July 23, 2011, 10:09 am

SKUL - SkullCandy

Update - Priced and opened strongly. However been a dud early in the aftermarket dropping below pricing. I suspect this has quite a bit to do with the perceived losses in 2010, nearly all of which were non-operational and non-reappearing. Tradingipos.com has no position in SKUL currently, waiting for it to get back above pricing after being stopped on break.

SKUL - Skullcandy

SKUL - Skullcandy plans on offering 9.6 million shares at a range of $17-$19. Insiders plan on selling 5.4 million shares in the deal. BofA Merrill Lynch and Morgan Stanley are leading the deal, Jefferies, Piper Jaffray, KeyBanc and Raymond James are co-managing. Post-ipo SKUL will have 26.8 million shares outstanding for a market cap of $483 million on a pricing of $18. Ipo proceeds will be used to repay debt.

Founder and former CEO Rick Alden will own 26% of SKUL post-ipo. Note that in 3/11, Mr. Alden abruptly resigned as CEO without giving a concrete reason.
From the prospectus:
'Skullcandy is a leading audio brand that reflects the collision of the music, fashion and action sports lifestyles.'
Not that one could discern from that above sentence, but SKUL is the 2nd largest headphone seller in the US and #1 for earbuds . Sony is #1 in headphones. SKUL has positioned themselves as a trendy and cool action sports accessory maker utilizing snowboarders, skateboarders, NBA players and even Snoop Dogg to hawk their headphones.
Great name by the way. Target market is teens and young adults, using hip and trendy “pitch people”. SKUL has focused on distribution through specialty retail shops focusing on action sports and youth lifestyles. As they've grown, they have also since branched out into mainstream retailers such as Target and Best Buy. In fact Target and Best Buy were SKUL's largest customers over the past year each accounting for 10%+ of sales.
SKUL claims to have 'revolutionized' the headphone market by turning a commoditized product into a 'must own' for certain subgroups. While I like the name and growth has been solid, the margins here do not indicate a revolutionary product at all. Less hype, more information is the way to go with prospectus' in my opinion.
SKUL's success lies in branding, marketing and redefining the headphone market by using bold color schemes, loud patterns, unique materials and creative packaging with the latest audio technologies.
Price points appear to be roughly $20-$150 with majority $70 and under. SKUL believes their target market owns multiple sets of headphones and replaces them frequently.
Market - SKUL was an early mover in envisioning the increasingly mobile communication society. Headphones and earbuds have seen a resurgence this past decade with the increase of mobile media devices beginning with portable MP3 players such as the iPod, followed by smartphones and the iPad and other tablets.
Growth - SKUL plans to begin selling directly internationally as opposed to via 3rd party distributors. In addition SKUL is broadening product line by adding speaker docks and mobile phones cases in the summer of 2011.
Competitors include Sony, JVC and Bose. Recently Adidas and Nike have introduced headphones. Barrier to entry here is quite low.
International revenues account for 20% of total revenues.
Nearly all of SKUL's products are manufactured in China.
$1 per share in cash post-ipo with $11 million of debt also on the books.
Seasonality - As is par for the course with a retailer, back half of the year is seasonally strongest.
***In 2010, SKUL had substantial one-time compensation expenses. Some of these were cash expenses. However as these expenses will not repeat once SKUL is a public company, we folded them out to get a better look at operations. In addition, numbers for 2010/2011 below take into account the debt being paid down on ipo.
2010 - Revenues of $160.6 million, a solid 36% increase from 2009. Gross margins of 53%. 24% operating margins. Operating margins were relatively flat with 2009 and 2008. I would not expect a substantial increase in operating margins going forward here, bottom line growth will have to come from top line growth. Net debt servicing will only eat up 1% of operating profits, debt not an issue here at all post-ipo. Net margins of 15%, EPS of $0.90.
2011 - Strong first quarter in what is traditionally the weakest seasonally. Revenues should increase 31% to $210 million. Much of this number relies on the 4th quarter annually, business as usual for a retail related ipo. Looking at core operations the past few years, pretty safe assumption that gross and operating margins will be in 2009 and 2010's ballpark. Plugging 53% gross margins and 24% operating margins we get 15% net margins. EPS of $1.17. On a pricing of $18, SKUL would trade 15 X's 2011 estimates.
Good looking deal here, 'sneaky profitable' due to pre-ipo compensation charges that will not reappear. I would expect most to underestimate SKUL's 2011 bottom line due to the perceived loss in 2010.
A couple of issues here though. First, not ideal when the CEO/founder abruptly resigns a few months prior to ipo. Second, SKUL is another one of these trendy retail ipos and those sometimes do not end well. For every SODA there is a Healy's. One thing has remained consistent with these type deals though: They do tend to do very well the first year public. Some end up being long term winners such as UA, others fall by the wayside and/or get bought out down the road a la VLCM.
Based purely on growth, potential bottom line and valuation, SKUL is a recommend in range. Strong recommend in range actually. I can easily envision SKUL trading up to 30 X's 2011 earnings, which would be the mid $30's on stock

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