Industry News 10/30/2013

B$Z: Skullcandy Announces Third Quarter 2013 Financial Results

Skullcandy Announces Third Quarter 2013 Financial Results
Press Release from Skullcandy

PARK CITY, Utah, Oct. 30, 2013 (GLOBE NEWSWIRE) -- Skullcandy, Inc. (Nasdaq:SKUL) today announced financial results for the third quarter ended September 30, 2013.

Third Quarter Results:

o Net sales were $50.0 million
o Gross margin was 44.9%
o Net income was $0.04 per diluted share
o Non-GAAP adjusted net income was $0.06 per diluted share

"The third quarter was a productive period as we continued to execute against the key pillars we have established that will put Skullcandy on a path towards long-term growth and shareholder value creation," said Hoby Darling, President and Chief Executive Officer of Skullcandy. "We have a good deal of work to go, however, we made important progress in fine tuning our distribution model, which over time should improve full price selling and strengthen our premium brand positioning. We also broadened awareness of our enhanced innovation platform through increased availability of Crusher. Our corporate culture is getting stronger and our level of execution continues to improve, helping us achieve our profitability target even as we purposefully reduced sales intra quarter to certain retailers as part of our ongoing Edit, Amplify and Add marketplace transformation strategy and continued to invest in in-store demand creation and innovation. There is tremendous opportunity to drive further improvements across our organization and I am very encouraged by the initial advancements and feel strongly that we are set up to deliver improved results beginning next year."

Net sales in the third quarter of 2013 decreased 29.6% to $50.0 million from $71.0 million in the same quarter of the prior year. North America net sales decreased 39.4% to $34.8 million from $57.4 million in the same quarter of the prior year. Consistent with the strategy stated in previous quarters, the Company continued to scale back its sales to the off-price channel, which were down approximately $4.4 million, or 74.6%, compared with the third quarter of 2012. In addition, there was a decrease in net sales of $2.2 million as a result of the transition to a direct distribution model in Canada. International net sales increased 11.9% to $15.2 million from $13.6 million in the same quarter of the prior year. Included in the North America segment in third quarter 2013 and third quarter 2012 are net sales of $0.9 million and $3.0 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 2.5%, and North America net sales decreased 37.8%, compared to the same quarter in the prior year.

Gross profit in the third quarter of 2013 decreased 33.4% to $22.4 million from $33.7 million in the same quarter of the prior year. Gross margin was 44.9% in the third quarter of 2013 compared to 47.4% in the same quarter of the prior year. The decrease in gross margin was primarily attributable to increased allowances to the Company's retail customers and a shift to a lower margin product mix.

Selling, general and administrative (SG&A) expenses in the third quarter of 2013 decreased 5.0% to $21.9 million from $23.1 million in the same quarter of the prior year. SG&A expenses in the third quarter of 2013 include $1.0 million in costs related to the closure of the San Clemente, California office. These costs include certain termination benefits, charges associated with subleasing the former office space, and the relocation of the marketing, creative, business development and legal departments, as well as certain sales and international personnel to the Company's headquarters in Park City, Utah. As a percentage of net sales, SG&A expenses were 43.8% compared to 32.5% in the same quarter of the prior year. The Company continues to invest in marketing and demand creation efforts with an increase in expenses of $0.3 million compared to 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 Company in the third quarter of 2013 was $1.1 million, or $0.04 per diluted share, based on 27.9 million diluted weighted average common shares outstanding and included a $1.0 million one-time tax benefit related to the retirement of certain incentive stock options as part of the employee stock option exchange that was completed in September 2013. Net income attributable to the Company in the same quarter of the prior year was $6.5 million, or $0.23 per diluted share, based on 28.1 million diluted weighted average common shares outstanding. Excluding costs associated with the closure of the San Clemente office, non-GAAP adjusted net income in the third quarter of 2013 was $1.7 million, or $0.06 per diluted share based on 27.9 million diluted weighted average common shares outstanding. In the third quarter of 2012, non-GAAP adjusted net income was equal to GAAP net income. 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 September 30, 2013, cash and cash equivalents totaled $34.7 million compared to $1.9 million as of September 30, 2012 and the Company had no outstanding debt, compared to $5.2 million of outstanding debt as of September 30, 2012. As of September 30, 2013, the Company had $50.0 million of availability under its new credit facility. Accounts receivable decreased 31.3% to $41.2 million as of September 30, 2013 from $60.0 million as of September 30, 2012, which is consistent with the decline in net sales for the comparable period. Inventory decreased 12.0% to $48.7 million as of September 30, 2013 from $55.4 million as of September 30, 2012. Inventory as of September 30, 2013 included approximately $2.5 million associated with the transition to a direct distribution model in Canada at the start of the third quarter 2013.

Call Information
A conference call to discuss the third quarter of 2013 results is scheduled for today, October 30, 2013, 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. In addition, a replay of the call will be available shortly after the conclusion of the call and remain available through November 6, 2013. To access the telephone replay, listeners should dial (877) 870-5176 or (858) 384-5517 and entering conference ID number 10000701.

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.