Beats Premium Just Went Out of Skullcandy
Shares of Skullcandy Inc. (SKUL) were 25% lower after reporting earnings last night, as shareholders dumped out of the headphone maker and shares gave back gains made over the last 18 months. Lower than expected profits and flat guidance make this $250M Small Cap look like it fell and fractured its skull, as share premium on the back of Dr. Dre Beats Headphones by Apple Inc. (AAPL) fell out of the company today. It took a year to build up, and one quarter to give it back.
Skullcandy designs, markets, and distributes audio and gaming headphones, earbuds, speakers, and other accessories under the Skullcandy, Astro Gaming, and 2XL brands in the United States and internationally. It sells its products through specialty, consumer electronics, sporting goods, mobile phones, and big box retailers and third party distributors, as well as through its skullcandy.com.
Gross profit in the first quarter of 2015 increased three percent to $18.7 million from $18.2 million in the same quarter of the prior year. Gross margin decreased to 40.5% in the first quarter of 2015 from 46.5% in the same quarter in 2014, primarily due to foreign currency depreciation, increased air-freight and warehousing expense to overcome west-coast port slowdowns, and product mix shift to gaming products. For the second quarter of 2015, the company currently forecasts net sales to increase at a growth rate of 7-9% over 2014 levels and net income on a per share basis of $0.01 to $0.03.
Skullcandy Investors Fear a 2012 Repeat
For the full year 2015, the company forecasts net sales to increase 13-15% over 2014 levels. Skullcandy reiterated guidance for net income of $0.36 to $0.40 per share, which was lower than what the street was looking for. I think many investors are concerned about shares doing a repeat of 2012, when the company lost 70% of its value during that year trading from $17 to $5 in the final three quarters. Today's 25% drop will make investors watch top line sales with a hopeful eye, meaning company management will need to buckle down and execute to attract new money.
Personally, I love the Skullcandy product line, but as this young management team learns its way around managing, you can be sure that street expectation prices will be volatile. I would be doing some deep due diligence on the channel before stepping in here with both feet, and someone should tell Skullcandy CEO Seth Darling that it's okay to have an off quarter. I also think shares were carrying a 12-month premium after Apple bought Beats Headphones from Dr. Dre Group, and I think that premium just went out of the balloon. Today, investors are saying that it will now rely on the sales metric versus the acquisition metric.
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