Skullcandy Nearly Doubles Q2 Earnings Despite Soaring Expenses

Skullcandy, Inc. reported net sales in the second quarter ended June 30 increased 46.4% to $52.4 million from $35.8 million in the same period of the prior year.

Domestic net sales increased 46.2% to $42.1 million and international net sales increased 47.1% to $10.3 million. Online net sales, which are included in domestic net sales, increased 284.3% to $4.3 million in the second quarter of 2011 from $1.1 million in the same period of the prior year.

“Skullcandy's innovative products combined with our authentic roots in music, fashion and action sports uniquely position the brand with consumers around the world,” said Jeremy Andrus, Skullcandy's President and CEO. “We believe this positioning, along with the continued global expansion of mobile devices and portable media, provides a strong foundation for the company's continued long-term growth.”

Gross profit in the second quarter of 2011 increased 46.4% to $26.8 million from $18.3 million in the same period of the prior year. Gross profit as a percentage of net sales was 51.1% for the three months ended June 30, 2011 compared to 51.2% for the three months ended June 30, 2010.

Selling, general and administrative (SG&A) expenses in the second quarter of 2011 increased 84.3% to $17.2 million from $9.3 million in the same period of the prior year. The increase was primarily the result of $3.7 million in increased payroll-related expenses due to an expanding employee base to support planned growth, as well as an additional $2.9 million in increased marketing expenses primarily related to increased in-store advertising, in-store displays, tradeshow attendance, and event sponsorship. Income from operations increased 6.8% to $9.6 million from $9.0 million in same period of the prior year.

Net income in the second quarter of 2011 was $4.3 million, or 22 cents per diluted share, based on 19.8 million weighted average common shares outstanding. Net income in the same period of the prior year was $2.1 million, or 11 cents per diluted share, based on 19.1 million weighted average common shares outstanding. Net income of $2.1 million in the second quarter of 2010 included a $2.3 million expense related to the fair value of amounts that were payable as additional consideration to non-employee stockholders pursuant to the securities purchase and redemption agreement in 2010.

EBITDA in the second quarter of 2011 increased 45.2% to $9.9 million from $6.8 million in the same period of the prior year. Adjusted EBITDA increased 8.9% to $9.9 million from $9.1 million in the same period of the prior year. For a reconciliation of EBITDA and adjusted EBITDA to net income, see the accompanying tables.

Outlook

For 2011, the company expects net sales in the range of $208 million to $218 million and diluted earnings per share in the range of 65 to 70 cents, based on diluted weighted average shares outstanding of approximately 23.7 million. Diluted earnings per share for 2011 includes $6.7 million of one-time expenses ($5.3 million net of tax effects) that the company expects to incur in the third quarter. These one-time expenses were incurred in connection with the company's initial public offering and relate to the securities purchase and redemption agreement and the debt discount and deferred financing fees related to the conversion of the convertible note. Excluding these one-time expenses, the company expects adjusted diluted earnings per share in the range of 87 to 92 cents, based on diluted weighted average shares of approximately 23.7 million.