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Skullcandy (NASDAQ:SKUL)

Q2 2012 Earnings Call

August 02, 2012 4:30 pm ET

Executives

Seo Salimi

Jeremy Andrus - Chief Executive Officer, President, Chief Operating Officer and Director

Ronald Ross - Vice President of Finance and Principal Accounting Officer

Analysts

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

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Jay Sole - Morgan Stanley, Research Division

Adam F. Engebretson - Piper Jaffray Companies, Research Division

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division

Amanda Sigouin - Jefferies & Company, Inc., Research Division

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Ryan Macdonald

David M. King - Roth Capital Partners, LLC, Research Division

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to Skullcandy's Second Quarter 2012 Earnings Conference Call. Presenting on today's call will be Jeremy Andrus, President and CEO; and Ron Ross, Vice President, Finance and Principal Accounting Officer. As a reminder, today's call is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Seo Salimi, Associate General Counsel. Please go ahead, sir.

Seo Salimi

Good afternoon, and welcome to Skullcandy's second quarter 2012 earnings call. Certain statements made on today's, during the prepared remarks or in response to your questions, may constitute forward-looking statements and 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 could actual results to differ materially from such statements. Those risks and uncertainties are described in Skullcandy's registration statement on Form S-1 and its quarterly and annual reports on Form 10-Q and Form 10-K. Investors should not assume that the statements made today during the conference call will remain operative at a later time and Skullcandy undertakes no obligation to update any information discussed on today's call.

With that, I'll turn the call over to Skullcandy's President and CEO, Jeremy Andrus.

Jeremy Andrus

Hi, everyone, and thanks for joining our second quarter earnings call. We are pleased with our second quarter results. Net sales increased 38%. Gross margin improved sequentially and net income increased 60%. Our sales growth was broad-based, with all of our major channels of distribution increasing on both the domestic and international sides. Sales growth was driven by sell-through and SKU growth with existing accounts, a double-digit increase in ASPs and the transition to a direct selling model in Europe. Also benefiting sales was the earlier timing of back-to-school shipping, which began about a week earlier this year and shifted some sales in the second quarter compared to the third quarter last year.

Second quarter gross margin increased 40 basis points sequentially from the first quarter and benefited, primarily by a more favorable mix of revenue and improved margins from 2012 model products. In the expense side, SG&A increased slightly above sales growth and were aligned with expectations. While we continue to invest in key areas of the business, the rate of investment has slowed and we are beginning to generate incremental revenue from those investments.

We're extremely excited about the second half of this year. We will be launching a new redesigned line of Astro Gaming headphones, a new line of Skullcandy gaming headphones and a number of internally designed and developed headphones from both our Skullcandy and 2XL brands. We believe Astro Gaming is the best premium gaming headphone brand on the market and there are many long-term opportunities to continue to develop this brand. When we acquired Astro in April of last year, we knew there were significant number of synergies between gaming and audio headphone categories. These synergies includes product development, supply-chain, sales channels and the customer base. The gaming headphone category is growing, especially at the high-end and there are limited number of established brands in this space. Barriers to entry are high because of the sophistication in technology involved with developing and distributing such a complex product. At the time of acquisition, Astro was a small niche business with great products and a strong brand, but had limited distribution and a cost structure that did not support traditional retail channels. The company's products were targeted primarily at hard-core gamers and sold exclusively online.

After years’ worth of product redesign and factory resourcing, Astro's entire product line now carries retail-ready margins giving us the ability to expand Astro's distribution into traditional retail channels. On July 20, we launched Astro's first new product since the acquisition, the $299 A50 Wireless gaming headset. A50 is Astro's most technologically advanced product in its award-winning line of headsets. It features cutting-edge KleerNet 5.8 gigahertz wireless technology, Dolby Digital 7.1 surround sound, and built-in MixAmp 5.8 and multi-platform compatibility. The A50 is professional tuned for audiophile level performance when gaming, watching movies or listening to music. It functions natively across all manner of entertainment devices, including gaming consoles, PCs, Macs and home theater systems.

Since the launch of the A50 less than 2 weeks ago, we have sold a significant number of units from the astrogaming.com website. And the early buzz around the product has been very positive. Just this week, it was awarded the Editors' Choice for gaming headsets in PCMag.com and a recent YouTube video featuring the unboxing of the new A50 has already received 230,000 views. Technology publication, The Verge, commented, "Astro's headset range has been praised for its sound quality, but the A50 may be the company's most versatile and best-sounding product yet." Astro's always built their products on that solid foundation and the A50 is no exception. The Astro A50 is, without question, one of the best gaming headsets on the market.

