Skull Candy (SKUL) IPO Initial Public Offering & Prospectus

 

Skull Candy (SKUL) IPO Initial Public Offering

 

When is the SKULL Candy (SKUL) IPO?  Wednesday July 20th, 2011

Skullcandy (NASDAQ:SKUL) plans to offer 9.58 millions shares at a range of $17-$19, of which the company is to sell 4.166 millions shares and the rest 5.147 million shares to be sold by insiders. Bofa ML , Morgan Stanley are leading the deal with Jeffries, Piper Jaffray, Key Banc Cap markets and Raymond James managing the deal. Skullcandy will have 26.78 million shares post IPO and will be valued at 500.82 million on a pricing of $19. Use of proceeds from IPO will be used to pay of debt and for corporate purposes.

 

From the SKUL prospectus:

 

'Skullcandy is a leading audio brand that reflects the collision of the music, fashion and action sports lifestyles. Our brand symbolizes youth and rebellion, and embodies our motto, “Every revolution needs a soundtrack.” We believe we have revolutionized the headphone market by stylizing a previously-commoditized product and capitalizing on the increasing pervasiveness, portability and personalization of music.'

 

According to The NPD Group’s Retail Tracking Service, Skullcandy held the #1 position domestically in ear buds and the #2 position domestically in headphones, behind only Sony, based on unit and dollar sales in 2010. This is testament to strong growth the company has been experiencing in the last few years, have to say the company has built a compelling brand and is evident in their sales which stood at an annualized $1 million to $160.6 million in 2010 more on that later.

 

Skullcandy essentially made aggressive strides in a commoditized product sector where headphone manufacturers like KOSS were struggling to survive, by introducing innovative products with bold color schemes, unique materials and creative packaging. The product offering spans to over 25 different models of headphones today. Skullcandy employed skateboarders, snowboarders and professional sports figures to market their products.

 

Skullcandy sells its products through various large national retailers, including those focused on consumer electronics, such as Best Buy and Radio Shack, mass retailers, such as Target and Fred Meyer, and those focused on sporting goods, such as Dick’s Sporting Goods and The Sports Authority. Domestic sales of Skullcandy products represented 80.7% and 78.9% of net sales for the year ended December 31, 2010 and the three months ended March 31, 2011, respectively. For the year ended December 31, 2010, each of Target and Best Buy accounted for more than 10% of net sales.

 

Outside the United States, Skullcandy sold products through third party distributors. Skullcandy currently has relationships with 26 distributors serving more than 70 countries. Sales to their European distributor, 57 North, represented more than 10% of our net sales for the year ended December 31, 2010 and the three months ended March 31, 2011, respectively, growing international sales as it appears and also in 2011 they have expanded the distribution agreement with 57 North thru 2013 firming up the relationship.

 

One can't help but observe the way Skullcandy is capturing a born-again head phones, ear phones market in the last few years with the advent of personal electronic devices enabling content distribution using devices such as iPod and also explosion of the mobile devices like smart phones.

 

 

Growth Strategy:

 

  • To date, the vast majority of products have been priced in the $20 to $70 range. With the recently introduced $150 Aviator headphones and $250 Mix Master headphones, they have begun to expand premium headphone offering and believes can increase its share of this growing market.

  • Skullcandy plans to launch two new speaker dock models in the summer of 2011, increase the offering of protective cases for mobile devices, and introduce several gaming and mobile phone headphones that are currently in various stages of development.

  • Skullcandy plans to further engage consumers and drive sales by adding, optimizing and broadening the content offered through their interactive platforms. Skullcandy believes new content will allow to dynamically interact with our loyal fan base, provide customized shopping experiences and drive our online sales. In addition, plans to launch select international websites with localized content and e-commerce functionality.

 

One note of interest here, essentially all of the products are manufactured in China.

 

Competition:

 

Competitors include Sony, JVC and Bose. Well established sports and lifestyle brands have also recently entered the headphone market, such as Adidas and Nike. Quite a low barrier of entry here and intense competition from some well established players.

 

Financials:

 

Skullcandy usually posts strong revenues for the second half of the year. Looking at 2008, 2009 and 2010 revenues have been growing at a faster clip at 80.38mil, 118.31mil and 160.58 million. For the first 9 months of 2010 Skullcandy posted SGA of 30.206 million and for the final 3 months they posted SGA of 37.4 million if we look closely that included “one-time charges of $17.5 million in management incentive bonuses and $2.9 million payable as additional consideration to certain employee stockholders pursuant to the securities purchase and redemption agreement.” and the other expense “consisted primarily of $14.6 million resulting from recording the fair value of amounts payable to non-employee stockholders as additional consideration pursuant to the securities purchase and redemption agreement.”

 

So to get a better idea of the overall picture let us shelve the SGA for a minute which should help the perspective get clearer as I do not expect these compensation expenses to show up again going forward.

If you look back at the sales numbers for the 2009, you see that sales in 2010 grew nearly 36%. The gross profit margin was 48.6% in 2009. It was 53.2% in 2010. That’s a good improvement.  The operating margins stand at 23.96% and leaving net margins at 15.81% and resulting in .94 EPS which is quite nice.

 

First quarter of 2011 resulted in a strong quarter with revenue standing at 36 million honestly a strong quarter since first half is always a slow period for sales, if we plug in 30% sales increase we should see 2011 revenues at around 209 million and plugging in the same for gross and operating margins for 2011 as we had from 2010 we should see EPS of 1.16.

 

 

 

Closing:

 

I have to say this though the CEO exited the company few months before IPO, I see the company has built a brand with loyal following and helping the same is the explosion of audio/video content distribution via personal electronic devices and also music services like Pandora and Spotify stepping in to further the same means continued growth for the product categories Skullcandy serves I like the deal quite a bit and I hope the price open allows us to participate in the same.

 

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