Skullcandy Inc. reported sales jumped 57.5 percent in the third quarter, to $60.6 million. Domestic sales increased 37.2 percent, international net sales jumped 75.9 percent and online sales grew 416.7 percent.

Other highlights of the quarter:

  • Gross profit increased 43.9 percent to $28.8 million
  • GAAP net income, which includes $3.6 million of one-time charges related to a 2008 capital transaction, increased 177.5 percent to $1.0 million, or $0.04 per diluted share
  •  Adjusted net income, which excludes $3.6 million of one-time charges related to a 2008 capital transaction, increased 76.7 percent to $4.6 million, or $0.17 per diluted share

Jeremy Andrus, Skullcandy's president and CEO, stated, “We are pleased with our strong third quarter results and continued growth across all areas of our business. Despite some of the headwinds in the overall macro environment, our business continues to benefit from the strength of the brand, growth in portable media and consumers' desire for higher quality audio accessories. Our 57.5 percent increase in net sales was once again driven by double-digit increases in both units and average selling prices and strong growth across our domestic, international and online sales channels. With the acquisition of our European distributor rights in this quarter, we remain excited about our global growth opportunities and our ability to control our business in that region.”

Third Quarter Results

Net sales in the third quarter of 2011 increased 57.5 percent to $60.6 million from $38.5 million in the same quarter of the prior year. Domestic net sales increased 37.2 percent to $39.8 million, international net sales increased 75.9 percent to $14.6 million, and online net sales increased 416.7 percent to $6.2 million during this quarter. In the third quarter of 2011, the company began separating online sales from domestic net sales for reporting purposes. On a combined basis, domestic net sales and online sales increased 52.3 percent to $46.0 million.

Gross profit in the third quarter of 2011 increased 43.9 percent to $28.8 million from $20.0 million in the same quarter of the prior year. Gross profit as a percentage of net sales, or gross margin, was 47.5 percent for the third quarter of 2011 compared to 52.0 percent for the third quarter of 2010. The decrease in gross margin is partially due to the sale of Astro Gaming, Inc. inventory that was recorded at fair value under the acquisition method of accounting. Excluding the $0.5 million increase in cost of goods sold related to the step-up in fair value of inventory in purchase accounting, gross margin would have been 48.3 percent. In addition, we have experienced lower gross margins on our direct business in Europe from August 26, 2011 through September 30, 2011 as a result of inventory that was recorded at fair value under the acquisition method of accounting. The company expects the gross margins to increase in Europe after the initial inventory acquired is sold as the future inventory will be purchased at a lower cost, with resulting higher gross margins.

Selling, general and administrative expenses in the third quarter of 2011 increased 54.8 percent to $20.6 million from $13.3 million in the same quarter of the prior year. This increase was primarily the result of $4.2 million in increased payroll related expenses and benefits due to an increased employee headcount to support planned growth and $1.3 million in increased marketing expenses primarily related to in-store advertising, in-store displays, trade show attendance, event and athlete sponsorships and promotional products. Income from operations increased 22.5 percent to $8.2 million from $6.7 million in same quarter of the prior year.

Other expense in the third quarter of 2011 decreased $2.1 million to $1.7 million from $3.8 million in the same quarter last year. For the third quarter of 2011, other expense consisted primarily of a $1.4 million expense related to a derivative liability associated with the third contingent payment paid pursuant to the securities purchase and redemption agreement, a 2008 capital transaction. For the third quarter of 2010, other expense consisted primarily of a $3.8 million expense for a derivative liability associated with the second and third contingent payments paid pursuant to the securities purchase and redemption agreement.

Interest expense in the third quarter of 2011 increased $0.6 million to $3.1 million from $2.5 million in the third quarter of 2010. The higher expense for the third quarter of 2011 was due to an expense of $2.2 million related to the second contingent payment paid pursuant to the securities purchase and redemption agreement that was recognized upon completion of our initial public offering.

The second and third contingent payments paid pursuant to the securities purchase and redemption agreement, a historical capital transaction that occurred in 2008, were paid in connection with the completion of our initial public offering. There will be no expenses associated with the securities purchase and redemption agreement in the future.

Net income in the third quarter of 2011 was $1.0 million, or $0.04 per diluted share, based on 26.3 million weighted average common shares outstanding. Excluding the expenses associated with one-time contingency payments paid pursuant to the securities purchase and redemption agreement that were recognized in connection with the closing of the initial public offering, adjusted net income in the third quarter 2011 increased 76.7 percent to $4.6 million, or $0.17 per diluted share. Net loss in the same quarter of the prior year was $1.2 million, or $(0.09) per diluted share, based on 14.1 million weighted average common shares outstanding. Adjusted net income in the same quarter last year was $2.6 million, or $0.13 per diluted share based on 19.4 million weighted average common shares outstanding. For a reconciliation of adjusted net income to net income (loss), see the accompanying tables.

EBITDA in the third quarter of 2011 increased 137.8 percent to $7.4 million from $3.1 million in the same quarter of the prior year. Adjusted EBITDA increased 26.8 percent to $8.7 million from $6.9 million in the same quarter of the prior year. For a reconciliation of EBITDA and adjusted EBITDA to net income, see the accompanying tables.

Outlook

The company is raising its outlook for 2011 and now expects net sales to be approximately $231.0 million and diluted earnings per share of approximately $0.78 based on diluted weighted average shares outstanding of approximately 23.7 million. Diluted earnings per share for 2011 will include $3.6 million of one-time after-tax expenses recorded in the third quarter. These one-time expenses were recognized in connection with the closing of the company's initial public offering and relate to the securities purchase and redemption agreement. Excluding these one-time expenses, the company expects adjusted diluted earnings per share for 2011 to be approximately $0.93 based on diluted weighted average shares of approximately 23.7 million.