We think the strong early sell-through is a positive indication of the demand for this product and the Astro brand, in general.

In the second quarter, we launched a redesign Hesh model across all channels, with a retail price of $60. The all-new Cassette model into select store and specialty accounts, with a retail price of $50. Redesigned Hesh integrates a new modern design into a superior engineered product platform built around Skullcandy's proprietary sound profile, Supreme Sound. Cassette is a compact headphone that is foldable and features removable speakers that can be worn in an audio-enabled beanie or hoody. It integrates Supreme Sound into a slim patent pending modular design that is unique to the market.

In alignment with our distribution and segmentation strategy, we also launched the MERGE at retail price, $30. MERGE is an all-new in-ear bud designed specifically for our consumer in the mobile channel. With combined Supreme Sound, and a contemporary design with hands-free communication.

In the second half of 2012, we will be introducing several new headphones, all with Skullcandy proprietary design, engineering and Supreme Sound. These include Stack, Navigator and iCon 3. Stack is an all-new base amplified headphone that was inspired by the success of the Skullcrusher. Stack features Supreme Sound packaged into dual subwoofers. Base-enhanced headphone moves the power and the controls from the cable to the ear cups.

Navigator is an Aviator-inspired headphone that will feature a smaller on-ear design. Many of our consumers prefer a smaller design and Navigator takes our award-winning Supreme Sound Aviator headphone and engineers it around an on-ear form.

iCon 3 is a new performance headphone targeted at snowboarders and skiers. The iCon 3 features Skullcandy's new Supreme Sound profile and our innovative technology called Cap Tech. Cap Tech is a mic and remote, conveniently located in the ear cup. This innovation allows a user to talk on the phone and control his or her music without having to remove their gloves.

Also in the quarter, we began rolling out new point-of-sale fixers and powered listening stations globally. By the end of the year, we plan to have over 5,000 fixtures in place. Approximately half of these fixtures will be powered listening stations of some type. In conjunction with the rollout of the new fixture program, we refreshed the brand across all channels with new imagery and assets.

In May, we launched a new company website that features new products, updated content and Supreme Sound messaging.

From the marketing and brand development side, we are telling a more consistent brand story. The branding message continues to revolve around our athletes and ambassadors, with a particular focus on basketball, skateboarding and music. Our NBA crew is made up of Derrick Rose, Kevin Durant, James Harden, Kyrie Irving and Andre Iguodala, 4 of whom are competing in the summer Olympic Games. We recently resigned Durant, Rose and Harden to long-term contract extensions. In the second quarter, we launched the first episode of the Take a Supermodel to Work video, which featured Kevin Durant and James Harden of the Oklahoma Thunder and swimsuit cover model, Kate Upton. And the video received a fantastic response on YouTube. It was covered in over 320 news articles and generated millions of media impressions.

With the Oklahoma Thunder making it to the NBA finals, we also sponsored James Harden Respect the Beard campaign. We printed 10,000 bandannas that contained a drawing of James Harden's beard. The bandannas could be worn to impersonate Harden's beard were distributed to fans at the arena through local retailers and to the media and were a huge grassroots success.

Finally, we have initiated a partnership to be the official headphone of 3 top high school basketball programs in the country. We are also sponsoring the ESPN Elite 24, a premier high school basketball tournament. And the MVP awards for top high school basketball tournaments.

We stepped up our grassroots marketing effort in the second quarter with sponsorships of the Zumiez Couch Tour and the Journey's Backyard BBQ. The activation resulted in 47 events in 29 states across the country with attendance topping 400,000 consumers. Our new skate team is made up of Eric Koston, Sean Malto, Theotis Beasley and Steve Berra. The entire skate team in featured in the new soon-to-be-released Hesh 2 video that was directed by Steve Berra and will premiere on The Berrics. The entire skate team is also currently touring Europe on the first ever Skullcandy skate team trip.

On the music side, we have partnered on music videos by 2 Chainz and Drake and Travis Porter and Cruella and they're leveraging our sports cultures and athletes to reach the music industry. In keeping with our grassroots activation strategy, we have another 34 events later for the back half of the year, including 6 Red Bull events, the Triple Crown Surfing, the NBA season, college football, high school basketball activations, seating events and more.

