Skullcandy Management Discusses Q4 2013 Results - Earnings Call Transcript

| About: Skullcandy (SKUL)

Skullcandy (NASDAQ:SKUL)

Q4 2013 Earnings Call

March 06, 2014 4:30 pm ET


Brendon Frey - Managing Director

Seth Darling - Chief Executive Officer, President and Director

Jason Hodell - Chief Financial Officer


Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Joseph Bess - Roth Capital Partners, LLC, Research Division

Jay Sole - Morgan Stanley, Research Division

Rafe Jadrosich - BofA Merrill Lynch, Research Division

Ryan MacDonald - Northland Capital Markets, Research Division


Good day, ladies and gentlemen. Thank you for standing by, and welcome Skullcandy's Fourth Quarter and Fiscal 2013 Earnings Conference Call. Presenting on today's call will be Hoby Darling, President and Chief Executive Officer; and Jason Hodell, Chief Financial Officer. As a reminder, today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Brendon Frey. Thank you. Please go ahead.

Brendon Frey

Good afternoon, and welcome to Skullcandy's fourth quarter and fiscal 2013 earnings call.

Before we begin, let me remind you that certain statements made on today's call, either during our prepared remarks or in response to your questions, may constitute a forward-looking statement. These statements are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to both known and unknown risks and uncertainties that can cause actual results to differ materially from such statements. Those risks and uncertainties are described in Skullcandy's quarterly and annual reports on Form 10-Q and 10-K. Investors should not assume that statements made during the teleconference today will remain operative at a later time, and Skullcandy undertakes no obligation to update any of the information discussed on this call. With that, I'll turn it over to Hoby Darling, Skullcandy's President and Chief Executive Officer.

Seth Darling

Thanks, Brendon. 2013 was a year of tremendous positive change geared toward executing our turnaround strategy and triaging certain aspects of our business and culture in order to set the foundation to return the company to growth, which we do expect to do in 2014. We now have a clear vision to transform Skullcandy and Astro Gaming into the most innovative brands in audio.

We're pleased to close out 2013 with better-than-expected fourth quarter results. The focus and commitment by the entire Skullcandy team around the world to execute on both our strategic short and long-term goals drove our performance and provides us great momentum heading into 2014.

In Q4, we continue to execute against our strategic vision. The results of these actions was solid sell-through at both our pinnacle, core and larger retailers during the holidays, including great consumer responses to our key product story, the Crusher headphone. Crusher's unique and innovative technology platform provides consumers the ability to have an experience that is much closer to being in the front row of a live concert and a more immersive experience with other media such as streaming movies and mobile games. Crusher makes experiencing audio entertainment more fun and is differentiated from any other products on the market. After a successful launch with select core and specialty accounts early in the year, we brought in Crusher's distribution to key CE retailers for the holidays and sell-through was very strong. This is a great signal that when we innovate, we win.

Our other new products also performed well. Smokin Buds 2 strengthened our position in ear phones thanks to the product's superior fit and sound quality. These delivered through our off-axis technology which employs an angled and oval shaped port that mirrors a person's ear anatomy to more comfortably seal the ear canal and provide in-ear stability as well as superior acoustics. These benefits were developed by our in-house advanced concept engineering team. With Smokin Buds 2, consumers can enjoy a high level of comfort, Skullcandy's styling and awesome acoustics all day long whether commuting, studying, watching a movie on a tablet or hitting the skate or train park. It's a great all-day bud at a price that provides a great value to the consumer.

And Air Raid, our first Bluetooth speaker, has had a lot of great hype since launching in mid-November. With its powerful sound performance and durable construction, Air Raid is a great building block for expanding Skullcandy's known-for categories per our strategic plan. It's 50% louder than any other speaker at similar price points and inspired by military specifications showcasing the power, durability and quality of our innovation platform.

With better-than-expected sales driven in part by the performance of these key products, earnings per share exceeded plan as we hit our gross margin targets and managed to keep expenses below plan. What was particularly encouraging about our recent performance was that it was done without participating in the same level of promotional activity as in prior years and what appeared to be less discount activity than most of our competitors. In a turnaround year aimed at reinforcing Skullcandy's premium yet accessible position, it was important to not be seen as a promotional brand. As a result, we're one of the very few brands to increase ASPs during the holidays. We probably could have driven more revenue during the holiday by following the competition with steep discounts and promotions, but we made a strategic decision that re-establishing brand and pricing power with our new products was more important than picking up market share right now.

Shifting away from Q4, I'd like to review our 5-pillar strategy to return to growth: First, marketplace transform, which includes editing distribution to control price and enhance brand and retailer relationships, amplifying with our key partners through enhanced in-store look and feel and a clear segmentation model, and lastly, strategically adding distribution where it makes sense for the brand and our consumer, while we'll also drive increased brand strength through enhanced focus on demand creation both with our partners and directly through Skullcandy.

Second, creating the innovation future, which includes significant innovation that both solve our consumers' audio friction points and also excites them in new ways they did not expect while doing it all and dominating in under $100 and under.

Third, growing international to 50% of our business.

Fourth, expanding and amplifying known-for categories and partnerships so that we're the audio company of choice for our consumer throughout the 24 hours of their day.

And fifth, and this is extremely important to me, team and operational excellence. Culture, talent and people are the foundation of our success as is making sure we operate in a focused and efficient way.

In Q4 and early Q1, we attacked each of these pillars. We did what we said we would do, and in some cases, we did more. It's now time to shift gears and accelerate on several of the main initiatives for the remainder of 2014.

On our first pillar, marketplace transform. On the edit side for the fourth quarter, we continued to cut off price with sales to that channel down nearly 50% compared to Q4 last year and over 60% for the full year. We also continued to focus on price integrity online, including minimizing in-season discounting at, where in prior years, site had been heavily promotional throughout the year. I'm very pleased with our success on this prong of our strategy. We now have much greater control of MSRP for new products like Crusher, Smokin Buds 2 and Air Raid with online marketplaces like Amazon and Yahoo Shopping. We took the steps of proactively stepping away from significant sales and doors during 2013 because it is what is right for the brand long-term and to ensure that we're the best possible partner to our retailers. We will continue the strategies of one, minimizing off-price; two, tightly controlling price online especially for our new products on; and three, only selling to those accounts where we believe we can sell effective brand and product stories, especially for our new products. We need to make sure we have solid in-store experiences for our new products or we'll need to explore how to improve the experience, remove our newest products from the retailer or exit that account. That includes the entire distribution pyramid from pinnacle to mass.

We began 2014 in a much better place with our distribution than a year ago. While there will always be work to do, I believe the majority of editing process is now behind us. So I'll focus more on marketplace transform strategies of amplify, add and drive, strategies that grow revenue.

