RC2 Corporation (RCRC) reported second quarter earnings of 17 cents per share, which surpassed the Zacks Consensus estimates of 15 cents, but was below 19 cents in the prior-year quarter. The better-than-expected results were driven by strong international sales.
For the quarter, net sales dropped by 1.1% to $86.1 million from $87.0 million for the quarter a year ago. Sales were, however, helped by 2% owing to favorable fluctuations in foreign currency exchange rates. The fall in sales resulted from the conservative ordering by retailers, though consumer spending remained stable.
The company achieved a 12.8% growth in international sales driven by solid international growth in the mother, infant and toddler products category, positive impact from currency exchange rates and shipments of the Chuggington product. However, North American sales were down 5.8% year-over-year.
Sales in the Mother, Infant and Toddler Products category leaped 5.4% year-over-year, attributable to the gains in The First Years care and gear product lines and Lamaze infant development toys. However, sales in preschool, youth and adult products category decreased 8.2% year-over-year, due to the decline in sell-off product lines including Take Along Thomas & Friends die-cast.
RC2’s transition plan for Preschool, Youth and Adult Products category remains on track with the launch of new preschool product lines including Dinosaur Train and Chuggington and growth in Thomas & Friends Early Engineers product, as excluding the impact of discontinued product lines, the category increased 16.3%.
RC2 reported a gross margin of 42.5% compared to 42.2% in the prior-year quarter. The improvement was primarily driven by elimination of unprofitable and low volume product line and favorable inventory absorption, partially offset by unfavorable product mix, higher input and labor cost and rise in promotional allowances. Operating margin was 6.9%, lower compared to 7.4% in the second quarter 2009.
Selling, general and administrative expenses increased slightly by 0.7% year-over-year to $30.3 million due to an increase in marketing expenses, but were offset by lower variable selling costs. Adjusted EBITDA was $9.6 million in the quarter, down from $10.6 million in the prior-year period.
Financial Position
As of June 30, 2010, RC2 had $94.7 million in cash and cash equivalents and outstanding term debt of $41.3 million on its balance sheet. It has no borrowings outstanding under its $70.0 million line of credit.
Outlook
For full-year 2010, RC2 has raised the lower-end of its earnings guidance range of $1.35, and now expects earnings in the range of $1.40 to $1.45 per share compared to the Zacks Consensus Estimate of $1.43. The company expects earnings in the third quarter to be lower from the year-ago quarter.
Management continues to invest in the Mother, Infant and Toddler Products category and expects it to perform well relative to other consumer product categories in fiscal year 2010. The company expects input costs to increase in fiscal 2010.
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