Business news :Skullcandy's Q4 Earnings Decline on Margin Pressures

Skullcandy, Inc. reported fourth quarter earnings slid 7.3 percent, hurt by increased sales of lower margin products, increased sales in lower margin channels and discounting. Net sales increased 21.0 percent to $101.0 million.

Select Highlights

• Fourth quarter GAAP net income was $11.5 million, or $0.41 per diluted share
• Fourth quarter non-GAAP adjusted net income was $13.2 million, or $0.47 per diluted share
• Annual net sales increased 28.1 percent to $297.7 million
• Annual GAAP net income increased 39.1 percent to $25.9 million, or $0.92 per diluted share
• Annual non-GAAP adjusted net income increased 19.3 percent to $28.0 million, or $1.00 per diluted share

"We are pleased with our overall fourth quarter results during what was a challenging environment," said Rick Alden, Skullcandy's Interim Chief Executive Officer. "Our intention in 2013 is to tighten our original distribution strategy and make key investments in product development and demand creation while endeavoring to reengage the consumer at the point of sale. I am confident that, with the solid foundation already in place and the talented group of people working here, we can accomplish our near-term objectives while creating a stronger, more efficient company for the future."

Fourth Quarter Results

Net sales in the fourth quarter of 2012 increased 21.0 percent to $101.0 million from $83.4 million in the same quarter of the prior year. North America net sales in the fourth quarter increased 12.0 percent to $82.7 million from $73.8 million in the same quarter of the prior year. International net sales in the fourth quarter increased 90.2 percent to $18.3 million from $9.6 million in the same quarter of the prior year. The increase in North America net sales was primarily driven by increased Astro Gaming sales of $13.6 million. The increase in international net sales was primarily driven by increased sales in Europe.

Gross profit in the fourth quarter of 2012 increased 8.5 percent to $45.2 million from $41.6 million in the same quarter of the prior year. Gross profit as a percentage of net sales, or gross margin, was 44.7 percent in the fourth quarter of 2012 compared to 49.9 percent in the same quarter of the prior year. The decrease in gross margin is due to increased sales of lower margin products, increased sales in lower margin channels and discounting.

Selling, general and administrative expenses in the fourth quarter 2012 increased 29.8 percent to $27.5 million and included $1.5 million of bad debt expense due to the bankruptcy filing of a major retail customer and $0.7 million of expenses associated with the settlement of a patent litigation matter. As a percentage of net sales, selling, general and administrative expenses increased to 27.2 percent from 25.4 percent in the same quarter of the prior year.

Net income attributable to Skullcandy, Inc. in the fourth quarter of 2012 was $11.5 million, or $0.41 per diluted share, based on 27.8 million diluted weighted average common shares outstanding. Net income attributable to Skullcandy, Inc. in the same quarter of the prior year was $12.3 million, or $0.44 per diluted share, based on 28.0 million diluted weighted average common shares outstanding.

Excluding certain expenses related to the bankruptcy filing of a major retail customer in Europe and expenses associated with the settlement of a patent litigation matter, non-GAAP adjusted net income in the fourth quarter of 2012 was $13.2 million, or $0.47 per diluted share based on 27.8 million diluted weighted average common shares outstanding. Non-GAAP adjusted net income in the same quarter of the prior year was $13.2 million, or $0.47 per diluted share based on 28.0 million diluted weighted average common shares outstanding. For a reconciliation of non-GAAP adjusted net income to net income and non-GAAP diluted earnings per share to GAAP earnings per share, see the accompanying tables at the end of this release.

Balance Sheet Highlights

As of December 31, 2012, cash and cash equivalents totaled $19.3 million compared to $23.3 million at December 31, 2011 and the company had no long-term debt. As of December 31, 2012, the company had $27.8 million of availability under its credit facility. Inventory decreased 5.5 percent to $41.6 million as of December 31, 2012 from $44.0 million as of December 31, 2011. Accounts receivable increased 50.8 percent, or $25.7 million, to $76.3 million as of December 31, 2012. The increase is primarily due to increased receivables of $13.7 million at Astro Gaming due to the launch of Astro products at certain retail stores and an increase in other international receivables, as well as an overall increase in fourth quarter sales in 2012 compared to 2011.

( Source Skullcandy through SportsOneSource )