Skullcandy Operating Income Surges on Strong Q3 Sales

Skullcandy Inc. grew its operating income more than six fold in the third quarter ended Sept. 30 and blew through analysts earnings estimates as net sales increased 16.1 percent to $58.1 million compared with the third quarter of 2013.

U.S. net sales increased 18.8 percent to $38.5 million from $32.4 million in the same quarter of the prior year. International net sales increased 11.1 percent to $19.5 million from $17.6 million in the same quarter of the prior year primarily due to increased sales in Canada, China and Mexico.

“Our third quarter performance exceeded our expectations across the board,” said Hoby Darling, President and Chief Executive Officer. “We grew revenue 16 percent, expanded gross margins and continued to show grittiness in focusing our SG&A spend to those areas that move the needle, all of which led to a sevenfold increase in operating income. At the same time we are looking to the future, as we increased demand creation spend by double digit growth, brought our innovative sports performance line with Sticky Gel to market, and added key talent to the team.

Gross profit in the third quarter of 2014 increased 17.4 percent to $26.3 million from $22.4 million in the same quarter of the prior year. Gross margin increased to 45.3 percent in the third quarter of 2014 from 44.9 percent in the same quarter in 2013.

Selling, general and administrative (SG&A) expenses in the third quarter of 2014 increased 3.8 percent to $22.7 million from $21.9 million in the same quarter of the prior year. The increase in SG&A expenses is primarily due to personnel expenses, demand creation and third-party sales commissions. As a percentage of net sales, SG&A expenses were 39.2 percent compared to 43.8 percent in the same quarter of the prior year.

Operating income in the third quarter of 2014 increased 597.1 percent to $3.6 million from $514,000 in the same quarter of the prior year. The increase in operating income is due to increased sales and gross margin, partially offset by increased SG&A expenses.

Net income in the third quarter of 2014 was $2.1 million, or $0.07 per diluted share, surpassing the $0.04 consensus estimate of 10 analysts following the stock. Net income in the same quarter of the prior year was $1.1 million, or $0.04 per diluted share, based on 27.9 million diluted weighted average common shares outstanding.

Balance sheet highlights
As of Sept. 30, 2014, cash, cash equivalents, and short-term investments totaled $39.7 million compared to $38.8 million as of Dec. 31, 2013. The company continued to have no outstanding debt. Accounts receivable decreased 8 percent to $52.8 million as of Sept. 30, 2014 from $57.5 million as of Dec. 31, 2013 and inventory increased 59 percent to $64.2 million as of Sept. 30, 2014 from $40.3 million as of Dec. 31, 2013, and from $48.7 million as of Sept. 30, 2013 in order to prepare for anticipated revenue growth during the upcoming quarter.

Fourth quarter and full year financial outlook
For the fourth quarter of 2014, the company currently forecasts net sales to increase at a growth rate of 12-14 percent over 2013 levels and net income on a GAAP fully-diluted per share basis of $0.23 to $0.25.
For the full year 2014, the company forecasts net sales to increase 10-12 percent over 2013 levels. The company is providing guidance for GAAP operating income in a range of $9.6 – $10.2 million and providing guidance for net income on a GAAP fully-diluted per share basis to a range of $0.24 to $0.26 per share.