On the international side, our office in Zürich, Switzerland continues to ramp with approximately 22 people in its own distribution center located in the Netherlands. Similar to the U.S., we are driving demand creation through a combination of in-store merchandising, product segmentation, product education and grassroots marketing. We began transitioning Europe to the new product and packaging in June and this transition is proceeding in line with our plans.

We continue to evaluate other international opportunities to set up a direct distribution model. We opened an office in Shanghai, China in June, hired a General Manager and now have approximately 12 people operating out of this office. We believe the emergence of music and the audio accessory category are 2 very positive long-term trends for our business in China.

In the personnel side, we have made some changes to our executive management team. On June 19, we appointed Brent Wilkins as Vice President, Global Business development. Brent previously served as Managing Director of HTC America, a designer and manufacturer of mobile devices.

Today, after the market closed, we announced -- we also announced the appointment of Sam Paschel, the Executive Vice President, Product Development and Merchandising, effective September 14, 2012. Sam comes to us from Burton where he held various product development, merchandising and marketing positions. Sam will succeed Dan Levine who announced his plans to leave the company to pursue another opportunity. Dan will stay on until August 31 to help with the transition.

Dan's been a great friend and contributor to the brand. We have truly benefited from his vision and leadership these past 4 years. I want to thank him for his many contributions and wish him well in his future endeavors.

Commenting quickly on the CFO position, we have interviewed several strong candidates for the CFO position over the last few months and are currently in later-stage discussions with a number of them.

In closing, I just want to thank the Skullcandy team for their hard work and commitment to the brand and reiterate my optimism towards the future.

I'll now turn the call over to Ron Ross for a more detailed review of our financial results.

Ronald Ross

Thank you, Jeremy, and good afternoon, everyone. I will review our second quarter 2012 financial results and outline our reiterated sales and earnings outlook for 2012. We'll then open the call for questions.

In the second quarter, net sales increased 38.2% to $72.4 million. The increase was driven by strong growth across all of our major channels and geographies on both the domestic and international sides of our business. Domestic net sales increased 34.1% to $50.6 million. International net sales increased 59.9% to $16.5 million and online net sales increased 22.8% to $5.3 million.

We experienced double-digit growth across all of our major channels with the biggest increases coming from the core specialty, wireless and international channels. Sales to our top 10 customers, domestic customers, increased 42% and accounted for approximately 49% of sales versus 48% of sales last year.

From a product perspective, sales growth was led by strong sales of over-ear and on-ear models Hesh, Uprock, Lowrider and Aviator. And in ear models Ink'd, Smokin Buds, Titan, 50/50 and FIX. Our internal unit volume and ASPs both increased to double digits in the second quarter, and we continue to see a mix shift toward over-ear styles and higher-priced products. Though this is positive for revenue growth and our average selling prices, over-ear products generally carry lower margins than in-ear products.

Our mic products, which feature an in-line microphone geared toward smartphones, also continue to experience strong sales. This second quarter, approximately 55% of our products sales contained a mic versus 47% for the same period last year.

The increase in domestic sales was primarily driven by increased volume to existing retailers and higher average selling prices. We saw a particular strength in the core specialty, mobility, sporting goods and airport newsstand channels. We began shipping product to customers in our domestic channels for back-to-school about a week earlier this year because of the timing of the July 4th holiday, which shifted some business into the second quarter this year versus the third quarter last year.

International sales increased 59.9% in the second quarter and were driven by increases across Europe and other international regions. Net sales in Europe increased 33.1% to $8.1 million from $6.1 million in the second quarter of 2011. Europe sales and gross margin continue to benefit from the transition to a direct distribution model, resulting from the acquisition of the European distribution rights in August 2011.

Other international sales increased 98.7% in the second quarter due to increased volumes to international customers and distributors. Starting in the third quarter of 2012, the company will begin reporting sales based on its 2 segments, North America and International. Segment data for the 3- and 6-month periods ended June 30, 2012, is contained in a table in our press release.

Online sales growth in the second quarter was driven primarily by the addition of the Astro Gaming business, which we acquired in April 2011, and generated $2.2 million of online sales in the quarter. As a reminder, we discontinued selling clearance-related items on our skullcandy.com website in the third quarter last year in order to better preserve the integrity of the brand. This continued to negatively impact organic online sales in the second quarter. We expect an improving trend in the back half of the year as a result of our efforts to enforce minimum advertised pricing online and limit access to gray market product supply.