So on the marketplace transform amplify. There's no doubt we have some of the best real estate in stores. Now we have to continue to make it the best looking real estate to excite the consumer and drive conversion. In 2013, we rolled out over 2,700 new fixtures and enhanced POS materials. We will again focus on our in-store experience in 2014 and intend to spend even more on it in 2014 than we did in 2013. This year, our plan is to allot Crusher Rumble [ph] experience stations with hundreds of key retailers so consumers can truly experience the immersive qualities of Crusher. We'll also be enhancing our in-store look and feel in 1,000-plus retailers with vastly improved POS materials that showcase marquee products like Crusher and Air Raid, support the upcoming launch of Women's and Sports Performance, and reinforce our leadership position in buds.

On the marketplace transform add side, we did not choose to add any material accounts in 2013 overall or during Q1. The focus was really on edit and amplify. As we look into the remainder of 2014, and as we detailed on our last call, we will look to add good solid distribution that helps further diversify our business. When we think about adding distribution, we think about 5 key questions: First, does our consumer shop at the location? Second, does our consumer expect to find us there because our competitors are there? Third, can we position the brand at retail point-of-sale in a way that is fun, young and irreverent and does not dilute the brand? Fourth, can we serve a customer that otherwise has limited access to our products at brick-and-mortar from a geographic perspective? And fifth, whether we can create segmentation throughout our distribution pyramid from pinnacle on down?

In 2014, one key strategic add opportunity will center on women's boutiques with our Women's line. Much like we pioneered bringing consumer electronics to action sports retailers and new consumers, we'll do the same with this retail channel. This will generally be a seed phase of distribution for Women's in 2014 to ensure that the right influencer accounts can showcase the product. So do not expect significant top or bottom line gains here. This is about radically changing the model with our Women's line and that takes time and strategic seeding before looking to really grow the category.

We'll also look to ensure we're in the key accounts for our Sports Performance line when we launch in summer, which will include some new doors. These are products specific to the channel, and being in the most influential retailers is important to brand building and also successfully selling those innovative products in other areas of the distribution period but over time.

We will also test the segmented product line that focuses on our entry level price points with Walmart in mid-Q2. Some people will ask- whether Walmart is right for the brand. We asked the same question and looked at it very carefully. When we looked at our criteria for adding accounts we determined that Walmart fit each critical criteria, including diversifying our business and not being in Walmart was hurting the brand and our ability to engage with our consumer.

First, we know our consumer shops at Walmart. Second, each of our competitors, including Beats, Apple, Sony, Bose, Yurbuds and Monster are all already sold at Walmart and have been there for multiple seasons.

Third, we have negotiated POS that we believe will look and feel right so that our consumer has a good experience with our brand.

Fourth, Walmart is the store in many towns, where there's no other or very limited Skullcandy distribution, especially throughout the South and Midwest.

Lastly, we'll segment Walmart during this test to only the price points and designs that we believe are most attractive to the Walmart customer and are different than most of our other accounts.

The product focus will be on buds under $20, and headphones under $35 with limited testing above these price points. We have a competitive advantage in that we can have a balanced product segmentation strategy that differentiates our various points of distribution, thanks to our broad SKU count and portfolio of brand creation athletes and ambassadors. Walmart is one of the world's leading sellers of electronics and audio and we're excited to partnering with them. Partnering with them also helps diversify our brick-and-mortar business.

As part of opening Walmart, we are also doubling down our core and influencer retail partners. This plan is important if not essential, because we want to ensure that we're the best possible partner to our key core retailers. I know from my days at Volcom and working with Hurley, Converse and Nike how important is to be relevant and a great partner to core and specialty retail. We have to keep specialty special.

Key parts of the plan include investing more in our retail operations and training teams, grassroots marketing support for key accounts that give back to the action sports community and promote the lifestyle. Action sports athlete sponsorships and certain exclusive high-volume fun products that provide differentiated products and speak specifically to the core audience.

Finally, on marketplace transform drive. To drive the brand in Q4, we executed some very creative marketing campaigns that will really effective in connecting us with our core consumer and done in a way that fit the brand's ethos of fun, young and irreverent. This included a 4-city takeover based around Crusher and our NBA All-Star in Chicago with Derrick Rose, Oklahoma City with Kevin Durant, Houston with James Harden, and Minneapolis, where we featured the product and athletes on billboards, buses wrap with Crusher and exploding windows, athlete product and brand images projected onto buildings and other out-of-home media during the holidays and into the beginning of this year. This campaign also included a significant social media, digital marketing and television commercial push with our athletes and ambassadors around Crusher.

In Europe it was a takeover of Grammy award-winning artist Bruno Mars and his concerts featuring different Crusher videos playing inside the arenas, coupled with material that direct the consumers back to our key retail partners.

In Q1, we also made great strides to drive our music and Energy Marketing program by adding Jay Brown, the cofounder of Roc Nation, to our Board of Directors. I can think of no better person to help with that endeavor than Jay. His energy and ideas are already driving some great activations, and I'm excited for the future with him on the team. His appointment was almost immediately followed up by an amazing pre-GRAMMY event we hosted with Roc Nation featuring the recording artist Grimes, which was covered by MTV, Billboard Magazine and several other trade publications and attended by some great artists like Katy Perry, Rihanna and Lorde. Not a bad showing and a great event for Grimes. We'll continue with additional activations around Roc Nation and other partners throughout the year.

On the sport side in Q1, we were there when the world was watching at the Winter Olympics with their newest athlete, Canadian Mark McMorris taking bronze in snowboard slope style. Our fixed earbud product were also heavily featured on silver medalist Ayumu Hirano, who was not a sponsored rider but clearly enjoys the brand.

Through 2014, we'll continue to attack. We'll drive demand and brand with launches of our Women's and Sports Performance lines and heavily feature Crusher throughout the year. Digital and in-store will continue to be focuses while, we'll also drive our authenticity to grassroots events and bring in new consumer awareness through participation in "when the world is watching" events. We'll be there this summer when all eyes will be on the World Cup as host nation Brazil is led by their captain and Skullcandy athlete Thiago Silva. Demand for the World Cup products is exceeding our current supply plan, and we have the high-class problem of having to boost production to fill our orders. No better way be there when the world is watching than have the athletes and fans wearing our latest high-demand products. Our demand creation plans also include grassroots collaborative campaigns around the World Cup.

Finally, a brand-new website with improved information architecture, more compelling content and a focused user experience design is also high on our strategic agenda for the back half of 2014.

On our second pillar, create the innovation future. In Q1, we signed a partnership agreement with DTS, a leader in audio innovation, that will accelerate future developments of our Crusher in emergent platforms as well as other future innovations. On the Women's side, we announced a completely new line of products that are fine-tuned and engineered for women. We built 2 new earbuds and one on-ear headphone and changed everything from the sound profile to fit and sizing and packaged it with great new graphics specifically designed to tell the product innovation story and appeal to our female target audience, a massively underserved market.

Our internal women's team and our athletes and ambassadors had active roles in designing and developing an amazing line of products as well. Our athletes Leila Hurst and Kimmy Fasani helped to shape the graphic direction of the pinnacle 4.0 print [ph] product including elements from their lives such as of flowers indigenous to the areas they live and vintage trucks including -- and motorcycles that were major influences in their personal style.

