Skullcandy Reports Sharp Drops in Sales and Operating Income

The Park City, UT maker of audio accessories said net sales fell 28.4 percent to $72.2 million compared with $101.0 million in the same quarter of the prior year. North America net sales decreased 30.3 percent to $57.6 million from $82.7 million in the same quarter of the prior year. Consistent with the strategy stated in previous quarters, these results were driven by the company's actions to significantly cut sales to the off-price channel, aggressively enforce its MAP pricing online, and control inventory levels with its customers.

 

International net sales decreased 19.9 percent to $14.7 million from $18.3 million in the same quarter of the prior year.
Included in the North America segment in fourth quarter 2013 and fourth quarter 2012 are net sales of $0.7 million and $7.4 million, respectively, of products that were sold from the United States to customers with a “ship to” location outside of North America. Including these sales in the international segment, international net sales decreased 40.2 percent, and North America net sales decreased 24.4 percent, compared to the same quarter in the prior year.

 

Gross profit in the fourth quarter of 2013 decreased 30.0 percent to $31.4 million from $44.9 million in the same quarter of the prior year. Gross margin was 43.5 percent in the fourth quarter of 2013 compared to 44.5 percent in the same quarter of the prior year. The decrease in gross margin was primarily attributable to increased sales returns and allowance expense due to increased returns rates and trailing credits.

 

Selling, general and administrative (SG&A) expenses in the fourth quarter of 2013 decreased 4.8 percent to $26.0 million from $27.3 million in the same quarter of the prior year. SG&A expenses in the fourth quarter of 2013 included $1.5 million in marketing costs related to the four city tour highlighting key athletes and products. These costs were offset by a decrease in bad debt expense of $1.5 million as compared to the fourth quarter of 2012. As a percentage of net sales, SG&A expenses were 35.9 percent compared to 27.0 percent in the same quarter of the prior year.

 

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.

 

Net income attributable to the fourth quarter of 2013 was $3.6 million, or $0.13 per diluted share, based on 28.1 million diluted weighted average common shares outstanding. Net income attributable to the same quarter of the prior year was $11.5 million, or $0.41 per diluted share, based on 27.8 million diluted weighted average common shares outstanding.

Cash up, inventory down
As of Dec. 31, 2013, cash and cash equivalents totaled $38.8 million compared to $19.3 million as of Dec. 31, 2012 and the company had no outstanding debt as of Dec. 31, 2013 and 2012 respectively. Accounts receivable decreased 24.6 percent to $57.5 million as of Dec. 31, 2013 from $76.3 million as of Dec. 31, 2012, which is consistent with the decline in net sales for the comparable period. Inventory decreased 3.1 percent to $40.3 million as of Dec. 31, 2013 from $41.6 million as of Dec. 31, 2012. Inventory as of Dec. 31, 2013 included approximately $3.4 million associated with the transition to a direct distribution model in Canada at the start of the fourth quarter 2013.

Outlook
For the first quarter of 2014, the company currently forecasts net sales to increase between 5 percent to 7 percent over 2013 levels and net loss on a GAAP fully-diluted basis to be between ($0.16) to ($0.18) per share.
For the full year 2014, the company currently forecasts net sales to increase in the mid to high single digit percentage range over 2013 levels and net income on a GAAP fully-diluted basis to be between $0.10 to $0.14 per share.