Gross profit for the second quarter increased 33.1% to $35.7 million. Gross margin was 49.2% compared to 51.1% in the second quarter last year and 48.8% in the first quarter of this year. The 40 basis points sequential increase in gross margin was driven primarily by a more favorable revenue mix of products and improved margins on 2012 model products. On a year-over-year basis, gross margin was pressured by a mix shift towards over-ear styles.

Selling, general and administrative expenses increased 39% to $24 million from $17.2 million in the second quarter of 2011. Approximately half of the increase was related to strategic investments in our direct, international and gaming platforms, including expansion of personnel.

As Jeremy mentioned, we are seeing some early signs of success in our gaming business and expect that revenue growth will begin to outpace SG&A growth in the back half of this year. On the international side, we will continue to make infrastructure and personnel investments and expect to begin leveraging international expenses next year.

The other half of the SG&A increase consisted of $900,000 of additional depreciation and amortization expense and $2.4 million of the infrastructure, public company compliance and variable expenses. A higher depreciation and amortization is the result of increased investments in a number of key strategic areas. These include increased tooling associated with our in-house product design model, store fixtures and point-of-purchase displays to improve our in-store presentation, property and equipment to support operational growth and the purchase of certain intangible assets related to our acquisition of the distribution rights in Europe.

Commenting quickly on a few balance sheet items. Accounts receivable increased $17 million to $50.5 million. The year-over-year increase in accounts receivable was impacted by the longer terms of some of our international customers and the shift in timing of some of the back-to-school shipments that occurred at the end of the quarter. Although the size of our accounts receivable has grown, we continue to see improvement in the quality of our receivables.

Inventories were $55.2 million at the end of Q2 2012 compared to $41.9 million at the end of second quarter 2011. The year-over-year increase was primarily driven by incremental inventory related to the direct distribution model in Europe. If you recall, we began selling direct in Europe in the third quarter of last year and began carrying the inventory necessary to manage that business at that point. Adjusting for the incremental Europe-related inventory, total inventory increased by 5.7%.

The recent implementation of a new demand planning software tool has provided us with a higher degree of precision in forecasting the sales patterns of our larger customers. This should result in better inventory management and demand planning.

Finally, let me conclude with our outlook for 2012. As mentioned earlier on the call, we continue to see a shift towards on-ear and over-ear products. While this is positive for sales and ASPs, on-ear and over-ear products generally carry a lower gross margin than in-ear buds. Gross margin is now expected to be flat on a full year basis. The second half gross margin is exceeding the first half.

On a quarterly basis, we expect third quarter gross margin to be roughly flat sequentially from second quarter gross margins. For the full year, we remain confident in our previously provided sales and earnings per share projections and are reiterating our outlook of $280 million to $300 million in net sales and $1.10 to $1.20 in adjusted diluted earnings per share.

We continue to expect diluted weighted average shares of approximately 28.7 million and depreciation and amortization expense of approximately $6 million. Our adjusted diluted earnings per share outlook excludes $400,000 of after-tax expenses related to the first quarter Monster litigation. Our effective tax rate will change quarter-to-quarter based on earnings in jurisdictions of varying tax rates. We now project our full year tax rate to be approximately 36.5%.

This concludes our prepared remarks. We'd now like to move to Q&A. Operator, please open the call and poll for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Edward Yruma with KeyBanc Capital Markets.

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

Can you guys talk a little bit about the margin dynamics between these on-ear and over-the-ear versus buds? I know you spent some time reengineering the product, but how should we think about that margin GAAP shrinking and the timing of that?

Jeremy Andrus

Yes, thanks for the question. As we've gone throughout the year, we've continued to see strength in that shift in the marketplace. And as part of our strategic strategy to push up ASPs, we have and will continue to introduce over-ear styles of product into the market. And we will participate in that shift that we're seeing in the marketplace. We view it very positively. It will increase our revenue and the dollar share of gross margin. The differential between buds and on-ear and over-ear style of products, we haven't specifically spoken to that in the past. It is more healthy on the bud side of the business due to there's less materials there and there's less technology associated with those products. We haven't specifically said what the differential is in the past. A little cautious to do that.