Also, board member Heidi O'Neill, The VP and GM of Women's Training at Nike has been a great resource in helping develop our women's strategy. Chloe Nørgaard, one of the hottest and influential models in the world right now, will be the face of the campaign with her colorful, fun and freestyle. We think this has the potential to change the game for women's audio and believe we were the first company to look at women's audio products from the ground up and enhance the total user experience versus the more typical "shrink it and pink it" aesthetic focused approach that commonly occurs with women's products.

We also announced our proprietary sticky gel technology that solves the consumer problem of sports performance buds falling out while sweating by creating buds that are 30% stickier when an athlete perspires while staying comfortable. Our position on sports performance will be different than anything else in the market and focus on our consumer who's combining sports with fun more than prior generations. This is a category where our entire team has great passion, including myself. And so we have lots of test subjects eager to try out the new gear.

The trend in athletic training and sports for our consumer has moved toward activities that embrace play, fun and community like adventure and obstacle racing, mud runs, functional and high-intensity training for specific sports, from basketball and football to surfing and snowboarding, and activities like CrossFit, which has seen an explosion in popularity in the past 5 years. These products embrace the future of sports performance and the consumers' active lifestyle while at the same time, staying very true to our DNA of being the best audio products for any time someone is on the mountain or in the skate park.

In 2014, we'll continue to push toward creating more innovation and capitalizing on our recent development efforts. Ensuring great sound quality is also part of our strategy. Many people do not realize it, and it's been a learning for me coming in from outside of the traditional audio world, but headphone audio quality really is scientifically measurable. When we measure the sound quality in our products, we believe it is as good as any product on the market, especially for the price point. But where most of the industry focuses almost entirely on optimizing sound quality, our vision goes beyond optimization. Our differentiated model focuses much more on disruptive technologies that significantly enhance how people experience audio in all forms of entertainment, while being able to match sound quality and performance. In short, we want to make audio experience as more fun and engaging for consumers. We think about being disruptive, and we brought in talent that aligns to this model. Wicked, smart, young, in touch with our consumer and a mindset that says anything is possible.

On our third pillar, drive international to 50% of revenue, we significantly grew several of our key focused territories in the fourth quarter and momentum has carried into Q1. In 2014 our marketplace transformed and product innovation strategies have us poised to make meaningful progress towards our long-term goal, led by an anticipated strong growth in Canada, China, Mexico, Japan and our Rest of World category, combined with some stabilization in Europe. Our performance in Canada is being driven by the recent transition to direct distribution. The dedicated team we now have in place has done a fantastic job building strong relationships with the brand's key retailers and developing a sound, go-forward plan to expand the business. Their initial efforts have resulted in very strong sell-through for our new products, especially Crusher, early in the new year.

In China, we're more than doubling our non-owned monobrand and direct to consumer shop-in-shops locations, which are great vehicles for connecting with our target consumer and telling great product stories. At the same time, we're expanding our shelf space with key CE retailers and increasing our marketing spend around key activations that highlight our lifestyle and performance positioning.

Our growth in Mexico is being fueled by strong demand for our 2XL line of headphones which we introduced into the market in Q4 of last year. We are leveraging the solid infrastructure we already have in place to accelerate distribution of 2XL in Mexico while continuing to strategically expand our core Skullcandy business with key accounts.

Our brand heat is extremely strong in Japan right now. The response to Crusher has been amazing. It's quickly become one of our best-selling products in the country. We are capitalizing on this strong momentum to increase our distribution footprint with major CE retailers and expect this relatively small market for us to continue growing at a rapid pace.

On our fourth pillar, expand and amplify new categories and partnerships, January was a significant month with the announcement of new product launches that provide a strong entry into Women's and significantly amplify our positions for its performance. When we develop this year category expansion strategies, we were committed to doing it in a way that brought new and compelling innovation to consumers.

On the expanding partnerships side earlier this year, we signed an exciting licensing partnership with Toshiba to supply our proprietary Supreme Sound to certain Toshiba laptops that will come out later this year. This is a great activation partner for us, particularly in our international markets where we're still early on in brand building. And financially, this represents a terrific high-margin revenue stream for the company. We will continue to partner and collaborate on high-margin opportunities that are consistent with our brand and consumer authenticity throughout 2014.

2014 is also set up to be an exciting year for our gaming business. If there's any question about the growing popularity of gaming and eSports in particular, where Astro dominates, just check out the viewership of streaming gaming sites like Twitch. Despite a challenging gaming market due to the compatibility issues for the industry created by the launch of new consoles from Microsoft and Sony, Astro had a solid fourth quarter. We are on track to have officially licensed the Xbox One product on shelves for holiday with a focus on continuing to dominate the market at $200 and above.

Leading that charge is the Astro A50, which was just voted best headset by an influential gaming blog. Skullcandy, Inc., including both Skullcandy and Astro Gaming brands, are 2 of the very select group with an Xbox One license for headphones, and we intend to take advantage of it. Astro will also be partnering with some of the hottest gaming titles in 2014 to bring fun experiences for users. In 2014, I am very excited for the Astro A38 wireless noise canceling headphone, which in beta testing with core users right now and we expect to open distribution later in the year. It was recently featured in Wired Magazine as a must-have. It will be at a price that is both accessible compared to some other Astro products but maintains Astro's premium ethos. This is our company's first foray into A&C [ph]. And so that is an exciting move for us as a company and continues to show what we can do making first-class products.

In addition, we will be launching several wireless and Bluetooth offerings during the back half of the year. We will move from what I believe is slightly behind in wireless and Bluetooth, dabbing Bluetooth across multiple categories and under both Skullcandy and Astro brands. This is a strong testament to the speed at which our product teams can bring consumer-driven products to market and will put us in a leadership position, and we'll continue it into 2015.

On our fifth pillar, team and operational excellence. We are now back to full speed post-closing our creative, marketing business development and sales locations in California and East Coast. We added critical hires in each of these areas to make sure we have the firepower to create demand for our products and brand, with a focus on digital and in-store while staying true to our roots and bringing in new consumers through grassroots activations and "when the world is watching" moments.

One particular hire I want to highlight is on the digital side, where we recently added an important senior leader to ensure we connect digitally with our consumer and amplifier digital commerce. He just arrived, but I have no doubt that he and his team will significantly improve our social media and overall digital connection to our consumer. My goal since coming aboard has been to make Skullcandy the most desired company to work for in our space made up of the best talent in the world. That is not an easy task during a turnaround, but we're making huge strides and I'm so proud of the team. In less than a year, we have truly transformed the culture of Skullcandy as our employees stepped up and assumed ownership of this turnaround and our corporate culture. As part of that, we are granting Skullcandy shares to all our employees so that our entire team has an ownership mentality and is completely aligned to our shareholders. We have elevated and challenged key internal talent and also brought on new leadership that has helped positively reshape the company's direction. I'm so proud of this team.

