Skullcandy Revises its Forecast for the Quarter

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.

They attribute the reduced forecast to, “…disappointing holiday results, combined with the impact on gross margin from product mix shift driven by a higher percentage of gaming headset sales during the holiday season…”

“This new outlook includes a $1.6 million pre-tax allowance for bad debt charge related to further challenges with a China distributor. Excluding this China related charge and associated tax rate impacts, fourth quarter diluted earnings per share is expected to be between $0.25 and $0.27.”

CEO Hoby Darling said they’d had “…solid consumer demand for both the Skullcandy and Astro brands.” But he continued, “…we are disappointed that our strong sell-through performances could not overcome the softness in the U.S. audio headphone market which was unexpectedly down in the fourth quarter. This headwind, as well as aggressive promotional activity by our competitors, negatively affected our replenishment business for Skullcandy branded products contributing to the majority of our revenue miss, combined with a product mix shift that negatively weighed on gross margins…”

Finally, he said they “…chose to minimize sales to discount channels to further protect the Skullcandy brand and our retailers…” Good.

One of the first things Hoby Darling did when he took the job was to cut back on off price sales to protect the brand. I thought that was exactly the right, and probably the only thing, to do. Still do. But they find themselves in a kind of public company hell where, as I’ve suggested before, you can either grow your revenue or protect your brand, but it’s hard to do both in a way acceptable to the investment community.

Poor holiday results are hardly unique to Skullcandy, but I wasn’t quite sure how to take a couple of the comments.

They talked about the impact on gross margin of revenues shifting to more gaming headset sales. In earlier filings and conference calls, they’ve talked about the fact that the gaming headsets had lower gross margins, but as higher priced products generated more gross margin dollars. We didn’t get any breakdown by product, but it sounds like the higher gross margin dollars aren’t completely compensating for the lower gross margin given the reduced bottom line projection.

Then there’s the comment about “solid consumer demand” followed by the statement that they are disappointed that strong sell-through couldn’t overcome U.S. headphone market softness. It just seems to me that if there’s solid demand you should have good sell-through. If the market is soft then, well, I guess demand wasn’t that good.

I hope we’ll get some more discussion of just what that means when they come out with their complete results for the quarter and full year in March.