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VTech's 1st-half profit surges 45%, but future is unclear

Hong Kong toymaker sees revenue impacted by failure of top client Toys R Us

VTech's products are seen on display at a toy store in Hong Kong.   © Reuters

HONG KONG -- VTech Holdings, a maker of learning toys and consumer electronics, saw its fiscal first-half profit jump 45.1% on the year to $103.6 million, thanks largely to recent acquisitions as well as the fast-growing Asian market.

But management of the Hong Kong-based firm is concerned about its future, as the sudden collapse of one of its biggest clients, Toys R Us of the U.S., is expected to have a negative impact on its full-year earnings.

For the six months through September, VTech's revenue grew 5.8% year on year to $1.04 billion, driven primarily by growth in the Asia-Pacific region, where turnover leaped 43.9%. Revenue in North America -- the toymaker's largest market, contributing 48% of total turnover -- climbed 5.3% from a year ago.

Earnings comparisons were helped by the absence of one-time costs incurred by the acquisition of U.S. rival LeapFrog last year. Both LeapFrog and Snom Technology -- a German phone maker also purchased in 2016 -- have already made positive contributions to VTech's half-year balance sheet.

But those contributions have been clouded by Toys R Us, the 60-year-old retail chain that filed for Chapter 11 bankruptcy protection in the U.S. and Canada in September, struggling with heavy debt amid fierce competition from online rivals such as Amazon. The American company still owes creditors $5 billion, but has said its 1,600 stores around the world will remain open during the loan-restructure period.   

"Our revenue growth has been negatively impacted by Toys R Us' filing for bankruptcy protection," conceded VTech President Pang King-fai. The  Hong Kong company has stopped shipping products to the U.S. retailer's shops, pending the negotiation of new terms.

Pang said VTech's sales to Toys R Us up to the date of the bankruptcy filing had been covered by credit insurance, but shipments thereafter will not be covered. "It is hard for us to gauge the extent of the impact at the moment," he said, noting that second-half shipments are still unclear. But he admitted that the group's gross margin might take a hit.

While VTech is currently negotiating with Toys R Us about supplies during the holiday seasons, Pang said the stock could easily be absorbed by other retailers, with demand for toys running high globally.

Electronic learning toys have become a key driver of VTech's business growth, with sales of the products improving 7.8% in the first half and contributing 34% of total revenue, according to the Chief Financial Officer Shereen Tong. By contrast, revenue from its traditional telecommunications products dipped 2% during the period, she added.

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