We'll continue to invest in great people who share our cultural values and can help grow the business and make Skullcandy the most desirable employer in our industry. With that, I'll now turn the call over to Jason.

Jason Hodell

Thank you, Hoby. Hello, everybody. Thanks for joining us today. It's personally quite exciting to be part of the turnaround of this very special company and brand. In my section, we will start with a review of our fourth quarter 2013 income statement, then provide some comments on the full year income statement, then discuss our balance sheet as we enter 2014, and finally, we'll outline our guidance for the first quarter of 2014 and the whole year.

First, our fourth quarter income statement. Fourth quarter net sales were $72.2 million as compared to $101 million a year ago, a decrease of 28%. As Hoby mentioned, this result was slightly better than planned, thanks to improved full price selling at many of our top accounts in the U.S. and higher sales in several of our international markets. In Q4, our global off-price revenue was, again, down nearly half from last year.

Let's give you some details about these sales from a geographic standpoint. Historically, we have segmented North America versus international in our public reporting, and this transparency continues in today's press release and our forthcoming 10-K. Of note, Internet sales through non-North American websites are being included in international this year as well as in 2012 for comparison purposes. These were not included historically in our North American versus international segmentation. However, in order to better highlight our progress towards our turnaround pillar of growing international with 50% of sales, let's talk today about U.S. domestic net sales versus non-U.S. net sales, thus moving our Canadian and Mexican customer sales into the international amounts.

Domestic U.S. net sales decreased 29% to $51.4 million from $72.4 million 1 year ago. This decrease included a near 50% reduction in sales to the U.S. off-price channel as part of our strategic plan to strengthen Skullcandy as premium positioning at retail. And we proactively walked away from full price sales to accounts and distributors that weren't holding and enforcing MAP pricing online. And our desire to carefully control inventory at retail with our customers, and finally, our transition of from heavily promotional offerings during the holiday season to mostly full priced offerings, specifically designed to protect the brand and our partners long-term but impacting short-term net sales.

Non-U.S. net sales decreased 27% to $20.8 million from $28.5 million 1 year ago. The decline was primarily attributable to lower sales in Europe, which continued to be a challenging retail environment and our desire to carefully control inventory with retail customers in our international set of distributor partners. The softness, though, in Europe was offset to a lesser extent by gains in Japan, Mexico and Canada, which we transitioned to a direct subsidiary at the start of the third quarter. So returning to the measurement of our strategic goal, for the fourth quarter, these non-U.S. sales represented approximately 29% of our overall business, up from 28% 1 year ago.

Our product mix splits were stable comparing Q4 2013 to Q4 2012. In Q4 2013, in-ear products generated approximately 44% of sales with on-ear and over-ear, including gaming headsets, representing approximately 46% of sales. The remaining 10% represents speakers and accessories. This very split was 44% in-ear and 45% on and over-ear in Q4 1 year ago. The remaining 11% represented speakers and accessories.

Gross margin. Gross margin for the fourth quarter was in line with expectations at 43.5% compared to 44.5% last year, a decrease of 100 basis points. This decline was largely due to SR&A expense increasing from 7% in Q4 2012, as a percentage of gross revenues, to 12% in Q4 2013, thus reducing net revenues against a baseline of COGS and lowering our gross margin. SR&A expense grew in 2013 due to observed return rates throughout the year and an increase, therefore, in our expense estimation. That said, we do feel that we are trending to healthier return rates as we enter 2014.

As previously disclosed, and as a note, we moved certain expenses including tooling depreciation and warranty-related expenses in the cost of goods sold in 2013 and we have, therefore, adjusted our 2012 results accordingly in our reporting for comparison. In our 10-K, however, our 2011 results will remain unadjusted as we have previously reported them. SG&A. Selling, general and administration expenses for the quarter decreased 4.8% to $26 million or to 36% of net sales, down from $27.3 million or 27% of net sales in Q4 2012. Comparing this SG&A result to our Q4 plan and despite our discussed Q4 marketing push, where we executed the marketing audibles carefully outlined in the Q3 earnings call, we still came in under on planned cost. And to further underscore our increasing marketing efforts as a brand, total demand creation for Q4 2013 increased significantly year-over-year.

Operating income in the fourth quarter was $5.5 million compared to $17.7 million in Q4 2012. Finally, Q4 2013 GAAP net income was $3.6 million or $0.13 per diluted share compared to $11.5 million or $0.41 per diluted share in Q4 2012.

Let's turn to the 2013 full year income statement. Net sales decreased 29% to $210.1 million compared to $297.7 million in 2012, with full year sales to the off-price channel down about half globally and nearly 60% domestically. The same themes mentioned earlier today around our Q4 sales decline were generally consistent throughout the year and have been discussed on prior management earnings calls. Looking at the U.S. versus non-U.S. breakout of geographic net sales, 2013 U.S. sales were down 33% to $142.5 million while international sales declined just 20% to $67.6 million. This international, including Mexico and Canada share of global sales grew, now representing 32% as compared to 29% in 2012.

During 2013, our in-ear share of net sales declined as on and over-ear products advanced. This is not a trend we see continuing and we'll talk about this later in the call. For the full year 2013, in-ear products generated approximately 48% of sales, with on and over-ear, including gaming headsets, representing approximately 44% of sales. The other 8% comprises speakers and accessories. This split was 52% in-ear and 41% on or over-ear for the full year 2012. Again, the other 7% comprises speakers and accessories.

Gross margin was 44.3% in 2013 as compared to 46.8% in 2012. Similarly, this decline was largely due to our increase in as SR&A expense from 6.4% in 2012 to 11% in 2013. In early 2013, the business experienced larger-than-expected returns from gaming unit sales, but we feel most of these return issues are now better understood and are trending to healthier return rates as we enter 2014.

Selling, general and administration expenses for the year were $98.1 million or 47% of net sales, slightly up from $97.9 million or 32% of net sales in 2012. Marketing efforts attacked during the year as demand creation increased by $1.1 million to $27.1 million. Of note, 2013 SG&A included approximately $2.2 million in cost associated with the closure of our San Clemente office and another $1.2 million in unrelated severance costs. Excluding these nonrecurring costs, SG&A expenses for 2013 decreased 3.5% to $94.7 million or 45% of net sales.

Our effective tax rate in 2013 was 48.9% compared to 36.1% in 2012. Let's take a moment to help you understand that rate. As we are in a consolidated GAAP net income loss position, an increase in this rate reflects additional tax benefit to Skullcandy consolidated. In Q3, we recognized a onetime tax benefit of $1.1 million from our employee option exchange due to the conversion of incentive stock options to nonqualified options and calculated the total tax benefit as if the options have been nonqualified options from inception. The key difference is that ISOs are generally not tax deductible as an expense whereas nonqualified options are deductible when exercised. Thus, this $1.1 million tax benefit represents the majority of the difference between the federal statutory rate of 35% and the 2013 effective tax rate of 48.9%.

