Skullcandy, Inc. reported year-over-year sales plummeted 29.6 percent to $50.0 million in the third quarter as it continued to slash distribution to off-price retailers in an effort to restore margins.
The Park City, UT maker of audio and gaming headphones and other accessories, reported gross margins of 44.9 percent, down 250 basis points compared with the third quarter of 2012.
“The third quarter was a productive period as we continued to execute against the key pillars we have established that will put Skullcandy on a path towards long-term growth and shareholder value creation,” said Hoby Darling, President and Chief Executive Officer of Skullcandy. “We have a good deal of work to go, however, we made important progress in fine tuning our distribution model, which over time should improve full price selling and strengthen our premium brand positioning. Our corporate culture is getting stronger and our level of execution continues to improve, helping us achieve our profitability target even as we purposefully reduced sales intra quarter to certain retailers as part of our ongoing Edit, Amplify and Add marketplace transformation strategy and continued to invest in in-store demand creation and innovation.”
Darling said he was very encouraged by the progress and is confident Skullcandy is now structured to to deliver improved results beginning next year. Skullcandy designs, markets and distributes its products under the Skullcandy, Astro Gaming and 2XL brands. Since its founding in 2003 as an action sports-inspired lifestyle brand, Skullcandy has grown into a global brand distribted in more than 80 countries.
Net sales in the third quarter of 2013 decreased 29.6 percent to $50.0 million from $71.0 million in the same quarter of the prior year. North America net sales decreased 39.4 percent to $34.8 million from $57.4 million in the same quarter of the prior year. Consistent with the strategy stated in previous quarters, the company continued to scale back its sales to the off-price channel, which were down approximately $4.4 million, or 74.6 percent, compared with the third quarter of 2012. In addition, there was a decrease in net sales of $2.2 million as a result of the transition to a direct distribution model in Canada. International net sales increased 11.9 percent to $15.2 million from $13.6 million in the same quarter of the prior year.
Included in the North America segment in third quarter 2013 and third quarter 2012 are net sales of $0.9 million and $3.0 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 2.5 percent, and North America net sales decreased 37.8 percent, compared to the same quarter in the prior year.
Gross profit in the third quarter of 2013 decreased 33.4 percent to $22.4 million from $33.7 million in the same quarter of the prior year. Gross margin was 44.9 percent in the third quarter of 2013 compared to 47.4 percent in the same quarter of the prior year. The decrease in gross margin was primarily attributable to increased allowances to the company's retail customers and a shift to a lower margin product mix.
Selling, general and administrative (SG&A) expenses in the third quarter of 2013 decreased 5.0 percent to $21.9 million from $23.1 million in the same quarter of the prior year. SG&A expenses in the third quarter of 2013 include $1.0 million in costs related to the closure of the San Clemente, California office. These costs include certain termination benefits, charges associated with subleasing the former office space, 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. As a percentage of net sales, SG&A expenses were 43.8 percent compared to 32.5 percent in the same quarter of the prior year. The company continues to invest in marketing and demand creation efforts with an increase in expenses of $0.3 million compared to 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 company in the third quarter of 2013 was $1.1 million, or $0.04 per diluted share, based on 27.9 million diluted weighted average common shares outstanding and included a $1.0 million one-time tax benefit related to the retirement of certain incentive stock options as part of the employee stock option exchange that was completed in September 2013. Net income attributable to the company in the same quarter of the prior year was $6.5 million, or $0.23 per diluted share, based on 28.1 million diluted weighted average common shares outstanding. Excluding costs associated with the closure of the San Clemente office, non-GAAP adjusted net income in the third quarter of 2013 was $1.7 million, or $0.06 per diluted share based on 27.9 million diluted weighted average common shares outstanding. In the third quarter of 2012, non-GAAP adjusted net income was equal to GAAP net income.
Balance sheet highlights
As of Sept. 30, 2013, cash and cash equivalents totaled $34.7 million compared to $1.9 million as of September 30, 2012 and the company had no outstanding debt, compared to $5.2 million of outstanding debt as of September 30, 2012. As of September 30, 2013, the company had $50.0 million of availability under its new credit facility. Accounts receivable decreased 31.3 percent to $41.2 million as of September 30, 2013 from $60.0 million as of September 30, 2012, which is consistent with the decline in net sales for the comparable period. Inventory decreased 12.0 percent to $48.7 million as of September 30, 2013 from $55.4 million as of September 30, 2012. Inventory as of September 30, 2013 included approximately $2.5 million associated with the transition to a direct distribution model in Canada at the start of the third quarter 2013.