Skullcandy, Inc. halved its loss and resumed growing in the first quarter ended March 31 after spending much of 2013 narrowing its distribution and cutting expenses to enhance margins.


“The focused execution of our five pillar growth strategy led to a solid start to 2014,” said Hoby Darling, President and Chief Executive Officer of Skullcandy. “The first quarter marked our return to revenue growth as both our domestic and international markets posted positive gains. Equally important, gross margins stabilized and we were able to leverage operating expenses while continuing to invest in key long-term growth drivers such as demand creation, innovation and talent. As a result, our bottom line performance improved dramatically from a year ago, putting us on course to exceed our original profit targets for the full year. We are encouraged by our current momentum and believe our commitment to culture and operational excellence is providing our teams the foundation to continue building remarkable products and developing deep, authentic connections with our consumer.”
 

Net sales in the first quarter of 2014 increased 5.5 percent to $39.1 million from $37.1 million in the same quarter of the prior year. North America net sales increased 1.3 percent to $29.0 million from $28.7 million in the same quarter of the prior year. International net sales increased 19.7 percent to $10.0 million from $8.4 million in the same quarter of the prior year. Included in the North America segment in first quarter 2014 and first quarter 2013 are net sales of $0.6 million and $2.1 million, respectively, of products that were sold from the United States to customers with a “ship to” location outside of North America. These sales represented an increase of approximately 1.2 percent to the International Segment, and an increase of approximately 7.2 percent to the North American segment compared to the same quarter in the prior year.
 

Gross profit in the first quarter of 2014 increased 10.2 percent to $18.2 million from $16.5 million in the same quarter of the prior year. Gross margin was 46.5 percent in the first quarter of 2014 compared to 44.5 percent in the same quarter of the prior year. The increase in gross margin was primarily attributable to a shift in product sales mix into higher margin products, decreases in shipping related costs, and reductions in warranty related costs.
 

Selling, general and administrative (SG&A) expenses in the first quarter of 2014 decreased 16.1 percent to $22.1 million from $26.3 million in the same quarter of the prior year. The decrease in SG&A expenses is primarily attributable to reduction in write-downs of tooling, fixtures and furniture, severance, performance-based compensation due to a change in accounting methodology which shifts the majority of the expense to later in the calendar year, and bad debt expense. As a percentage of net sales, SG&A expenses were 56.5 percent compared to 71.0 percent in the same quarter of the prior year. The company continues to invest in marketing and demand creation efforts at the same level compared to the same quarter of the prior year with an increased focus on in-store displays and presence.
 

Net loss attributable to the company in the first quarter of 2014 was $(3.5) million, or $(0.12) per diluted share, based on 27.8 million diluted weighted average common shares outstanding. Net income attributable to the company in the same quarter of the prior year was $(7.0) million, or $(0.25) per diluted share, based on 27.7 million diluted weighted average common shares outstanding.
 

Balance sheet  
As of March 31, 2014, cash and cash equivalents totaled $48.2 million compared to $38.8 million as of Dec. 31, 2013. The company continued to have no outstanding debt. Accounts receivable decreased 37 percent to $36.4 million as of March 31, 2014 from $57.5 million as of Dec. 31, 2013, which is consistent with the seasonality of our business. Inventory increased 5.9 percent to $42.7 million as of March 31, 2014 from $40.3 million as of Dec. 31, 2013.

 
2014 second quarter and full year financial outlook
 
For the second quarter of 2014, the company currently forecasts net sales to increase between 5 percent to 7 percent over 2013 levels and net income on a GAAP fully-diluted basis to be approximately breakeven.

 
For the full year 2014, the company still forecasts net sales to increase in the mid to high single digit percentage range over 2013 levels. The company now expects net income on a GAAP fully-diluted basis to be between $0.16 and $0.20 per share, up from its previous expectation of $0.10 to $0.14 per share.