In the future, as we grow and generate more profit in our warning entities, we expect to benefit from our reduced corporate tax rate on the earnings of our Skullcandy International GmbH entity operating out of our international hub in Zürich, Switzerland. Skullcandy International GmbH oversees sales operations throughout Europe, the Middle East, Australia and parts of Asia. Of our top 30 non-U.S. retail customers, for example, all 30 are contracted with GmbH or a subsidiary of GmbH. 2013 operating income was a loss of $5 million compared to $41.5 million in 2012. GAAP net loss for the full year 2013 was $3 million or a loss of $0.11 per diluted share, compared to 2012 GAAP net income of $25.9 million or $0.92 per diluted share. Adjusted net income for 2013 was a loss of $0.8 million or a loss of $0.03 per diluted share compared to 2012 adjusted net income of $28 million or $1 per diluted share. For a detailed reconciliation of our non-GAAP adjusted net income to GAAP net income and non-GAAP diluted earnings per share to GAAP earnings per share, please see the table at the end of our earnings release.

Turning to our balance sheet. On December 31, 2013, let's highlight a few items. Our cash and cash equivalents totaled $38.8 million compared to $19.3 million 1 year ago, and we have no bank debt similar to a year ago. Approximately 74% of our cash is held in domestic bank accounts. Accounts receivable decreased to $57.5 million from $76.3 million a year ago. Accounts receivable have naturally fallen in line with the reduction in our sales volume. Our valuation allowance for doubtful accounts is currently $1.9 million or 3.3% of the gross receivables balance, the same valuation allowance percentage as 1 year ago.

Inventories were $40.3 million at the end of Q4, down from $41.6 million at the end of 2012. Aggregate levels remained fairly consistent as we managed on-hand inventory demand from customers and increased levels of inventory held in our non-U.S. warehousing, as in Canada where we held $3.1 million of current inventory on 12/31/13, whereas that warehouse did not exist 1 year ago. Our inventory valuation was reestimated in a new fashion at the end of the year and is currently offset by $1.1 million consolidated inventory reserve against the following: the full value of the cost of slow-moving products or those with less than 12 units in inventory and 50% of the cost of a product when it's no longer actively marketed to retailers.

On the liability side of the balance sheet, let's explain the key driver of change in our accrued liabilities account as it had increased to $22.1 million from $21.11 million year ago, while sales fell during the period. The major driver of this change is the accrual for SR&A. The accrued liability for sales returns has increased to $7 million from $4 million 1 year ago. This is due to increased return rates during 2013 and specific accruals for holiday pricing credits to our retailers

So in summary, the balance sheet has good liquidity, and our net book value of equity advanced by $5.6 million during Q4 to $141.7 million.

Now I would like to share our thoughts on guidance. Let's focus first on Q1 and then touch on the full year 2014. For the first quarter of 2014, we are currently forecasting a return to growth with a net sales increased 5% to 7% over 2013 levels, led by the expansion of our international businesses while our U.S. results continue to be affected by the challenging domestic retail market. We expect our Q1 gross margin in a range of 41.5% to 43%. The quarter's gross margin is decreasing as our higher-margin in-ear products share of total revenue will decrease while share of lower margin products are higher due to an initial set-in of Air Raid with one of our key accounts. We do anticipate in-ear share of revenues to increase to approximate our historical in-ear share levels for the duration of the year and for gross margin to be more consistent with past post-Q1 history. We expect SG&A to decrease by approximately $3 million year-over-year to within a range of $23 million to $24 million for the quarter, driven by the lack of the $0.2 million worth of write-offs and accounting adjustments that were expensed 1 year ago and lower personnel costs today. Of note, our demand creation plan for the quarter will increases year-over-year as we drive to strengthen the brand. This yields a Q1 GAAP diluted loss per share in the range of $0.16 to $0.18.

For the full year 2014, we expect to return to growth with a mid-to-high single-digit net sales percentage growth rate year-over-year. The current domestic retail sales environment is challenging, and this growth rate includes our estimated impact from recent retailer public announcements. Internationally, we are targeting a continuation of our growth in Canada, Japan and China, a stabilization of Europe and continued penetration into Latin America and the Asia-Pacific region. However, please note that the majority of our revenue will continue to be in the second half of the year and is subject to many influences.

And with regard to the quarterly cadence of sales growth, we do expect it to be somewhat variable as we enter new distribution and see market consolidation.

We are targeting a gross margin for the year of approximately 44.5%, similar to 2013. We are targeting SG&A at approximately 40% of net revenues for the year. In addition, we may execute opportunistic marketing and innovation spending like we did in Q4 with success. If we determine to proceed, the spending will be back half weighted with our launch of Skullcandy's Sports Performance back-to-school and the holiday season as well as opportunistic spend on potentially accelerating innovation. We want to be on the attack as we introduce further innovations and new categories that drive awareness. Our 2014 tax rate should approximate 31% as we begin to see the benefits of our aforementioned GmbH tax rate.

And finally, we are targeting 2014 GAAP net income of $0.10 to $0.14 per diluted share. In putting forth this outlook, we want to remind everyone of the complexity of accurately assessing future earnings and revenue growth given the competitive nature of the industry, the difficulty in predicting sales of our products by key retailers, changes in technology, sourcing costs, trends and consumer preferences. Because of our consumer and innovation focus, brand strength, quality products, strong cash position and dedicated team of employees, athletes, sales reps and distributors, we are confident we can achieve our vision of being a global ROE leader, delivering profitable growth and increase shareholder value.

Thanks, everyone. I will now turn it back to Hoby.

Seth Darling

Thanks, Jason. I said last year, I would be disappointed if the company didn't return to growth at some point in 2014. As Jason just outlined, we're expecting an improvement right out of the gate in the first quarter and for the year. What's important to understand about our return to growth is that it is being executed in a measured and balance way. We will not revert back to chasing sales at all cost or short-term decision-making. We will be aggressive and on the attack in 2014, though, especially when we see an opportunity to attack with some incremental variable spend dollars in targeted demand creation efforts or to accelerate innovation. Where we committed to investing in our brand, channels and innovation platform to create a business that generates sustainable sales and earnings growth over the long term and doing it in a way that is fun, gritty and authentic to youth culture. I'm confident this goal is achievable through the roadmap we've outlined and the team we're building. We are on the attack in 2014 and will be doing it in a way that is long-term brand accretive.

To close, I want to thank the entire Skullcandy family for their dedication to our turnaround efforts this past year. That includes employees, athletes and ambassadors. I know at times I pushed the team hard. Your response to the challenges we face has been amazing, and it's the reason we are in a position to attack. We are gritty and we're on the offense. Keep up the great work in 2014. While there are always be ups and downs and challenges, there's a lot to be excited about, and our team is passionate about accomplishing our vision.

