By Galileo Russel
Skullcandy (SKUL) has seen overwhelming success and growth since its inception in 2003. Skullcandy specializes in all types of headphones and apparel surrounding their flagship brand. Luckily, I got the opportunity to have CEO Jeremy Andrus answer a couple questions.
Skullcandy is a leading audio brand that reflects the collision of the music, fashion and action sports lifestyles. Our brand and distinctive logo symbolizes youth and rebellion, and embodies our motto, every revolution needs a soundtrack. - Skullcandy.com
Galileo: The headphone industry has seen incredible growth in recent years as the use of smartphones and tablets has increased. Do you see the demand for headphones continuing to increase because of this trend?
Jeremy: Yes, we see the demand for headphones and earbuds as the portable device market continues to increase. However, we also drive demand creation through a combination of in-store merchandising, product segmentation, product education, and grassroots marketing.
G: Skullcandy is going through a very exciting time as you unveil your new Supreme Sound brand. Could you explain what this product transition means for Skullcandy, and how it will better position you in the booming over ear head phone market?
J: Supreme Sound is our new proprietary balance of bass, vocals, and highs to deliver true premium audio. We believe that Supreme Sound creates a superior audio experience for our consumer. Not all headphones are created equal and our proprietary audio profile reinforces a significant difference in Skullcandy's sound and performance quality.
G: For the past several years Skullcandy has had phenomenal success expanding its US market share and presence. How do you plan on continuing this momentum into 2012, and how will your new alliance with The Berrics help sales?
J: We believe we are very well positioned to continue gaining market share and growing the business over the next several years. This includes product development, point-of-sale merchandising, grassroots marketing, strategic partnerships and more. The alliance with Berrics will help deliver the new Skullcandy Supreme Sound message via the integration of products and branding on theberrics.com, as well as a new Berrics skate park and offices which are slated to open later this year. A revamped skate team includes some of skateboarding's biggest names, including Eric Koston, Sean Malto, and Theodis Beasley.
G: In your most recent conference call you mentioned the opening of a new office in Zurich, and new opportunities emerging in France, the UK and Germany. Do you see a possible Eurozone recession as threat to this expansion at all?
J: Certainly the recession can hurt us just like any company but the opportunity is bigger than the threat. We plan to begin transitioning to the new product and packaging in Europe in June, and will follow that up with new fixtures and interactive listening displays in the second half of the year so we will have a better sense in the coming months.
G: You also mentioned a new Skullcandy office opening in China in June of this year. What do you see as the long term potential for China, and how are you planning on initially marketing your brand over there?
J: Headphones are becoming a status symbol in China, and brand awareness in the category is growing. We believe the emergence of music and the audio accessory category are two very positive long-term trends for our business in China. We have our team in place an already initiated a grassroots marketing campaign in both the music and action sports segments.
G: Skullcandy grew revenues 35.7% from 2010-2011, but 44.8% from 2011-2012. Despite a worse economy in 2011, you were actually able toaccelerate growth. Could you explain what made this possible, and how it shows that the Skullcandy brand is gaining momentum across all markets?
J: We continue to make critical investments in the business to support long-term growth. We continue to be focused on adding personnel in key areas of our business, making strategic investments in product development, point-of-sale merchandising, international expansion, and the development of our gaming platform. From a channel perspective, we experienced growth across all of our major channels, with the biggest increases coming from the consumer electronic and core specialty channels.
International sales growth in the first quarter was primarily driven by increases in Europe. Sales in Europe increased 43.7%, to $7.1 million, and was driven by strong increases in both unit volume and ASPs. Online sales growth in the first quarter was driven primarily by the addition of the Astro Gaming business, which we acquired in April 2011, and generated $2.4 million of online sales in the quarter.
G: Thus far in 2012, Skullcandy has shown a strong inclination to social media and revamping your brand. Could you explain the way you are using social media to enhance the brand?
G: Last but not least, as a Skullcandy fan I couldn't help but notice (and applaud) the signing of Kate Upton to your new Supermodel team. As Skullcandy continues to diversify and expand its marketing tactics, do you see the brand reaching out to new consumers who you would have previously neglected marketing too?
J: Yes, we see the brand reaching out to new consumers through specific partnerships and are always looking for new ways to get in front of consumers. We continue to innovate our product line up to meet the needs of all consumers.
Analysis
Skullcandy has dramatically underperformed since announcing its Q1 results despite displaying phenomenal top-line growth (47.9%). As Skullcandy goes through with its Supreme Sound product transition in Q2, across all markets, we should see strong sales growth continue through the back half of 2012.
Skullcandy currently trades at around 10-12x 2012 EPS estimates, which is remarkably cheap considering they continue to outperform analyst expectations. Estimates for 2012 revenue (currently at $297 million) have climbed $26 million (or about 10%) since late 2011, and will continue to climb on the success of Supreme Sound.
As Skullcandy expands its marketing tactics to include sponsors such as Kate Upton, Kevin Durant and Derrick Rose who cater to a much bigger market (than previous sponsored athletes that were exclusively skateboarders and surfers), its overall brand image will continue to improve.
Skullcandy generated exceptional growth within its social media outlets in 2011 (Facebook Fans up over 100% yoy to more than 1.75 million), this shows the brands strong inclination to keep up with the rapidly changing scope of social media. As Skullcandy builds itself through its presence on the internet as well as presence within retail locations (through its alliance with The Berrics) we should see US growth continue.
China is a massive untapped opportunity for Skullcandy. The opening of an office there in June of this year shows that Skullcandy is starting to expand in that region and shift its focus to emerging markets. As Skullcandy rides Supreme Sound through its transition into being a global brand, growth doesn't seem likely to slow for many years to come.
Bottom Line
With about 90% of its float short (yes that's correct, 9.66 million shares are short vs. 10.15 million share float), and explosive top-line growth that actually accelerated in 2011, Skullcandy is very cheap at 11x 2012 EPS estimates of $1.17 per share. If Skullcandy can continue to beat analyst expectations on both the bottom and top line (like they have done in the past 4 quarters) the stock has a huge upside.
If Skullcandy can prove that its growth is sustainable (by delivering another record year in 2012) then I believe we could easily see shares trade at 15-20x forward earnings. 15-20x 2013 earnings estimates of $1.43 per share would put a fair value for Skullcandy shares around $22-$29, implying a 100% upside or more from today's prices of $12-$13.
The following is by Galileo Russell, who primarily invests in momentum stocks and is currently in the process of starting a hedge fund focusing on emerging markets & high growth stocks.
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