Unknown Executive

Yes, let me add to that. So there's clearly a trend in the marketplace. Ron spoke a little bit to the margin piece, but I think, we also view it positively aside from the financial impact from a brand perspective. There is more real estate to brand with. We build, we create products that have very unique industrial design and graphic design. And so net net, both financially from a brand standpoint, even with lesser margin on the year-over-year, we view the trend is positive for our brand.

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

Great. And one follow-up, if I might. With your older packaging, how much of inventory do you think still sits in the retail channel? And I guess, when should we see that exited?

Jeremy Andrus

Yes, we think that for the most part, that old package product in channel has sold through. And we see that as we visit our customers and in-store -- and look at in-store how our brand is presented. So we view that as something that's towards the tail end of the transition from old packaging to new packaging.

Operator

Now we'll hear from Robbie Ohmes with Bank of America Merrill Lynch.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

A couple of quick questions. The first one is, it's impressive that a lot of your growth is coming it looks like mostly from existing accounts. But what is the outlook for new accounts? And I guess, specifically I'd love to ask you about Walmart. Obviously, Beats has gone in there and has a presentation there. And so if you could comment on that. And then the other 2 questions. One was just on the gaming launch and how significant from a revenue standpoint is in maybe remind us, is it a similar margin impact to on-ear or over-ear, where do the margins fall out on gaming? If I recall, I think, Astro's were pretty low, but you may have fixed that now. And then the last question is just the -- can you tell us how much you think the shipments shift was into second quarter from third quarter this year? And how much we need to think about that in our third quarter revenue forecasts?

Jeremy Andrus

Great. Thanks, Robbie. So let me take the first half of that and then I'll defer to Ron on the back half. In terms of new accounts generally, that's going to vary by channel and by geography. So within the U.S., our opportunity to add new accounts in the near future is really a function of our gaming business. And so a lot of the channel that we currently have, have a gaming operation in a different section of the store. And those won't be new accounts but they'll be new parts of the new gaming SKU opportunities. There are some gaming-specific accounts, with whom we're in discussion and we do expect to add some new gaming distribution in the back half this year. Internationally, we are adding new accounts and that's an opportunity given our level of penetration. But we continue to see opportunity within the current footprint to grow our business by fixturing better, turning inventory faster, driving price points and then adding new product categories such as gaming. Specifically, related to Walmart, we certainly watch that retail and electronics department. Beats does have a nice display in there. And I guess, what I'd say right now is although not an active conversation or commitment, it's, of course, it's the largest retailer in the world. It's one of the largest electronic retailers and we continue to watch the progress of that department.

Ronald Ross

Robbie, just to add to Jeremy's comment to go to your question about the shift that we saw in the last half of the quarter. We wanted to call that out. We did see some strength towards the end part of the quarter. Last year, when you go back to the July 4th holiday, it fell on a Monday. And it was more of an extended holiday weekend. Whereas this year, it fell right smack dab in the middle of the week. And we knew that there was going to be more time taken off by the employees at the warehouse. They were going to running a skeleton crew. They were also going to be reslotting and maintenance there at the warehouse. And so because of that, our operations team made note of that to our customers, focusing on those customers that had shipments that were slated for the first part of Q3. And we wanted to be proactive in that regard to make sure that we kept product on shelf for those customers and met their needs. It's hard to tell the exact amount of shift from Q3 into Q4. We noted that there was a change in shift in ordering pattern. We can get into the details of that and magnitude of that, I suppose, after the call or later on.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Sorry, the Astro product margin versus a typical over-ear headphone margin?

Ronald Ross

Yes, thanks for the reminder on that part of the question. To follow through on what I earlier said about the on-ear and over-ear models compared to buds, there's more technology and materials that go into the on- and over-ear style headphones. And even pushing further into the gaming headphones, as Jeremy mentioned in his prepared remarks, they have more technology associated with them. Therefore, higher cost to produce them. So they are a lower-margin products. However, overall, we expect that the mix shift or the mix of those products for the gaming platform, considering that there's a higher percentage of that business in the online channel, will be 50% margins, maybe slightly more than that for this year. And over time, we expect about mid-40s from a gross margin standpoint for that component of our business.

Jeremy Andrus

Just to add to that. When we acquired Astro just over a year ago, margins were high-20s, selling direct to consumer. And we have dramatically improved margins since then.

Operator

Now we'll hear from Morgan Stanley's Jay Sole.

