys, are built as web-enabled products designed to be connected to a computer that has Internet access
in order to access content and features. As we focus on web-enabled products and consumer relationship
management, any resistance by parents to buying children’s products requiring installation of software and
connecting the product to a computer could have a more pronounced effect on our business. Also, launch or
adoption of web-enabled products may be limited in regions where broadband Internet access is not widespread,
such as in some international markets. If parents fail to sign up for the Learning Path or use it at lower rates than
we expect, or choose not to permit us to send them marketing email, or if our web efforts prove ineffective at
generating repeat customers, our investment in building, maintaining and improving our web-based services may
not yield the return on our investment that we anticipate. See also “System failures in our web-based services or
store could harm our business.”
Weakness in the current economic environment could have a material adverse effect on our sales, and a
slow recovery could prevent us from achieving our financial goals in 2011 and beyond.
We rely heavily on sales to retailers during the third and fourth quarters of each year to achieve our overall sales
goals. Also, we rely on strong consumer sales in these periods to prevent build-up of retail inventory. Any such
inventory build-up can have a continuing negative effect on our sales in the first and second quarters of the next
year. The recent global economic crisis and the drastic deterioration of consumer sales in late 2008 led to a
severe drop-off in our sales beginning in the fourth quarter of 2008 and continued through the third quarter of
2009. Although our net sales increased 14% in 2010, as compared to 2009, our first, second and third quarter net
sales in 2010 increased 42%, 26% and 23%, respectively compared to 2009, while our fourth quarter net sales in
2010 increase only 1% compared to 2009. Further deterioration of the current economic environment would
materially adversely impact our business and our financial results for 2011. Many economists predict that the
current economic recovery may be weak and subject to set-backs.
To drive sales in 2010, we provided more pricing reductions, promotional incentives and other concessions in our
sales terms than we have in the past, and we may need to continue offering such concessions in 2011 to drive
sales. Consumers may have become used to paying lower prices for some of our products and efforts to restore
normal pricing may hamper sales. Weak economic conditions in the United States or abroad, lower consumer
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