RC2 profits despite recalls

Infant, toddler category sees 5% increase

From Playthings -- Kids Today, 2/20/2008 12:47:00 PM

OAK BROOK, Ill.—RC2 Corp. eeked out a modest profit in 2007’s fourth quarter and saw its full year drop by more than half in periods rattled by recall-related costs and falling sales, particularly in the U.S.

The company said this week that income from continuing operations dropped $9 million from the corresponding period of 2006 to $400,000, while income from continuing operations for the year ended Dec. 31, 2007, was $21.6 million, down from $43.8 million in the prior year.

Results for the fourth quarter of 2007 include $12.6 million in recall-related costs, $7.6 million net of tax. Results for full year 2007 include $28.3 million in recall-related costs, $17.6 million net of tax.

Net sales for the year decreased by approximately 6 percent from 2006 to $489.0 million, a decrease attributed to a 14 percent decline in sales in the preschool and youth and adult products categories, where licensed toys and ride-ons were said to be particularly hard hit. Those results were partially offset by a 5 percent increase in the infant and toddler products category.

Highlights in RC2’s infant and toddler products category included its Take & Toss toddler self-feeding system, Soothie bottle feeding system, American Red Cross health and wellness products and Lamaze infant development products, the company said.

Excluding $22.2 million in net sales of discontinued product lines and $5.6 million in recall-related returns and allowances from the results, net sales for the year declined by 2 percent from 2006. On that comparison, sales in the preschool products category were down nearly 12 percent compared to 2006. Sales in the youth and adult products category for the year, excluding $22.1 million of discontinued product lines, increased approximately 11 percent compared with the full year of 2006. Sales in the infant and toddler products category, excluding $0.7 million in recall-related returns and allowances, increased approximately 6 percent over 2006 year.

Looking at the factors that fed the results, RC2 CEO Curt Stoelting said, “Our fourth quarter results were negatively impacted by lower domestic consumer spending, which caused many retailers to limit reorders of our products. Spending on new product launches, though higher than normal in the fourth quarter, did not produce expected sales levels and had a negative impact on profits.

“For the full 2007 year, we are disappointed with the 2 percent comparative sales decline and with lower than normal profits. It was a challenging year as we experienced soft sales in our preschool products category, product cost pressures, product recalls and an 8 percent comparative decline in our North American sales.”

On the plus side, Stoelting said, was a 30 percent jump in comparative international sales due to increased market penetration in both Europe and Asia Pacific, and the implementation of a “comprehensive Multi-Check Safety System which now covers all of our product lines.”

Looking forward to RC2’s new year, Stoelting said, “Many challenges remain in 2008. We expect product cost increases to be material beginning in the first quarter of 2008. These increases are driven by higher labor, benefits, tax and currency costs which our China contract manufacturers are passing along to us. Accordingly, we are working to mitigate these increases with sourcing and supply chain initiatives and price increases. Overall economic conditions, especially for consumers in the U.S., also remain a concern for us and our retail partners.”

The company’s 2008 products are weighted toward line extensions, with fewer new product line introductions than in 2007, according to Stoelting.

“Following our strategic plan, we continue to leverage consumer insights and digital marketing investments to guide our new product development and drive sales increases,” Stoelting added. “We also remain committed to completing acquisitions that build long-term shareholder value. We are excited about the opportunities to improve our business and to build momentum for future growth."