Image source: Skullcandy.
reported its first-quarter results after the market close on
May 4. The company managed to grow revenue, but profitability
slumped, in part because of significant issues with
Skullcandy's China sales operation. Here's what investors need
The raw numbers
Earnings per share
Data source: Skullcandy Q1 earnings report.
What happened with Skullcandy this quarter
Slow revenue growth and rising costs led to a drop in profits
during the first quarter. However, the numbers look better if
results from the company's China sales operation are
- Sales grew by 6% year over year, excluding China
- U.S. sales grew by 4% year over year, while international
sales slumped 3%.
- Gross margin fell to 37.5%, down from 40.9% during the
prior-year period. Excluding China sales, gross margin would
have dropped to 39.5%.
- SG&A expenses increased to $24.1 million, or 52% of
revenue, up from $22.3 million, or 49% of revenue, during the
Skullcandy reiterated its outlook for the full year and
provided guidance for the second quarter.
- Net sales growth in the mid- to high single digits
expected in 2016.
- Full-year EPS between $0.24 and $0.28, up from $0.20
- Second-quarter net sales expected to be in a range of
down 4% to flat.
- Second-quarter loss between $0.02 and $0.04 per share
What management had to say
Skullcandy CEO Hoby Darling pointed to some promising trends:
"Domestic sell-through of the Skullcandy brand grew more than
twice as fast as the rest of the audio headphone industry,
according to NPD, driven by triple digit growth of our expanded
wireless offering. At the same time, Astro retail sales once
again outpaced the competition despite significant supply
constraints following a very strong holiday season."
Darling also acknowledged that China was causing problems.
"On the international front, we continued to take necessary
actions to improve our China wholesale position, which
unfortunately offset solid growth in several of our other
overseas markets and negatively affected earnings per share
by $0.02 versus our plan. We continue to be cautiously
optimistic about our prospects for growth in the second half of
2016, as our innovative audio and gaming product introductions
provide us with added momentum and some of the current top-line
headwinds begin to subside."
Trouble in China was mentioned during Skullcandy's
fourth-quarter conference call back in March, with the company
stating that it withheld shipments to a distributor due to
inventory overhang and payment issues. Even excluding the China
sales operation, though, Skullcandy's profitability declined
during the first quarter despite a small boost in revenue.
The good news is that the first quarter is the least
important quarter for Skullcandy. The second half of the year
accounted for about 60% of the company's sales last year, so
the company's performance during the holiday season will be the
real test of whether its strategy is working. Skullcandy
continues to have a strong balance sheet, with no debt and
ample cash, so even though the company is struggling at the
moment, it has plenty of time to right the ship.
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Skullcandy's Results Zapped by Trouble in
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