RC2 Corporation (RCRC) reported third quarter 2010 adjusted earnings of 63 cents per share, which 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 margin. On a reported basis, including the impact of infant sleep positioners and acquisition-related costs, RC2’s earnings were 56 cents per share, down 15.2% year over year.
For the quarter, net sales upped 2.0% to $129.0 million from $126.5 million in the year-ago quarter. Sales were driven by strong organic growth, solid international sales and contribution from recent acquisition of JJ Cole Collection. However, sales results were below the Zacks Consensus Estimate of $134 million.
The company achieved an 18.7% growth in international sales, driven by a solid international growth in the mother, infant and toddler products category and shipments of the Chuggington line of products. However, North American sales were down 2.9% year over year.
Sales in the Mother, Infant and Toddler Products category escalated 13.4% year over year, attributable to the gains in The First Years care and gear product lines and Lamaze infant development toys as well as acquisition of JJ Cole Collection. However, sales in preschool, youth and adult products category dropped 4.3% 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, excluding the impact of discontinued product lines, increased 19.4% year over year.
RC2 reported a gross margin of 41.4%, down 500 basis points year over year. The decline was partly due to retailer product returns, inventory charges and costs related to infant sleep positioners. The gross margin also contracted due to unfavorable product mix, higher product and transportation costs and rise in promotional allowances.
Selling, general and administrative expenses fell 5.7% year over year to $34.7 million due to lower royalty and variable selling costs. Adjusted EBITDA was $26.0 million in the quarter, down from $26.9 million in the prior-year quarter.
Operating margin also fell by 310 basis points year over year to 14.1% in the reported quarter.
Financial Position
As of September 30, 2010, RC2 had $49.2 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 reaffirmed its earnings guidance in the range of $1.40 to $1.45 per share compared with the Zacks Consensus Estimate of $1.52.
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. However, RC2 remains focused on eliminating unprofitable and low volume product line as well increase prices to overcome cost inflation.
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