Skullcandy, Inc. reported sales to the off-price channel plunged 74.6 percent, or by $4.4 million, compared with the third quarter of 2012 as it continued to tighten distribution as part of a turnaround plan aimed at protecting its brand, margins and dealers.
The maker of audio and gaming headphones and other audio accessories said total sales were off 29.6 percent to $50.0 million from the third quarter of 2012. In North America net sales decreased 39.4 percent to $34.8 million from $57.4 million, including a $2.2 million decline in sales in Canada, where SKUL is transitioning to a direct distribution model. International net sales increased 11.9 percent to $15.2 million from $13.6 million in the same quarter of the prior year.
“Our two largest accounts on a combined basis were up for the quarter,” said CEO, president and director Seth Darling, who was brought on earlier this year to turn around the company. “As were our largest 10 accounts combined, if you exclude RadioShack, who is going through its own turnaround. We are growing our business with the accounts where we want to win.”
Still, gross margins fell 250 basis points to 44.9 percent compared with the third quarter of 2012 as SKUL increased allowances to retail customers and sales shifted toward lower margin products.
Selling, general and administrative (SG&A) expenses decreased 5.0 percent to $21.9 million, net of $1.0 million in costs related to the closing of the company’s San Clemente, CA office and relocation of marketing, creative, business development and legal departments to the company's headquarters in Park City, UT. As a percentage of net sales, SG&A expenses increased to 43.8 percent compared with 32.5 percent in the same quarter of the prior year. Net income was $1.1 million, compared with $6.5 million in the third quarter of 2012.
SKUL ended the quarter with inventory valued at $48.7 million, down 12 percent from a year earlier.
Though inspired by the action sport lifestyle, SKUL’s most high profile holiday promotions in the coming year will focus on pro team athletes. The company will launch integrated TV, digital and grassroots campaigns featuring NBA stars Derrick Rose and Kevin Durant over the holidays to be followed next year by campaigns featuring Stevie Johnson of the Buffalo Bills and Thiago Silva, the captain of the Brazilian national men’s football team.
Darling’s turnaround plan pivots around bringing disruptive innovation to the sub-$100 price point for head phones, an area SKUL already dominates and where there has been very little innovation or differentiation. The company will continue to push its Crusher – an over-the-ears headphone with an MSRP of $99.99 and expects to introduce wireless headphones in 2014 at a disruptive price point.
“If you look at Skullcandy's current position in the marketplace number 1 in-ear and number 1#2 in all models $100 and under, it is obvious where we dominate and win and that is where our product roadmap is headed,” said Darling. “Our athlete, musician and trend leaders continue to share that they're moving back towards more portable and easy-to-use, in-ear products and moving away from more conspicuous consumption over-ear premium products.”
