Business nerws : Skullcandy's New CEO Reports Ugly First Quarter

Skullcandy, Inc. reported an net sales declined 30.4 percent in the first quarter ended March 31 as it slashed distribution to the off price retail channel in North America.

North America net sales decreased 37.9 percent to $28.7 million from $46.1 million in the same quarter of the prior year. The prior year's first quarter was aided by lower retail customer inventory coming out of the holiday season and a packaging change that led to higher sales, creating a challenging year over year quarterly comparison.

Further, the company chose to scale back its sales to the highly discounted off-price channel by approximately 67 percent. This decrease was partially offset by an increase in gaming net sales of 43.8 percent.

International net sales increased 17.5 percent to $8.4 million from $7.1 million in the same quarter of the prior year. Included in the North America segment in Q1 2013 and Q1 2012 are net sales of $2.1 million and $3.4 million, respectively, that were sold from North America to customers with a "ship to" location outside of North America. Adjusting these sales into the international segment, international net sales are flat year over year.

Gross profit in the first quarter of 2013 decreased 35.6 percent to $16.5 million from $25.6 million in the same quarter of the prior year. Gross profit as a percentage of net sales, or gross margin, was 44.5 percent in the first quarter of 2013 compared to 48.1 percent in the first quarter of 2012. The decrease in gross margin is primarily due to a write off of $0.8 million related to end of life products ("EOL"). Certain reclassifications have been made to the 2012 balances to conform to the 2013 presentation so as to better reflect where these costs should reside 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.

“While our first quarter results were in line with expectations, there is still much work to be done in order to improve on our recent performance," stated Hoby Darling, president and CEO. "Skullcandy rapidly expanded its share of the headphone category the past few years driven in large part by a disruptive market position and strong brand equity within action sports. We now need to broaden our growth pillars in order to evolve as an audio leader and expand the category. Our go-forward plans will focus on developing more technology driven, consumer innovative products, creating deeper connections with consumers through authentic and clear brand messages, and winning at the point of sale. Through diligent focus on these key areas, combined with establishing a balanced distribution platform, we believe we can achieve our near-term operating goals while setting the company up to deliver consistent sales and earnings growth over the long-term."

Selling, general and administrative (SG&A) expenses in the first quarter 2013 increased 9.0 percent to $26.3 million from $24.1 million in the same quarter of the prior year. As a percentage of net sales, selling, general and administrative expenses increased to 71.0 percent from 45.3 percent in the same quarter of the prior year. SG&A expenses in the first quarter 2013 include $1.2 million in certain severance related expenses. During the three months ended March 31, 2013, the company recorded a loss of $2.0 million related to disposals of property and equipment for certain EOL products.

Income (loss) from operations decreased to ($9.8 million) from $1.5 million in the same quarter of the prior year.

Net loss attributable to Skullcandy, Inc. in the first quarter of 2013 was ($7.0 million), or ($0.25) per diluted share, based on 27.7 million diluted weighted average common shares outstanding. Net income attributable to Skullcandy, Inc. in the same quarter of the prior year was $1.1 million, or $0.04 per diluted share, based on 27.9 million diluted weighted average common shares outstanding. Excluding certain severance related expenses, non-GAAP adjusted net loss in the first quarter of 2013 was ($6.3 million), or ($0.23) per diluted share based on 27.7 million diluted weighted average common shares outstanding.

As of March 31, 2013, cash and cash equivalents totaled $33.5 million compared to $10.9 million as of March 31, 2012 and the company had no long-term debt. As of March 31, 2013, the company had $25.6 million of availability under its credit facility. Accounts receivable decreased 11.0 percent to $34.8 million as of March 31, 2013 from $39.2 million as of March 31, 2012 and were down $41.5 million from Dec. 31, 2012. Inventory as of March 31, 2013 was consistent with levels as of March 31, 2012.

SKULLCANDY, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of dollars, except share and per share information) (unaudited)
	Three Months Ended March 31,
	2013	2012
Net sales	$ 37,050	$ 53,280
Cost of goods sold	20,564	27,665
Gross profit	16,486	25,615
Selling, general and administrative expenses	26,311	24,131
Income (loss) from operations	(9,825)	1,484
Other expense (income)	539	(48)
Interest expense	103	124
Income (loss) before income taxes and noncontrolling interests	(10,467)	1,408
Income tax expense (benefit)	(3,387)	267
Net income (loss)	(7,080)	1,141
Net loss (income) attributable to noncontrolling interests	33	(24)
Net income (loss) attributable to Skullcandy, Inc.	$ (7,047)	$ 1,117
Net income (loss) per common share attributable to Skullcandy, Inc.
Basic	$ (0.25)	$ 0.04
Diluted	(0.25)	0.04

Source Skullcandy through SportsOneSource