Operator, we're now ready to take questions.

Question-and-Answer Session


[Operator Instructions] Our first question comes from Edward Yruma of KeyBanc.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

I wanted to ask a little bit about SG&A. I think you guys indicated it would be around 40% for '14. Kind of peak profitability for the company was when SG&A to sales is closer to the 30% range. So I guess, how do we think about the longer-term earnings calculus of the business particularly as it weighs with some of the demand creation that you're executing?

Seth Darling

I think, when we think about SG&A, I mean, we're trying to show clearly going from where we were in 2013, bringing that down in 2014. So I think overall, you can see where we're taking SG&A in the way that we need to drive it. I don't know that we're ready to talk long-term around where SG&A goes, but just so you could be thinking somewhere along to me -- I mean, when you look at the best-in-the-world companies that have great demand creation efforts and combine that with great product, you look at those companies have SG&A that's sort of in the low 30s in that range. And so as we think about long-term goals, we look at those companies for some guidance around it.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Got it. I wanted to drill a little bit on the returned allowances as well. I know you guys indicated that, that was kind of increasing presence on the balance sheet, is that pressure we should see to the remainder of the year? Kind of what drives that? And are there things you can do operationally to mitigate some of that?

Jason Hodell

Sure thing, Ed. So when it comes to our SR&A expense, the thing to understand is that it's always an estimate, and it's backward looking so it's looking at the returns rate of recent history and then we're doing an expense estimation for what we think returns might look like in the future. So in my script, I talked a little about in early 2013, we did have some issues with gain in returns and, therefore, you saw the SR&A expense increase, and that's a direct drag on gross margin. As I noted, though, we do feel comfortable that we've got our arms operationally around those issues. Return rates are getting healthier and our 2014 model does reflect an improvement in SR&A.

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Got it. Another question. Now that you pulled back on the sales to off-price, I guess, how comfortable are you with your ability to clear out of aged or kind of underperforming inventory?

Seth Darling

Ed, this is Hoby. On the aged piece on inventory, I think we feel pretty good. We tested the outlet last year. We'll look at doing some licensed to outlet this year so that we can have brand accretive way to clear through some of that inventory. But I think the good news on that is if you look at our inventory right now, I mean, it is great in-season inventory. I think as we talk about that a little bit, we're a little heavy on some of the old SKUs that we're out of the strategy from old management team around navigators and aviators. But overall, we have really clean inventory. And one of the advantages that we have that's different than the world that I came from, around apparel and footwear, is you don't just continually have this every season -- new goods coming out, so you're consistently having to have a channel to push that through. The vast majority of our products are carryover products, and so I think we're going to be okay in that.


Our next question comes from Dave King with Roth Capital.

Joseph Bess - Roth Capital Partners, LLC, Research Division

This is Joe Bess acting for Dave. So my first question is on your guys' new products with the Women's and the Sports line. Can you talk a little bit about what doors you guys are trying to get into and kind of some of the milestones that we should be looking for this year as we see those products roll out?

Seth Darling

Absolutely. So on the Women's side, as I said on the call, really about seeding this year. I mean, I think from a perspective of what does winning look like for a Women's for 2014, it's are we placed in influential boutiques, number one? And then number two, from a core door perspective, are we in those core doors that have a strong women's business and a strong influence on women's business? And that's really going to be the drive for Women's. I mean, we're looking at this long term. It's not a short-term initiative. We truly want to do what we're able to do with action sports with Women's. And that takes careful seeding, not just blowing it out into the market. So really a focus is in those 2 areas on Women's. On the Sports side, we're going to be a better job in some of those accounts that we're in, really do a great job at point of sale with the new product. And then there are some doors that we are not in that are much more sports focused that I think are out there. I don't think again, on Sports Performance you're going to see us adding hundreds of accounts, but there are some key influencer accounts that we need to be in that when we think about growing that category and competing in a very high level in it, that we need to be in from an influence perspective.

Joseph Bess - Roth Capital Partners, LLC, Research Division

Okay, great. And then kind of switching over to Astro and kind of thinking about the new game console cycle. Can you give us kind of your ideas on sort of your guys' attach rate that you guys are seeing with the console cycles at this point? Then also I guess the kind of how you see or when we could see the A38 headphone being launched in stores?

Seth Darling

Sure. On the console piece side, maybe let me hit that one first. Clearly, that has been a big piece not just for us but I think everyone in the gaming industry. And I think when we think about that, really this holiday is the big holiday and that's why, we're working really hard to have Xbox One and PS4 compatible products. With that being said, you will still see a lot of the old Xbox and a lot of the old PlayStation out there. And so I don't know the exact numbers, but they're still going to be selling through those in the holiday and really throughout this year. So we need our products that attack both of those from a specific attach rate perspective. I think we're still working through some of the numbers on how that looks, but really we're focused in on, when we hit holiday, specifically with Astro on the high end, that we come in and really push. I mean, we have 75% to 80% market share there above $200. We want to own that with Xbox and PS4. And on the Skullcandy side, a lot of opportunity for us when we come in with one of the only Xbox One licenses to come in the holiday and have a strong business around it. So when consumers are looking come holiday, what do we have that's compatible for the new products, right now, we're one of the few companies that have licenses, and then as far as the kids that are going in and getting the first generation products or the last year's products, we're going to be there with great product as well. So that's on the consoles side. And then on the 838 side, the 838 is a fun product. It's probably the first product that I've seen where you really take Astro and Skullcandy and you walk around Skullcandy headquarters and people are wearing 838s because it's such a great product and this whole company is proud of it. It's in beta testing right now, which has gotten really neat reviews from the technology magazines whether that was Wired, and everyone is going wow. This is the first company going out and really in a Silicon Valley model much more than a traditional audio model testing product, seeding with the right people, getting feedback and that's just been even in itself, a really innovative way to launch a product through beta. We expect that, that, will be sometime in the summer late summer, back-to-school that product will be ready for distribution. But right now, we're really focusing on hey, let's make that the best A&C product out there that goes across gaming, goes across tablets, goes across streaming, really that all day headphone for mobile entertainment. So it's one that we're really excited about.

Joseph Bess - Roth Capital Partners, LLC, Research Division

Awesome. And then when we think about Toshiba and your guys' partnership there, can you talk about which computers you might be in or is this going to be able to go across the gamut of Toshiba's laptops.

Seth Darling

Yes, we're looking at different lines that really fit with our brand. I mean, we want to make sure that anything we do fits with fun, young and irreverent and done in a way that's creative and active. So we're working through that with them right now exactly which laptops it will be to make sure that it fits with our consumer. As you can expect we don't want to put our name, our Supreme Sound, on a computer that doesn't fit with our consumer. So when we look at that, it's got to be brand authentic. It's got to be brand building, and then we'll work really hard on those to make them not just have a better sound overall but, I mean, great sound for how our muse uses laptops. And again, that's everything from watching a movie to streaming and so forth, much more than you think of the typical, just being on word, Excel, PowerPoint. It's a consumer that's living in digital, whether that's on phone, tablet or PC. So we'll attack there through that product line.

