The Skullcandy (SKUL) roller coaster is heading back up the hill today, and in a hurry. Thanks to impressive Skullcandy earnings for Q4, SKUL stock is up almost 30% in afternoon trading.
But investors should still be wary of Skullcandy — which even above $10 is still well below its July 2011 IPO price.
If anything, SKUL stock could be a good short.
The rally in Skullcandy shares came on a fourth-quarter earnings report that saw SKUL earn 13 cents per share on $72.25 million in sales. That trumped Street expectations of 9 cents on just less than $72 million per share.
The company does seem to be getting some traction with its turnaround. For example, products like Air Raid, Crusher and Smokin’ Buds 2 have been racking up sales … and that’s despite the fact that SKUL has not boosted spending on marketing or engaged in aggressive promotions. Skullcandy’s focus right now is to create more premium brands, which naturally command better pricing.
However, a healthy dose of skepticism might be warranted right now.
Despite SKUL’s figures beating the Street, the company’s sales were actually down by 28%. And the road ahead doesn’t look great, either. Skullcandy is forecasting a first-quarter loss of 16 to 18 cents per share, and revenue growth of 5% to 7%. Meanwhile, for full-year 2014, SKUL expects growth in “the mid to high single digit percentage range” for 2014.
So yes, the surge in SKUL stock does look overdone.
As I pointed out about a year ago, SKUL stock would face some tough headwinds, such as:
- Competition: It is intense, with operators like Beats by Dre, Incase, Urbanears, Soul, Sony (SNE), JVC, Bose and even Adidas (ADDYY).
- Fickleness: This is the bane of the fashion business. The Skullcandy brand isn’t too hip — that can change overnight, but success can be fleeting, too.
- Market Size: For the most part, Skullcandy has focused on the youth crowd, such as those who are snowboarders or skateboarders. The problem is that it’s a niche market, and one where the crowd rapidly moves on as it gets older.
These issues all remain for SKUL stock, as evidenced by the steep drop in the revenues in 2013.
Whenever a brand hits the wall, it can be extremely tough to get customers re-interested in it. There are many alternatives to choose from, and many more can pop up in this segment.
So while Skullcandy has done a good job in its most recent quarter, today’s enthusiasm in SKUL stock would appear overdone.
In other words, SKUL stock should be avoided at the very least … and if you’re feeling aggressive, even shorted as it falls back to earth.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.