Jay Sole - Morgan Stanley, Research Division

I just want to ask you about the category, in general. How do you feel like the category did in the U.S. as a whole, and how did your share change in 2Q?

Ronald Ross

So we could certainly speak to that from the perspective of the NPD data, looking at various price bands and growth within those price bands. The category overall increased on first half of the year in terms of total dollars. Units were relatively flat, up single digits. In terms of the growth in the market, much of that growth we've seen in the higher price points and we've certainly seen a mix in increasing ASPs across the price bands. Or we've seen volume migrate upward, unit volume in those price bands. But again, a lot of the growth has come from the greater than $100, the premium price bands. In terms of our share, we have maintained share within the ear buds, within price bands where we do most of our business. Overall share has been flat to down simply due to the disproportionate growth in the higher price points.

Jay Sole - Morgan Stanley, Research Division

Okay, so that's interesting. Now with the new products coming out, are the new products designed to address the fact that a lot of the markets is moving to the higher price points?

Jeremy Andrus

Absolutely. The new products that are releasing are addressing a couple of strong trends in the market. One is the rise in ASPs. The other is the shift from bud to over-ear. So we talked about 3 of those products, all of which that will be launched in the back half of the year. All of which have significantly higher retail price points than our ASP and the price bands where we're currently doing most of our business. We feel like the price points that we're introducing are also well within reach of our current consumer where we'll have success within the current distribution channels.

Ronald Ross

And just to add to Jeremy's comments. What we're seeing in the market data is a validation of our strategy to move up in price points and introduce products that are higher price points. And one thing to point out, the NPD data does report part of our business but not all of it. We are a multi-brand, multichannel, global business. And as you can see in Q2, the results show strength from areas of our business that don't report into NPD and that there's not good market data for. But we know that those markets are -- and those components of the headphone and gaming market are growing. And for the gaming business, that also reports through NPD in a different component. And that particular segment, we think, is ripe for taking over market share. And the market is growing.

Jeremy Andrus

I just want to add one last comment to that. There are a couple of trends that we've seen coming. One, the shift to over- and on-ear from ear buds to headphones and the other, the increase in price points. And so we have been actively configuring our business over the last couple of years from a product development perspective and from a brand perspective to take advantage of it. We feel like we're well prepared to do that, although I will say that it's happening faster than we had anticipated.

Jay Sole - Morgan Stanley, Research Division

Okay. If I can just squeeze one more in. Going to Best Buy, you can see a lot Mix Masters on the shelf. Can you talk about the sale of that $299 product, in general, not necessarily just the Best Buy. Is that product doing better as you're seeing the trends shift to higher price point SKUs?

Jeremy Andrus

For us, actually, we have very limited distribution of Mix Master. It's a high-end pro DJ headphone. And so it's a couple of things. Number one, we had always intended to limit distribution of that headphone. The second is that it really was intended to be a showpiece for our line and on audiophile websites, it's been reviewed very positively. It certainly validates our capability of building a high-end, high-quality performance headphones. With that said, we're very much focused on driving price points from that sweet spot of sort of $20 to $70 and migrating that up to sort of $50 to $150. And we really view from a volume perspective, a unit volume perspective, $150 is being sort of the ceiling in terms of where we are really driving volume from a distribution standpoint for the brand.

Operator

And now we'll hear from Adam Engebretson with Piper Jaffray.

Adam F. Engebretson - Piper Jaffray Companies, Research Division

So maybe, first, one quick question would be, I'm wondering if it's possible to quantify what the impact is on the sell-through of your new listening stations?

Jeremy Andrus

We have seen varying levels. If you would step back and look at the menu of listening stations or demonstration fixtures that we have, it really varies across the board from sort of passive fixtures where we own real estate and the consumer has the ability to walk up and plug in their own music source, all the way to higher-end demonstration systems, which have full video and brand imagery and multiple listening stations on there. And so it's hard to say what that looks like because the options are so different. What we can say is we have consistently seen pickup across the board, as we've owned the real estate and it's been dedicated exclusively to the Skullcandy brand and there's been an opportunity to listen to the product. I would say that's particularly true. And as price points improve, the necessity to provide a listening experience to the consumer at the point of sale is critical. So we've seen it impact sell-through from sort of low-double digits up to significantly higher than that, depending on the retailer or the fixture type.

