Fourth quarter Results
◦Net sales were $72.2 million
◦Gross margin was 43.5%
◦Net income was $0.13 per diluted share
◦Non-GAAP adjusted net income was $0.13 per diluted share
"2013 was a year of tremendous positive change geared toward executing our turnaround strategy. We now have a clear long-term vision for transforming Skullcandy and Astro Gaming into the most innovative brands in audio through obsessing about our consumers, disruptive technologies, and creative branding," said Hoby Darling, President and Chief Executive Officer of Skullcandy. "The year was capped off by a strong fourth quarter performance focused on reinforcing our brand ethos and positioned the business for long-term success. The great work the team has done establishing a new direction for the Company speaks volumes about our people and our culture and the foundation we are building. With our five key growth pillars established and a clear understanding of our consumer, where we will innovate and focus, and a segmented distribution strategy, it is now about executing. We are confident we can achieve our vision of being a global audio leader while delivering profitable growth, increased shareholder value and living by our core values."
Net sales in the fourth quarter of 2013 decreased 28.4% to $72.2 million from $101.0 million in the same quarter of the prior year. North America net sales decreased 30.3% to $57.6 million from $82.7 million in the same quarter of the prior year. Consistent with the strategy stated in previous quarters, these results were driven by the Company's actions to significantly cut sales to the off-price channel, aggressively enforce its MAP pricing online, and control inventory levels with its customers. International net sales decreased 19.9% to $14.7 million from $18.3 million in the same quarter of the prior year. Included in the North America segment in fourth quarter 2013 and fourth quarter 2012 are net sales of $0.7 million and $7.4 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 40.2%, and North America net sales decreased 24.4%, compared to the same quarter in the prior year.
Gross profit in the fourth quarter of 2013 decreased 30.0% to $31.4 million from $44.9 million in the same quarter of the prior year. Gross margin was 43.5% in the fourth quarter of 2013 compared to 44.5% in the same quarter of the prior year. The decrease in gross margin was primarily attributable to increased sales returns and allowance expense due to increased returns rates and trailing credits.
Selling, general and administrative (SG&A) expenses in the fourth quarter of 2013 decreased 4.8% to $26.0 million from $27.3 million in the same quarter of the prior year. SG&A expenses in the fourth quarter of 2013 included $1.5 million in marketing costs related to the four city tour highlighting key athletes and products. These costs were offset by a decrease in bad debt expense of $1.5 million as compared to the fourth quarter of 2012. As a percentage of net sales, SG&A expenses were 35.9% compared to 27.0% in 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 fourth quarter of 2013 was $3.6 million, or $0.13 per diluted share, based on 28.1 million diluted weighted average common shares outstanding. Net income attributable to the same quarter of the prior year was $11.5 million, or $0.41 per diluted share, based on 27.8 million diluted weighted average common shares outstanding. For a reconciliation of non-GAAP adjusted net income (loss) to net income (loss), see the accompanying tables at the end of this release.
Balance Sheet Highlights
As of December 31, 2013, cash and cash equivalents totaled $38.8 million compared to $19.3 million as of December 31, 2012 and the Company had no outstanding debt as of December 31, 2013 and 2012 respectively. Accounts receivable decreased 24.6% to $57.5 million as of December 31, 2013 from $76.3 million as of December 31, 2012, which is consistent with the decline in net sales for the comparable period. Inventory decreased 3.1% to $40.3 million as of December 31, 2013 from $41.6 million as of December 31, 2012. Inventory as of December 31, 2013 included approximately $3.4 million associated with the transition to a direct distribution model in Canada at the start of the fourth quarter 2013.
2014 First Quarter and Full Year Financial Outlook
For the first quarter of 2014, the Company currently forecasts net sales to increase between 5% to 7% over 2013 levels and net loss on a GAAP fully-diluted basis to be between ($0.16) to ($0.18) per share.
For the full year 2014, the Company currently forecasts net sales to increase in the mid to high single digit percentage range over 2013 levels and net income on a GAAP fully-diluted basis to be between $0.10 to $0.14 per share.
Call Information
A conference call to discuss the fourth quarter of 2013 results is scheduled for today, March 6, 2014, at 4:30 PM Eastern Time / 2:30 PM Mountain Time. A broadcast of the call will be available on the Company's website, www.skullcandy.com. Analysts and investors can participate in the live call by dialing (877) 705-6003 or (201) 493-6725. A replay of the conference call will be available until 11:59 p.m. ET on March 13, 2014 and can be accessed by dialing (877) 870-5176 or (858) 384-5517 and entering conference ID number 13576848.
About Skullcandy, Inc.
Skullcandy is the original lifestyle and performance audio brand inspired by the creativity and irreverence of youth culture. Skullcandy designs, markets and distributes audio and gaming headphones and other accessory related products under the Skullcandy, Astro Gaming and 2XL by Skullcandy brands. Skullcandy was launched in 2003 and quickly became one of the world's most distinct audio brands by bringing unique technology, color, character and performance to an otherwise monochromatic space; helping to revolutionize the audio arena by introducing headphones, earbuds and other audio and wireless lifestyle products that possess unmistakable style and exceptional performance. The Company's products are sold and distributed through a variety of channels in the U.S. and approximately 80 countries worldwide.
Visit skullcandy.com, or join us at facebook.com/skullcandy or on Twitter @skullcandy.
Forward-Looking Statements
Certain statements in this press release and oral statements made from time to time by representatives of the Company are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements regarding the Company's anticipated future financial and operating results and any other statements about the Company's future expectations, beliefs or prospects expressed by management are forward-looking statements. These forward-looking statements are based on management's current expectations and beliefs, but they involve a number of risks and uncertainties that could cause actual results or events to differ materially from those indicated by such forward-looking statements. Important factors that could cause actual results to differ materially from expectations are disclosed under the "Risk Factors" section of the 2012 10-K filed with the Securities and Exchange Commission ("SEC") on March 13, 2013 and in any subsequent reports the Company files with the SEC. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company does not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise
Non-GAAP Measures
Non-GAAP adjusted net income and non-GAAP adjusted fully diluted earnings per share, for the periods presented, represents diluted net income per share excluding the impact of severance expenses associated with the departure of the Company's former Chief Executive Officer, exit costs associated with the office closure in San Clemente, California and the settlement of litigation. Management does not believe these expenses correlate to the underlying performance of the business. As a result, the Company believes that non-GAAP adjusted net income and non-GAAP adjusted fully diluted earnings per share provides important additional information for measuring its performance, provides consistency and comparability with the Company's past financial performance, facilitates period to period comparisons of the Company's operations, and facilitates comparisons with other peer companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. The Company's management team uses these metrics to evaluate the Company's business and believes they are a measure used frequently by securities analysts and investors. Non-GAAP adjusted net income and adjusted fully diluted earnings per share do not represent, and should not be used as a substitute for net income and diluted earnings per share, as determined in accordance with GAAP. The Company's method of calculating non-GAAP adjusted net income and adjusted fully diluted earnings per share may differ from that of other companies.
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