Joseph Bess - Roth Capital Partners, LLC, Research Division

Okay, great. And then just the last question is you guys have had some great success with your citywide takeovers. Just any plans for 2014 go into any new cities?

Seth Darling

Yes, I'm glad that you brought it up. As Jason mentioned in his script, when he talked about some of the marketing audibles and opportunities that might be there, we learned a lot from the city takeovers. We learned that they work great for our brand. We also learned what pieces of that works even better and what are more average in our ROI. And so that's one that we can pull the trigger on very quickly. And as we get to the end of the quarters and especially as we get in back-to-school, we get into holiday and we do some of the things where our athletes might be performing great, NBA playoffs, something like that. We have the ability to attack those things very quickly in a very fun and creative way. So that's one that's definitely worked in the past. I don't want to give up the playbook for what we'll do in the future, but I can tell you it's one that's been exciting and it's gotten great awareness for the brand.


Our next question comes from Jay Sole with Morgan Stanley.

Jay Sole - Morgan Stanley, Research Division

So great call. A lot of information. Let me ask you a couple of questions. One is on the fifth pillar, the one you said is very important to you, the team and operational excellence. Obviously, in a turnaround situation sounds like everybody's working really hard. You said you're pushing the team really hard. Talk about how you're incentivizing the team. How is everybody going to get on same page and how is everybody going to get rewarded for their hard work?

Seth Darling

Yes. It's a great question, Jay. I mean, I love it because as you know, it's close to my heart and I think when you talk about building the company not only for the short term but for the long-term, it's what it all comes down to. And it starts with the people, having them aligned to our vision, being excited to come in here every day and just charge as a family and as a team. And you're right. I mean, in a turnaround, that is not an easy task, and I couldn't be more proud of this team. And the way this team has come together over the last 11 months is absolutely incredible. I mean, how we fit today and I think we're the culture is makes me really proud to be part of the team. From a perspective of how we incentivize them, a big thing that we wanted to do that's clearly very off-market, and those public companies don't do, is we wanted to make every single person in this company an owner of this company and able to participate in the upside. So when people are here for 14 hours a day and they're giving their blood, sweat and tears, they get to see that upside, and they're a true owner in the turnaround of this company. And I think people are really excited about that. That puts them in a spot where it's not just dollars and cents, which are important. I mean, compensation is important, but that puts them in a place where they go; "I own this company. I'm responsible for the turnaround." And it really changes that ownership mentality.

Jay Sole - Morgan Stanley, Research Division

Interesting. And then let me ask you one more on the opportunity to attack. Obviously, it has come up a couple of times. How confident are you in your ability to invest in demand creation and see return. What do you still need to see for sure to be able to go ahead and do some of the things of you're talking about on this call today?

Seth Darling

Sure. I mean, the great thing about having done the city takeovers in the way that we did them and, Sam and the whole marketing team did a fantastic job on those, is we did those, one, to generate heat; but we also did it because we wanted to try some creative marketing techniques and be able to judge ROI on them. And so part of that is we hired outside consultants that go through it every step with us and look at what is the ROI when we do it in different cities and not only from just an ROI perspective to bottom line and the top line. But what does it do to brand? And we got those back just a couple of weeks ago, and I mean, we have them gems that we've learned on ROI. And I think how we can even do a better job accelerating on those, to even increase the ROI significantly more. So I think that's number one. Number two as we've talked about is digital and social. It's just such a big piece of where we want to go and where our muse lives, and that's one that thankfully, ROI is just really easy to do from a social and digital perspective. So we have a really good idea as we tried to change up some of our social attack. We've tried to change up digital. And now Diego in, who's going to really bring, I think, a strong level of sophistication. That's our new Senior Leader that we brought in to run digital to our group to look at ROI. So we have some great data on that. We're continuing to get better. And then the last place, we said we're going to put a lot of dollars. We said it's going to be in digital, where our muse lives. And number two , we will be in-store and we talked about that with 2,700 new reps last year, doubling down on that this year. In-store, you get to see that return. Did you sell more product in that door when you changed to a listening station, out of a listening station, 2 feet to 4 feet? And so we have a lot of those results right now. So I think ROI for a brand is always challenging but I think some of these things that we've been able to do lately are helping us be more analytical about our demand creation spend.


[Operator Instructions] Our next question comes from Robbie Ohmes of Bank of America.

Rafe Jadrosich - BofA Merrill Lynch, Research Division

This is Rafe Jadrosich in for Robbie. So can you guys just give a little bit more color on the products you're entering Walmart with? Would it be like a new product or is it sold anywhere else right now?

Seth Darling

Yes. Good question. I think the important part, I just want to make sure this is on Walmart. We look at Walmart long-term as a great partner for us and so we're going to do the things necessary to see great sell-through with them. As far as initially out of the gate, we're really focusing on that $20 dollar and under bud, and then focusing in the $35 and under on over-ear. And that's a different assortment than almost all of our other retailers have. So we're going to give them the SKUs that we think are going to win with them right out of the gate, make sure we have strong sell-through and at the same can segment away from some of our other retailers, the Best Buys of the world, the Targets of the world, RadioShack, et cetera. Give them a segmented line, but we're going to make sure they have a great line so we've got a great sell-through and they could be a great long-term partner for us.

Rafe Jadrosich - BofA Merrill Lynch, Research Division

So what was kind of the reaction from some of your core accounts that you're entering Walmart and how do you manage that relationship?

Seth Darling

Yes, absolutely. I mean, we were born at the core, and as I've said in our prepared remarks, we have to keep specialty special. I think most people realize that the core, they've seen this with other brands, and quite frankly, they know that all of our competition is in Walmart. We're kind of the last brand actually to enter into Walmart. So I think unless they have been asleep at the wheel, people have known this one is coming and we've been very transparent in our strategy around hey, we're first going to edit and make sure that we're controlling price that our retailers can win. They're not getting beat by off-price first, and then number two, we're going to amplify with them and we're going to put dollars in there. We're going to make them look fantastic and be their best partner. And then we've told them that we are going to strategically add. So I don't think that's a surprise to most people. And then now, as we think about where do we go forward on that, especially at the core and on those influencer retails, this gives us the opportunity to spend some of those dollars that we make with Walmart and do more programs at core, do more programs in specialty, and invest some of those dollars in innovation. And those are the products that really do well at core specialty and some of our other channels. And so I think overall, there's always a little bit when anybody opens up new distribution, and you’re a retailer, you don't like it. But I think from the other side of it, it allows us to really double down with them, makes our business a whole lot healthier so we can be a great partner to our retailers long term and allows us to invest more in innovation, which is great for them when they think about trying to drive their audio business and having this be a great category for them long-term.

