Skullcandy Inc., the headphones maker, reported sales in the second quarter decreased 29.9 percent to $50.8
million from $72.4 million in the same quarter of the prior year. The loss in the period came to $635,000, or 2 cents a share, against earnings of $6.8 million, or 24 cents, a year ago.
“The second quarter was about taking the initial steps toward getting our house in order to drive positive, long-term transformation at Skullcandy,” stated Hoby Darling, president and chief executive officer. “We had to reduce expenses and recalibrate our operating platform to better align with our current sales trajectory. Our decisive actions during the quarter allowed us to break even on the bottom line despite ongoing sales headwinds. With our product, marketing and sales teams now consolidated in Park City we are in a much better position to build momentum and establish Skullcandy as the world's leading lifestyle and performance audio company driven by the creativity and irreverence of youth culture. I am excited about the future and I am confident that we are assembling the right team to successfully execute our strategic plan and deliver significant shareholder value.”
North America net sales decreased 39.1 percent to $39.0 million from $64.1 million in the same quarter of the prior year. The company experienced lower sell-in at a key customer and a decline in sales to several of its specialty retailers. Consistent with its strategy, the company purposefully scaled back its sales to the off-price channel which were down approximately 52 percent compared with the second quarter of 2012.
In addition, the second quarter of 2012 included increased sales from a significant packaging change. International net sales increased 40.6 percent to $11.8 million from $8.4 million in the same quarter of the prior year. Included in the North America segment in second quarter 2013 and second quarter 2012 are net sales of $1.8 million and $7.8 million, respectively, of products that were sold from the United States to customers with a “ship to” location outside of the United States. Including these sales in the international segment, international net sales decreased 15.9 percent, and North America net sales decreased 33.9 percent, compared to the same quarter in the prior year. The decrease in adjusted international net sales is primarily due to a $2.4 million negative impact of winding down the company's relationship with its former Canadian distributor in anticipation of going to a direct model in that country.
Gross profit in the second quarter of 2013 decreased 35.3 percent to $22.8 million from $35.2 million in the same quarter of the prior year.
Gross margin was 44.9 percent in the second quarter of 2013 compared to 48.6 percent in the second quarter of 2012. The decrease in gross margin is primarily due to the impact of the gaming category carrying lower gross margins, coupled with higher sales allowances on gaming products in the retail channel which was not in place a year ago. In addition, gross margin was negatively impacted by certain sales allowances associated with the transition to a direct sales model in Canada and slightly higher raw material costs.
Certain reclassifications have been made to the company's 2012 results to conform to the 2013 presentation to better reflect where certain costs should be presented in the statement of operations. For this reason, tooling depreciation and warranty related expenses are being included in cost of goods sold for all comparable periods.
Selling, general and administrative (SG&A) expenses in the second quarter of 2013 increased 2.0 percent to $24.0 million from $23.5 million in the same quarter of the prior year. As a percentage of net sales, SG&A expenses increased to 47.2 percent from 32.4 percent in the same quarter of the prior year. SG&A expenses in the second quarter of 2013 include $1.1 million in costs related to the closure of the San Clemente, California office which was announced on June 18, 2013. These costs include certain termination benefits and the relocation of the marketing, creative, business development and legal departments, as well as certain sales and international personnel to the company's headquarters in Park City, Utah. Even as the company implements cost control initiatives, the company continues to invest in marketing and demand creation with an increase in expenses of $0.6 million compared to the same quarter of the prior year.
Net loss attributable to the company in the second quarter of 2013 was $(0.6) million, or $(0.02) per diluted share, based on 27.7 million diluted weighted average common shares outstanding. Net income attributable to the company in the same quarter of the prior year was $6.8 million, or $0.24 per diluted share, based on 28.0 million diluted weighted average common shares outstanding. Excluding costs associated with the closure of the San Clemente office including certain severance expenses, non-GAAP adjusted net income in the second quarter of 2013 was $0.1 million, or break even per diluted share based on 27.8 million diluted weighted average common shares outstanding. In the second quarter of 2012, non-GAAP adjusted net income was equal to GAAP net income. For a reconciliation of non-GAAP adjusted net income (loss) to net income (loss), see the accompanying tables at the end of this release.
Balance Sheet Highlights
As of June 30, 2013, cash and cash equivalents totaled $29.7 million compared to $7.0 million as of June 30, 2012 and the company had no debt outstanding, compared to $5.1 million as of June 30, 2012. As of June 30, 2013, the company had $28.5 million of availability under its credit facility. Accounts receivable decreased 16.9 percent to $42.0 million as of June 30, 2013 from $50.5 million as of June 30, 2012 and were down $34.3 million from December 31, 2012. Inventory decreased 7.4 percent to $51.1 million as of June 30, 2013 from $55.2 million as of June 30, 2012.