“The second quarter was about taking the initial steps toward getting our house in order to drive positive, long-term transformation at Skullcandy,” stated Hoby Darling, President and Chief Executive Officer. “We had to reduce expenses and recalibrate our operating platform to better align with our current sales trajectory. Our decisive actions during the quarter allowed us to break even on the bottom line despite ongoing sales headwinds. With our product, marketing and sales teams now consolidated in Park City we are in a much better position to build momentum and establish Skullcandy as the world’s leading lifestyle and performance audio company driven by the creativity and irreverence of youth culture. I am excited about the future and I am confident that we are assembling the right team to successfully execute our strategic plan and deliver significant shareholder value.”
Net sales in the second quarter of 2013 decreased 29.9% to $50.8 million from $72.4 million in the same quarter of the prior year. North America net sales decreased 39.1% to $39.0 million from $64.1 million in the same quarter of the prior year. The Company experienced lower sell-in at a key customer and a decline in sales to several of its specialty retailers. Consistent with its strategy, the Company purposefully scaled back its sales to the off-price channel which were down approximately 52% compared with the second quarter of 2012. In addition, the second quarter of 2012 included increased sales from a significant packaging change. International net sales increased 40.6% to $11.8 million from $8.4 million in the same quarter of the prior year. Included in the North America segment in second quarter 2013 and second quarter 2012 are net sales of $1.8 million and $7.8 million, respectively, of products that were sold from the United States to customers with a “ship to” location outside of the United States. Including these sales in the international segment, international net sales decreased 15.9%, and North America net sales decreased 33.9%, compared to the same quarter in the prior year. The decrease in adjusted international net sales is primarily due to a $2.4 million negative impact of winding down the Company’s relationship with its former Canadian distributor in anticipation of going to a direct model in that country.
Gross profit in the second quarter of 2013 decreased 35.3% to $22.8 million from $35.2 million in the same quarter of the prior year. Gross margin was 44.9% in the second quarter of 2013 compared to 48.6% in the second quarter of 2012. The decrease in gross margin is primarily due to the impact of the gaming category carrying lower gross margins, coupled with higher sales allowances on gaming products in the retail channel which was not in place a year ago. In addition, gross margin was negatively impacted by certain sales allowances associated with the transition to a direct sales model in Canada and slightly higher raw material costs.
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.
Selling, general and administrative (SG&A) expenses in the second quarter of 2013 increased 2.0% to $24.0 million from $23.5 million in the same quarter of the prior year. As a percentage of net sales, SG&A expenses increased to 47.2% from 32.4% in the same quarter of the prior year. SG&A expenses in the second quarter of 2013 include $1.1 million in costs related to the closure of the San Clemente, California office which was announced on June 18, 2013. These costs include certain termination benefits 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.
Even as the Company implements cost control initiatives, the Company continues to invest in marketing and demand creation with an increase in expenses of $0.6 million compared to the same quarter of the prior year.
Net loss attributable to the Company in the second quarter of 2013 was $(0.6) million, or $(0.02) per diluted share, based on 27.7 million diluted weighted average common shares outstanding. Net income attributable to the Company in the same quarter of the prior year was $6.8 million, or $0.24 per diluted share, based on 28.0 million diluted weighted average common shares outstanding. Excluding costs associated with the closure of the San Clemente office including certain severance expenses, non-GAAP adjusted net income in the second quarter of 2013 was $0.1 million, or break even per diluted share based on 27.8 million diluted weighted average common shares outstanding. In the second 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 June 30, 2013, cash and cash equivalents totaled $29.7 million compared to $7.0 million as of June 30, 2012 and the Company had no debt outstanding, compared to $5.1 million as of June 30, 2012. As of June 30, 2013, the Company had $28.5 million of availability under its credit facility. Accounts receivable decreased 16.9% to $42.0 million as of June 30, 2013 from $50.5 million as of June 30, 2012 and were down $34.3 million from December 31, 2012. Inventory decreased 7.4% to $51.1 million as of June 30, 2013 from $55.2 million as of June 30, 2012.
Call Information
A conference call to discuss the second quarter of 2013 results is scheduled for today, August 1, 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 August 8, 2013. To access the telephone replay, listeners should dial (877) 870-5176 or (858) 384-5517 and enter ID #417887.
About Skullcandy, Inc.
Skullcandy is the leading global lifestyle and performance audio brand driven by the creativity and irreverence of youth culture. Skullcandy designs, markets and distributes audio and gaming headphones and other 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 we file 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 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.
PLEASE VISIT SKULLCANDY’S INVESTOR RELATIONS PAGE FOR BALANCE SHEETS.
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