Rafe Jadrosich - BofA Merrill Lynch, Research Division

Just last question. Just on the guidance. It implies some SG&A leverage, and you guys talked about growing marketing for 2014. Can you just talk where some of those cost savings are coming from and then how much opportunity is there to continue this?

Seth Darling

Yes, absolutely. So I mean, we will continue to focus on those things that will drive this business and have us be on attack, always. That something from just the DNA of this company and my DNA as the leader on it. We will be on attack always. And so when they do that, we have to focus on specific areas to attack. We are always going to spend in digital. We are always going to spend in-store. Demand creation is important, and we'll spend there. We'll spend on innovation, and we'll spend on having the best talent in the world here. So those are places that just from a DNA perspective, we will continue to amplify and we will amplify hard. So what does that mean? I mean, we have to look at other areas where either we felt like we weren't getting the return for what we needed or areas that weren't as much a focus area as an amplifier is. So when you look at that, a couple of them are, we are just from a people perspective, we're a smaller company today than we were last year, and that goes to this team, who's working so hard and has gotten gritty and getting after it. So we have some strong savings there of rightsizing the organization. And then we have some strong savings around just how we are spending our money, around SG&A. And this team is getting gritty around how it spends its dollars. So there's not one silver bullet that I go, oh, this is a significant reduction. But there are a lot of ones that add to it, not a small amount of consolidating our headquarters. We don't have the California location, people flying back and forth from California. We all here in one culture, in one place. So there are definitely a lot of buckets, but I think the overall piece on that is I think we can continue to leverage SG&A as we grow sales. But we will absolutely focus on growing this business and not cut dollars where we think that we need to grow and make this really a healthy business.


Our next question comes from Ryan MacDonald with Northland Capital Market.

Ryan MacDonald - Northland Capital Markets, Research Division

Just piggybacking off of some of the Walmart questions earlier. How was that going to be starting out? Is that a nationwide launch right away or are you starting regionally in certain markets? Can you kind of just go through that for me?

Seth Darling

Sure, absolutely. So we're not going in there, Ryan, until the summer. So we still have a little time. This is -- we wanted get the information out to our retailers. Actually, it's a big reason that we want to talk about it on the call so that we would be very transparent with them and then just give everybody a forward look where our strategies are. So we're not setting for multiple months before we get out there. So we saw some things to work out with them. As far as is this is going to be a rollout to all their doors, I think in the U.S., Walmart has something like 6,000 plus stores and globally, more than 10,000. When you look at those numbers, this is absolutely an initial test that is nowhere near those numbers when we think about it rolling out. Again, for us it's getting a big enough test that we know and Walmart knows, can we partner together and be great partners together? And our focus is really on how do we make sure we have great sell in with them and then also doing a great job and really doubling down with the rest of our retailers. So it is -- it's a significant test, but it's definitely not a test that we're rolling out to all doors.

Ryan MacDonald - Northland Capital Markets, Research Division

Okay. And then I think you mentioned in your prepared remarks some commentary around some new products in Bluetooth and wireless. Was that just specific to a gaming headset or is that across the board and you'll be throwing those options in for earbuds or music headphones as well?

Seth Darling

Yes, I mean, from a wireless perspective, as I talked about in our prepared remarks, I think we came in this year, and we're a little behind. I think last year, we were quite a bit behind on it. And then didn't have what we needed it from a Bluetooth perspective outside of some of the products at Astro and in gaming. And then this year, it's a great testament to our product team and how quickly they can move and how quickly they can work with our factory partners, is we're going to introduce wireless in addition to Bluetooth speakers, we're going to introduce wireless in both Skullcandy and add in Astro for over-ear and on-ear. So, we're going to roll out wireless in multiple dimensions. You won't see a wireless bud come out in that in the fall. That's definitely one that I think is important. But across the rest of the categories, you're going to see us taking much more of the leadership position in wireless and Bluetooth.

Ryan MacDonald - Northland Capital Markets, Research Division

Okay. And just one final question. I mean, it seems like only, the sales to the off-channel -- discounted off-channel has declined quite a bit over -- year-over-year. How do you see that continuing -- that process continuing throughout 2014?

Seth Darling

Yes, I mean, I think we want to stay at levels about where we are right now. I mean, I think, we looked at this and went hey, there are couple of ways that you can cut this distribution and lessen it. One is you can slowly decrease it and bleed it down over time. Or you can go, hey, you know what, we're going to be the best partner to our retailers and we are going to reestablish this brand and rip the band-aid off. And we decided last year, when you talk about cutting off price by 60%, what was a very material number for this company historically. We went, we're going to rip this band-aid off. We're going to do it quickly, and we're going to get moving forward on this turnaround versus slowly bleed it out. And so when we think about it right now, I mean, we are, from a percentage of our revenue that we think about, we're kind of right where I want to be and where I think a healthy business is, and even a little bit lower than that. So I don't think that you're going to see further cutting in off-price. But we are definitely not going back to the old days where off-price was as big as it used to be.


Our last question comes from Andrew Burns of D. A. Davidson.

Unknown Analyst

This is Mike [ph] on for Andrew. I'd like to ask you a big picture question about the current brand landscape. I know there's been a lot of new entrants over the last few years, and yet the market seems to be consolidating around a few brands. Do you guys believe the competitive landscape is settling down at all? Or is the threat of new entrants just as high as it was 2 years ago?

Seth Darling

Yes, Mike, that's a great question and one that we talk a lot about both externally and one we talk about a lot internally as well. I think there's no doubt that we're entering a consolidating market for audio, headphones in particular. What we're hearing from our retailers is coming very quickly, they see kind having their top 4, 5 brands, cutting that down from a much larger number of brands. And then they'll have 1 or 2 brands they kind of bring in and test. But it is definitely consolidating market. It is a very different market than it was 3 or 4 years ago, even 2 years ago, 1 year ago, where I think retailers were just trying everything because the category was growing so fast. I think you now look at it and the category is still growing I mean, the most recent NPD data that I saw still had in-ear growing at kind of high single-digit, 10%, something like that and over-ear down somewhat, and on-ear I think was up little bit. But when you think about that, I think you go yes, there's definitely a consolidation and that consolidation is happening there. I think the important part on that as you go when you look at where we sit with the vast majority of our retailers, we are in that top 4, definitely in that top 5. And so in a consolidation, I think that we're going to have a place in that consolidation and that bodes well, I think is number one. I think the second part when you think about it from a consolidation perspective is we need to continue to get better. We can be in the top 5, but we really even want to be better than that in the consolidation. And so that's why we're going to attack 100%. We're going to spend dollars. We're going to have the best talent and absolutely be on attack when we go into it, but the landscape is definitely consolidating.


And now, I'd like to turn the conference back over to management for closing comments.

Seth Darling

Thank you. Well, thank you for everybody for being on the call. We appreciate it. I think more than anything, thank you to the team here at Skullcandy that's put in the blood, sweat and tears to get to the Q4 results and put us in a great place as we head into 2014 and beyond. So thank you.


Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you, all, for your participation.

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