Skull filed its 10-Q for the June 30 quarter on August 9th. As you are probably aware, there are a couple of dueling offers to take the company private out there. At this point, I’d be surprised if they didn’t end up private- I’m just not sure of the price or who the owner will be.
Because, I assume, of that pending and probable transaction, there was no conference call. So my comments here are based on the 10-Q and press release.
I imagine you are all aware that Incipio reached an agreement with Skullcandy on June 23rd to make a tender offer for the company’s common stock at a price of $5.75 representing a price of approximately $177 million. That agreement allowed Skullcandy some time (until July 23rd) to see if it could find a better offer.
Skullcandy filed a form 13D today with the Securities and Exchange Commission announcing that founder Rick Alden was going to explore a transaction to take the company private. To be clear, that doesn’t mean it will go private. Here’s the relevant section of the 13D.
Skull’s loss for the quarter ended March 31 rose 27.9% from $3.7 to $4.9 million. Sales rose just 1.4% to $46.3 million while the gross profit margin dropped from 40.9% in last year’s quarter to 37.5% in this year’s. The pretax loss rose 50% from $4.6 to $6.9 million.
The balance sheet remains as strong or stronger than it was a year ago. Cash on the balance sheet rose $12 to $14 million, as did accounts payable, as Skull stopped taking some discounts for early supplier payments. Paying early would boost the gross margin and stopping early payments would reduce it. They don’t tell us what the impact was.
Somehow, I didn’t see Skull’s 10-K with their results for the December 31, 2015 year when it came out and then I found myself busy with a couple of clients. But it’s not so much that I want to give you a deep dive on the financials, but that I want to talk about their strategic balancing act a bit. There are some things we can all learn.
Let’s take a brief look at the numbers and then move on to that.
A couple of days ago, Skullcandy decided that the prospects for its fourth quarter had changed enough that they needed to disclose it. They filed an 8K with the SEC to accomplish that. You might want to read the press release that’s part of it.
Skull said it expects fourth quarter sales to be the same as last year’s fourth quarter. Previously, they had forecasted an increase of 5%-7%. Earnings per share for the quarter are expected to be between $0.20 and $0.22 per share. Previously, they had projected $0.38 to $0.40 per share.
The thing is, I really like Skullcandy’s marketing. There is some commonality of message and attitude among their sponsored people (notice I don’t just say team riders) even when those people come from very different places and perspectives.
I like it is because while they have, for example, sponsored surfers the message isn’t just about surfing. It’s about life and living it- the experience, if you will. With that approach, they can be aspirational to a broader group of potential customers. You may never ride a 30 foot wave, but there’s no reason you can’t be positive, innovative and willing to take a risk as you live your life.
The issue isn’t getting a lot these ambassadors, to use Skull’s word. It’s getting the right ones. Those would be the ones who are not only in sync with Skull’s corporate culture and market position, but who can, maybe, be attractive to an additional customer segment , allowing revenue to grow, without Skull losing credibility and causing customer confusion as it gets further from its “core.”
Since right after he joined the company, Skull CEO Hoby Darling has been pushing the same five pillar strategic plan as the company works through its issues and out of turnaround mode. I’ve reviewed those five pillars every quarter since he presented them, and I think I’m done. You can go read one of my earlier articles or the conference call transcript if you need your memory refreshed.
Those five pillars are hardly unique to Skull- some of them are things that need to be done well by any company. But what I like is that they aren’t “things you have to do in a turnaround.” They are five targets, or areas of focus, that provided when he presented them, and continue to provide, a focus and consensus about how Skullcandy expects to succeed.
I’ve been writing, talking and thinking a lot lately about the evolution of the retail market; about HOW YOU SELL STUFF TO PEOPLE and WHY THEY BUY IT.
Skullcandy CEO Hoby Darling has a plan, and he sure talks pretty about how the company is making it happen. I recommend you read his opening statement in the recent conference call. As he does on every call, he reviews his five strategies. They are, as a reminder,
“…one, marketplace transform; two, create the innovation future; three, grow international to 50% of our business; four, expand and amplify known for categories and partnerships; and five, team and operational excellence.”
Skull is a public company or I probably wouldn’t be writing this. As such, it needs quarterly growth and, as I’ve written, there can be a conflict between getting that growth and differentiating your brand if your brand’s distinctiveness is based mostly on marketing.
You recall that Skullcandy found itself in turnaround mode when it sold too much poor quality product in low priced distribution that wasn’t consistent with its preferred branding and market positioning. I suppose that happened when the newly public company tried to meet Wall Street growth expectations.
CEO Hoby Darling came in and put a stop to it. His five pillar strategy included, and continues to include, marketplace transform, create the innovation future, grow international to 50% of the business, expand and amplify known-for categories and partnerships, and team and operational excellence. I’ve reviewed each of those in detail in previous articles, and won’t do it again here. You can find his progress report in each one, as always, in the conference call transcript. And while I’m at it, here the link to the 10K.
Those pillars are all important and necessary. But to my mind marketplace transform was the essential first step, as the company pulled back from questionable distribution for the sake of growth and focused on working with the right retail partners in the right way. Note that this includes Walmart as well as specialty shops, and that tells us something about how the market has changed.
Because of progress in all five of those areas, financial results have improved and things look much better. But the company still has to confront the not insignificant competitive circumstances it’s faced since going public. If I were to sum it up, I’d say that I love what they are doing and have a lot of respect for the progress so far. However, it still feels like there might be some conflict between being a public company and the market position they want to have. We’ll look at the numbers, and then return to that issue.
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