RC2 Corp. (RCRC), a leading designer, producer and marketer of innovative, high-quality toys, collectibles, and infant and toddler products, has been downgraded from Neutral to Underperform.
The rating has been downgraded mainly due to the disappointing fourth quarter results due to lower gross margin. 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.
Additionally, retailer orders remain soft and they possess excess inventory on the toy side from other companies like Hasbro Inc. (HAS) due to weaker-than-expected holiday sales, which is negatively impacting the sales of the company.
However, the company’s new product line up including the launch of all three Chuggington product lines throughout the US in 2011, along with growth in the Mother, Infant and Toddler Products segment, boosted by the addition of JJ Cole Collections, improved earnings aided by cost-saving measures and a modestly levered balance sheet to facilitate growth augur well for the investors.
Fourth Quarter Results Missed Estimates
RC2 reported fourth quarter 2010 adjusted earnings of 49 cents, which missed the Zacks Consensus estimate of 55 cents.The disappointing results were due to lower gross margin.
For the quarter, net sales upped 2.3% from the prior-year quarter to $124.2 million in spite of soft retail ordering in North America in the last month of the quarter. Sales were driven by strong organic growth, solid international sales and contribution from the recent acquisition of JJ Cole Collection. However, sales were below the Zacks Consensus Estimate of $134 million.
RC2’s gross margin of 41.9%, declined 350 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.
Outlook
For full-year 2011, RC2 initiated the earnings guidance in the range of $1.80 to $1.95 per share versus the Zacks Consensus Estimate of $1.97. The company expects input cost pressure to continue in 2011.
Zacks Estimates
Over the last 30 days, the analysts reduced their respective estimates for fiscal 2011 by 4 cents to $1.92, with a cut of 7 cents in the first quarter and 4 cents in the second quarter. For fiscal 2012, the analysts have slashed their respective estimates by 2 cents to $2.22.
The analysts slashed their estimates as fourth quarter results were below expectations. The company is also facing cost inflation, which will negatively impact its gross margin in the coming quarters.
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