Coleco Industries Inc. yesterday pulled the plug on its troubled Adam home-computer line, and said the move would cause it to post a "substantial" 1984 loss -- despite $500 million in revenue from its wildly successful Cabbage Patch dolls.
The Hartford, Conn.-based toy maker, which introduced Adam with much fanfare 18 months ago as a complete low-priced home-computer system but had problems delivering on its promise, said it had sold its entire remaining inventory of Adam equipment to an undisclosed retail chain. It did not say how much it was writing off as a result, but said it expected to post a loss for both the just-ended year and the fourth quarter.
"Current unstable conditions in the home computer marketplace are requiring us to sell Adam inventory at prices below cost," Coleco President Arnold Greenberg said in a letter to the company's stockholders. He said that because of "attractive opportunities" in the company's traditional toy business, it was not in the firm's best interests "to continue to incur the significant costs and risks necessary to keep Adam competitive."
On Wall Street, where analysts had been expecting the company to close out the Adam line for some time, the reaction to yesterday's announcement was positive. Coleco's stock jumped $2.25 to $14.37 a share.
"It gets the big unknown out of the equation. As a result, the company is back to being a toy company," said David S. Leibowitz, an analyst at American Securities Corp. "It is safe to project that the worst is over."
"It was a question of trying to make the best of a bad situation that got worse and worse," said Harold Vogel, an analyst at Merrill Lynch. "They got into a business that was moving too fast. They tried to catch on, and they didn't have the resources to do it. . . . Now they're back to more basic products that they understand."
Coleco is the latest of several toy makers to retreat from the computer and electronics business. In recent months, Mattel Inc. has sold its computer division and Hasbro Bradley has shut down its electronics subsidiary. In each case, analysts say, the toy makers found themselves unable to compete with the bigger, better-financed computer companies.
"This was not an area toy companies should have been in, in retrospect, and now the last toy company is out of the game," Leibowitz said. "When you come up with a $500 item, or even a $250 item, you move beyond the realm of toys. . . . These were toy companies playing in the area known as consumer electronics."
Adam's problems had been well chronicled, and Coleco found itself in the odd position over the past year of having one of the toy industry's biggest hits -- the Cabbage Patch doll -- at the same time it was suffering through one of the business' biggest bombs in Adam.
Coleco did not say how much it expects to lose in the fourth quarter and year -- those figures will be out in about 60 days -- but it said it expected to report 1984 sales of more than $800 million -- 80 percent of them from toys -- and to have pre-tax profits from toys of more than $100 million. In 1983, the company lost $7.4 million on sales of $596.5 million, with the loss attributed by analysts to Coleco's woes and problems in producing enough Cabbage Patch dolls to meet the heavy demand.
Leibowitz said that the fallout from Adam's failure would not have as serious an impact on Coleco as some on Wall Street had anticipated. "The bears were yelling that the Adam bomb was going to make coleslaw out of the Cabbage Patch," he said. "It is not as bad as many feared."
When introduced in mid-1983, Adam was billed as a $700 computer system replete with a printer, word-processing program, strong graphics and memory capabilities, and many other features usually found in much more expensive systems.
But Coleco had trouble making the machines fast enough and cheaply enough to meet demand. The company was able to make less than one-third of the machines it promised for Christmas 1983, and production, marketing and quality problems continued to plague Adam. Analysts say that other computer systems introduced since Adam came out have made the Coleco product all but obsolete.
Even with Adam gone, Coleco is not out of trouble, analysts said yesterday. Although the company has a clutch of back-orders for Cabbage Patch dolls and expects to sell $125 million worth in the first quarter, analysts said it was not clear what the company will do once that fad has ended. "Their Cabbage Patch dolls will sustain them to the first part of the year, but after that, we don't see anything that will sustain earnings growth," Vogel said. "We're encouraging people to sell the stock."
In addition to Adam and Cabbage Patch, Coleco makes riding toys and childrens' swimming pools. Like other toy makers, it is scheduled to introduce its next generation of toys at February's toy-industry trade show. "They have enough momentum on carryover volume, especially on Cabbage Patch, to make 1985 a good year," Leibowitz said. "How much more they can accomplish with the new line remains to be seen."