Skullcandy Is Cracking Skulls

Skullcandy (Nasdaq: SKUL  ) users usually have their ears covered, but shareholders are better off hearing what the headphone and earbud maker has to say every three months.

It was another solid quarter for the company. Net sales climbed 29% to $83.4 million, fueled by a 73% surge in online sales. Earnings before a lawsuit settlement charge clocked in at $0.47 a share. Analysts were banking on a profit of $0.43 a share on $82.5 million in net sales.

Skullcandy has topped Wall Street bottom-line targets in each of its three quarters as a public company.

You wouldn't know it from the market's general disdain for Skullcandy. The stock continues to trade below this past summer's $20 IPO.

Too many investors see audio as a cutthroat industry. Outside of Dolby Labs (NYSE: DLB  ) -- and its rich and enforceable patents -- audio component makers are seen as commoditized losers.

Headphones? Isn't that what airlines sell for less than a can of beer?

Skullcandy has defied the skeptics. It introduced brash designs, loud patterns, and unique materials into headgear, and began distributing them several years ago at extreme sporting events.

Don't underestimate the power of edgy market positioning. Sure, it didn't help Jones Soda, but check out the specialty retail influence at the local mall. Quiksilver (NYSE: ZQK  ) and Zumiez (Nasdaq: ZUMZ  ) appeal to haters of collar-popping preppies with legacies rooted in surfing, skateboarding, and snowboarding.

Skullcandy is upbeat about its future. It sees gross margins expanding in 2012, and that may be the best sign you'll see that this isn't just some cutthroat mess of meager markups. Skullcandy's gross margins are already nearly double what industry giant Harman (NYSE: HAR  ) is cranking out. Worrywarts figuring that Skullcandy's chunky gross margins would shrink may want to rethink that assumption.

Skullcandy is targeting adjusted earnings to grow 10% to 20% to between $1.10 a share and $1.20 a share. Net sales should grow by 18% to 27%. Analysts are roughly parked in the middle of the ranges. At the midpoint of its projected range, Skullcandy is fetching less than 14 times this year's earnings. That's pretty cheap for a company growing faster than that.

Audiophiles? You can now remove those headphones.

World of sound
Skullcandy may have seen its international sales grow 19% in its latest quarter, but it's not one of the three American companies set to dominate the world. If you want to find out what they are, a free report is yours. Check it out now.

Motley Fool newsletter services have recommended buying shares of Zumiez and Dolby Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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