RC2 Corp. (RCRC), a leading toy company, has been downgraded from Outperform to Neutral.
The rating has been downgraded mainly due to the disappointing third quarter results. Additionally, tough comparisons in 2010 due to the loss of the Thomas & Friends license may be a drag on the stock.
We also remain cautious on the stock, owing to input cost pressure and currency fluctuation risk. Moreover, competition from private label toys and the video game industry is increasing and orders from retailers remain soft.
However, we expect the company to benefit from its new line-up of products including Chuggington, Dinosaur Train and Early Engineers, along with growth in theMother, Infant and Toddler Products segment, particularly with the addition of JJ Cole Collections.
We also remain optimistic about its long-term growth potential with new product launches, possible acquisitions, improved earnings helped by cost-saving measures and a modestly leveraged balance sheet to facilitate growth.
Third Quarter Results Missed Estimates
RC2 third quarter 2010 adjusted earnings of 63 cents missed the Zacks Consensus Estimate of 66 cents, and plunged 4.5% from the prior-year quarter. The disappointing results were due to lower gross margins.
For the quarter, net sales upped by 2.0% year over year to $129.0 million. Sales were driven by a strong organic growth, solid international sales and contribution from JJ Cole Collection, acquired recently. However, sales results were below the Zacks Consensus Estimate of $134 million.
RC2’s gross margin of 41.4%, declined 500 basis points year over year. The gross margin shrunk due to an unfavorable product mix, higher product and transportation cost and rise in promotional allowances. The drop was also due to retailer product returns, inventory charges and costs related to infant sleep positioners. The operating margin also fell by 310 basis points from the year-ago quarter to 14.1%.
For full-year 2010, RC2 has reaffirmed its earnings guidance range of $1.40 to $1.45 per share compared with the Zacks Consensus Estimate of $1.52. The company expects input cost pressure to continue in 2010.
In the last 7 days, for both fiscal years 2010 and 2011, 1 analyst has moved the estimate downward and none has moved upward.
Over the last 7 days, the analysts reduced their estimates for fiscal 2010 by a penny to $1.49 and for fiscal 2011; the estimate remains unchanged at $1.94.
The analysts slashed their estimates as third quarter results were below expectations. The company is also facing cost inflation, which will negatively impact its gross margin in the fourth quarter of 2010.