Having largely completed its purge of off-price dealers, Skullcandy Inc. will turn its attention in 2014 to adding retailers who meet its turnaround criteria, including Wal-Mart Stores Inc., the company disclosed Thursday.



SKUL President and CEO Hoby Darling, the former Volcom executive who tied the first phase of SKUL's turnaround to shutting down off-price dealers and enforcing its online pricing policies, told analysts listening to the company's fourth quarter earnings call that it will introduce a line ear buds and headphones at an undisclosed number of Walmart stores in the second quarter.


 

“We'll segment Walmart during this test to only the price points and designs that we believe are most attractive to the Walmart customer and are different than most of our other accounts,” said Darling. “The product focus will be on buds under $20, and headphones under $35 with limited testing above these price points.”


 

While acknowledging that “some people will ask whether Walmart is right for the brand,” Darling said partnering with the world’s largest retailer could ultimately enable SKUL to create more premium and innovative products for its core action sports accounts. He also noted that SKUL will spend more on marketing and merchandising to support its “influencer accounts,” although that will include new women’s boutiques selected to help launch the company’s first line of products designed specifically for women.


 

A veteran of the actions sports industry who preaches the importance of “keeping specialty special,” Darling said the announcement should come as no surprise to SKUL’s action sports accounts. “We're kind of the last brand actually to enter into Walmart,” he said. “So I think unless they have been asleep at the wheel, people have known this one is coming.”


 

Darling declined to say how many of Wal-Mart’s 4,835 U.S. stores would participate in the pilot, but added that the partnership would help the company penetrate many smaller towns where its products are under-distributed.

 


SKUL reported Thursday that its sales to off-price dealers declined almost 50 percent in the fourth quarter ended Dec. 31, 2013, when overall net sales fell 28.4 percent to $72.2 million compared with $101.0 million in the fourth quarter of 2012. In North America, net sales dropped 30.3 percent to $57.6 million from $82.7 million in the same quarter of the prior year as, SKUL cut sales to the off-price channel and aggressively enforced its MAP pricing online. International net sales decreased 19.9 percent to $14.7 million from $18.3 million.

Gross margin dipped 100 basis points (bps) to 43.5 percent primarily due to increased sales returns and trailing credits. SG&A expenses as a percentage of net sales soared 890 bps to 35.9 percent as sales declined nearly six times faster than SG&A expenses.  SKUL reported net income of $3.6 million, or 13 cents per fully diluted share, compared to $11.5 million in the fourth quarter of 2012.


The company ended the year with 3.1 percent less inventory, including approximately $3.4 million it acquired when it took over operations from its Canadian distributor in the fourth quarter of 2013.


SKUL forecast for the first quarter calls for net sales to increase 5 to 7 percent over the year ago quarter and a net loss on a GAAP fully-diluted basis of between 16 and 18 cents per share. For the full year, it’s forecasting a net sales increase in the mid-to-high-single-digit range and net income of between 10 and 14 cents per share.