RC2 Corp Beats, Raises Outlook

RC2 Corporation’s (RCRC - Analyst Report) third quarter earnings of 66 cents per share are ahead of the Zacks Consensus Estimate of 60 cents. Results were driven by cost reduction initiatives implemented by the company though sales reported a drop in the quarter.

Net sales were down 4.8% year-over-year to $126.5 million. Sales were reduced by 3% due to unfavorable fluctuations in foreign currency exchange rates. Slightly better results in North America were offset by weak International sales. Foreign currency exchange rates had a negative impact on International sales.

Sales in mother, infant and toddler products category decreased 5% year-over-year, driven by lower sales in health/safety and infant toy product lines. Management expects growth in this category in 2010.

Sales in preschool, youth and adult products category decreased 5% year-over-year. However, this decline was low when compared with the 15% year-over-year decline in the first half of 2009. The company experienced declines across most of the product lines except Thomas & Friends Wooden Railway.

The economic downturn and challenging credit markets have impacted the company’s distribution channels. Sales have declined over 20% in its Specialty retailers, Wholesalers, OEM dealers and Other channel.

RC2 Corporation reported gross margin of 46.4%, almost flat with the prior-year quarter’s 46.7%. However, selling, general and administrative expenses reported a decline of 10% year-over-year to $36.9 million. Results reflected the benefits of cost reduction initiatives.

Both operating income and adjusted EBITDA increased year-over-year. The company reported operating income of $21.8 million and adjusted EBITDA of $26.1 million in the quarter as compared with operating income of $20.9 million and adjusted EBITDA of $24.2 million in the prior-year period.

At quarter end, RC2 Corp. had $86.8 million in cash and cash equivalents on the balance sheet, with outstanding debt of $60.0 million, down from $67.5 million at the prior quarter's end. Excluding the company’s stock offering proceeds, debt, net of cash, improved by $50.5 million over that at Sept. 30, 2008.

For the full year 2009, RC2 Corp now expects that higher net income than the $23.5 million reflected in its previous guidance. Its improved outlook ranges around $25 - $27 million or $1.30 - $1.40 per share.

The economic slowdown has severely impacted discretionary consumer spending, which has deteriorated sharply in the U.S. and in many countries around the world. As a result, the balance sheets of toy manufacturers such as RC2 Corporation, Mattel Inc. (MAT - Analyst Report), Hasbro Inc. (HAS - Analyst Report) and JAKKS Pacific Inc. (JAKK - Analyst Report) have been impacted significantly.

While the third results were encouraging, we expect that the company will face a difficult holiday season in 2009 and a challenging operating environment in 2010. Also the loss of the Thomas & Friends license to Mattel’s Fisher-Price will likely prove to be a significant blow in 2010.