Skullcandy Inc.s, which is planning to raise up to $125 million in an IPO, reported net sales surged 65.9 percent to $36.0 million in the first quarter ended March 31, 2011. The Park City, Utah maker of headphones for the action sports market said sales to its European distributor and big box retailers in the United States drove growth, allowing the seven-year-old company to become profitable for the quarter.


Net sales reached $36.0 million during the quarter, up $14.3 million from $21.7 million for the three months ended March 31, 2010, according to an amendment Skullcandy filed last week to its IPO registration statement.

 

The increase includes a $4.9 million increase in international net sales and a $4.0 million increase in net sales to large national retailers, including Best Buy and Target, driven by increased volumes to existing retailers and the addition of new retailers. Online net sales increased $2.0 million compared to the prior period.

 

Domestic net sales increased $9.5 million, or 50.3 percent, to $28.4 million, or 78.9 percent of our net sales for the three months ended March 31, 2011 from $18.9 million, or 87.1 percent of our net sales for the three months ended March 31, 2010. This increase primarily reflects a $4.0 million increase in net sales to large national retailers as noted above.

 

International net sales, which consist primarily of net sales in Europe and Canada, increased $4.9 million, or 175.0 percent, to $7.6 million, or 21.1 percent of our net sales for the three months ended March 31, 2011 from $2.8 million, or 12.9 percent of our net sales for the three months ended March 31, 2010.

 

 

This increase was primarily attributable to a 312.0 percent increase in net sales to our exclusive European distributor. An arbitration hearing with our exclusive European distributor resulted in a decrease in net sales in Europe in 2010. The arbitration was resolved in the third quarter of 2010. Following the arbitration proceeding, our agreement with this distributor will continue until 2013. We are currently working aggressively with this distributor to expand our European sales resulting in increases as noted above.

 

Gross Profit
Gross profit increased $7.3 million, or 66.4 percent, to $18.3 million for the three months ended March 31, 2011 from $11.0 million for the three months ended March 31, 2010. Gross profit as a percentage of net sales, or gross margin, was 50.8 percent for both the three months ended March 31, 2011 and 2010.

 

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.8 million, or 89.5 percent, to $14.4 million for the three months ended March 31, 2011 from $7.6 million for the three months ended March 31, 2010. This increase was primarily the result of $2.5 million in increased payroll related expenses and $1.9 million in increased marketing spend on in-store advertising and in-store displays, as well as costs associated with attending and sponsoring a higher number of trade shows and events.

 

The balance of the increase resulted from expanding our employee base during the year to support our growth and increased sales commission expenses resulting from increased net sales. As a percentage of net sales, selling, general and administrative expenses increased 5.0 percentage points to 40.0% for the three months ended March 31, 2011 from 35.0% for the three months ended March 31, 2010.

 

Income from Operations
As a result of the factors above, income from operations increased $500,000, or 14.7 percent, to $3.9 million for the three months ended March 31, 2011 from $3.4 million for the three months ended March 31, 2010. Income from operations as a percentage of net sales decreased 4.9 percentage points to 10.9% for the three months ended March 31, 2011 from 15.8 percent for the three months ended March 31, 2010.

Interest Expense
Interest expense decreased $200,000 to $2.0 million for the three months ended March 31, 2011 from $2.2 million for the three months ended March 31, 2010. The lower expense for the three months ended March 31, 2011 was a result of lower expense associated with paying down unsecured debt, partially offset by greater use of our credit facility.


 

Income Taxes
Income taxes were $900,000 for the three months ended March 31, 2011 compared to $500,000 for the three months ends March 31, 2010. Our effective tax rate for the three months ended March 31, 2011 and the three months ended March 31, 2010 was 44.0 percent and (177 percent), respectively. The decrease in the effective income tax rate is primarily due to the difference between the book and tax treatment of the additional consideration payable to stockholders that redeemed shares pursuant to the securities purchase and redemption agreement.

 

Net Income (loss)
As a result of the factors above, net income increased $1.9 million, or 237.5 percent, to $1.1 million for the three months ended March 31, 2011 compared to a net loss of $800,000 for the three months ended March 31, 2010.














































































































































































































































Year ended December 31,     Three Months ended
March 31,		  
    2006     2007     2008     2009     2010         2010             2011      
                      (as restated)                    
    (in thousands, except share and per share data)  
             

Net sales

   $ 9,105      $ 35,346      $ 80,380      $ 118,312      $ 160,583      $ 21,658      $ 36,018   

Cost of goods sold

     5,493        18,162        41,120        60,847        75,078        10,660        17,703   
                                                       

Gross profit

     3,612        17,184        39,260        57,465        85,505        10,998        18,315   

Selling, general and administrative expenses

     2,658        7,350        18,040        28,574        67,602        7,572   
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