Skullcandy Says Currency Depreciation, Port Congestion Offset Q1 Growth

Skullcandy Inc. reported net sales in the first quarter of 2015 increased 18 percent to $46.2 million from $39.1 million in the same quarter of the prior year, or growth of 21 percent on a currency-neutral (c-n) basis.

The Park City, UT-based maker of ear buds and other audio gear for action sports, outdoor and fitness enthusiasts reported U.S. net sales increased 19 percent to $31.1 million from $26.1 million in the same quarter of the prior year. International (Non U.S.) net sales increased 17 percent to $15.1 million from $13.0 million in the same quarter of the prior year, or 26 percent c-n. Total net sales increased across both segments, primarily due to increased gaming sales in the U.S., and increased sales in China, India, and Latin America.

Gross profit in the first quarter of 2015 increased 3 percent to $18.7 million from $18.2 million in the same quarter of the prior year. Gross margin decreased to 40.5 percent in the first quarter of 2015 from 46.5 percent in the same quarter in 2014 primarily due to foreign currency depreciation, increased air-freight and warehousing expense to overcome west-coast port slowdowns, and product mix shift to gaming products.

Selling, general and administrative (SG&A) expenses in the first quarter of 2015 increased 1 percent to $22.4 million from $22.1 million in the same quarter of the prior year. The modest increase in SG&A expenses is primarily due to increases in demand creation and research and innovation expenses, partially offset by decreases in bad debt and professional fees. As a percentage of net sales, SG&A expenses were 48.4 percent compared to 56.5 percent in the same quarter of the prior year.

Earnings per share meet expectations
Operating loss in the first quarter of 2015 improved by 7 percent to $3.6 million from $3.9 million in the same quarter of the prior year. The improvement in operating loss was due to increased sales and gross profits, partially offset by increased SG&A expenses.

Net loss in the first quarter of 2015 was $3.7 million, or $0.13 per share, in line with analysts' consensus estimate, based on 28.3 million weighted average common shares outstanding. Net loss in the same quarter of the prior year was $3.5 million, or $0.12 per share, based on 27.8 million weighted average common shares outstanding.

“Our first quarter revenue demonstrates the increasing global strength of the Skullcandy and Astro brands and our long-term growth potential,” said Hoby Darling, President and Chief Executive Officer. “Our sales are in the right channels to drive long-term brand and the consumer response to our new product introductions are driving strong full price selling at retail. The underlying trends in our business are even stronger than our GAAP results indicate as we are only reporting the significant foreign currency change effects in our revenue line, yet the changes had significant impacts to gross margin and operational bottom line growth. Despite these headwinds, I feel even more confidence about our prospects for the year and our longer term success. The team is on full attack. We are confident that our actions aimed at improving both our top and bottom line, while investing in innovation and demand creation, have us on track to achieve our full year guidance, and more importantly deliver sustained growth and increased earnings over the long-term.”

Balance sheet highlights

As of March 31, cash, cash equivalents, and short-term investments totaled $34.4 million compared to $36.6 million as of Dec. 31, 2014. The company continued to have no outstanding debt. Accounts receivable, net decreased 39 percent to $45.4 million as of March 31, from $74.4 million as of Dec. 31, 2014. Inventories, net increased 16 percent to $63.9 million as of March 31 from $55.0 million as of Dec. 31, 2014.

2015 second quarter and full year financial outlook

For the second quarter of 2015, the company currently forecasts net sales to increase at a growth rate of 7-9 percent over 2014 levels and net income on a U.S. GAAP fully-diluted per share basis of a range of $0.01 to $0.03.

For the full year 2015, the company forecasts net sales to increase 13-15 percent over 2014 levels. The company reiterated guidance for net income on a U.S. GAAP fully-diluted per share basis of a range of $0.36 to $0.40 per share.