Adam F. Engebretson - Piper Jaffray Companies, Research Division

Got it. And then one other question. In Q2 versus Q1 within North America, we saw a healthy improvement in gross margin. And International segment, it ticked the other direction. Is that a function of just kind of product mix shifting in the International segment or was there something else going on there during the quarter?

Jeremy Andrus

It's partially attributable to what you just mentioned, as well as there is an improvement in margins for the 2012 products. And we transitioned to that a little bit later for the international segment.

Operator

Now we'll go to Mike Malouf with Craig-Hallum.

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division

My question is on 2XL. I'm just wondering if you could give us a little bit of color with regards to when that relaunch of that brand launches? And how many doors and specifically, where do you think it will end up?

Jeremy Andrus

So 2XL is a brand that we have began to put some additional focus on from a product perspective. And those new models have just started to launch. It's a price point brand. It's a derivative or sub brand of the Skullcandy brand and we use it for the doors that we don't think make sense for the Skullcandy brand. It tends to find itself in drug and convenience channel. We've got a number of doors. Currently, customers such as Walgreens and Rite Aid. Current door count in the U.S. is over 10,000 doors. And we certainly see additional opportunity going forward.

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division

Okay, great. And then just a quick housekeeping, Ron, maybe you can comment on the SG&A. I think, on the last quarter, you had said that you thought it was going to remain sort of flattish throughout the year. Obviously, this quarter remained as you said. Is that sort of where you think it will trend for the rest of the year?

Ronald Ross

That's exactly it, Mike. And in fact, we can spend more time with you, to go over more details of the pattern towards the balance of the year. But yes, we -- that is evident in our model. That's what we expect to see.

Operator

And now we'll hear from Jefferies' Randy Konik.

Amanda Sigouin - Jefferies & Company, Inc., Research Division

This is Amanda Sigouin on for Randy. Just a couple of question around Europe. I guess, first, where are you in the process of auditing the retail partners, is that largely done? And then just regarding the investment in the region, it sounds like it's still ongoing. Kind of where are you in that? What still needs to be done to the team and the infrastructure there? And when do you think that will be finished? And then just a question around European headphone trends. Are they similar to what you discussed the NPD data showing with the higher ASPs and the trend towards over-ear?

Jeremy Andrus

Sure. So first of all, in terms of where we are in auditing distribution and in making investments, of course, we started this process in the third quarter last year and I would say that at this point in time, we have made some changes to distributors. We've had some consolidation of retailers. And principally, we've spent a fair amount of time really understanding the most important accounts that drive both brand energy in the region. Those independent specialty retailers are the lifeblood of our business. As well as really understanding the dynamics of the larger accounts, which drive the volume. We're well into the process. We're making progress. There's no question that from a macro standpoint, Europe is a challenging environment right now. But it's -- our business there is so much smaller than the current business in the U.S. in a market that has similar characteristics in terms of size and growth. But we continue to pace our investment and make the right investments in the region. And we're very confident in the opportunity of our brand long-term. In terms of the investment in team and infrastructure, we have a fully functioning team. We've got just over 20 people in Zürich. We filled out most of our key positions and we feel very good about the quality of the management team that we have there. And then we have a third-party logistics provider based in the Netherlands, which handles all of our regional logistics. So we like where we are and we'll continue to make staged investments. And it will be an ongoing process.

Operator

[Operator Instructions] And now we'll hear from Dan Wewer with Raymond James.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Jeremy, Best Buy is your largest customer. Can you talk to us how the disruptions with all of the management changes at Best Buy are impacting Skullcandy and your performance in their stores?

Jeremy Andrus

So we typically don't speak to individual retailers, but Best Buy continues to be a very important account. We have been adding to shelf space there. We have -- we've committed to a planogram for the fall reset, which, we think, is favorable to the brand. We've got a very strong partnership there. Best Buy views us as a strategic partner. We kind of cater to a consumer that really which no other brand does in the marketplace at early teens to mid-20s. And so we feel like we're very well positioned in all of our major retailers, especially in Best Buy, to continue to do well and grow our business there.

So in terms of management, as we discussed, Dan Levine is leaving the company to pursue another opportunity. We have we filled that position with Sam Paschel who is coming from Burton. We have a lot of confidence in Sam. We view Sam as a key hire and we are making progress on the CFO search. And so generally, management team is strong and we think strengthening. We're filling key holes and we don't have any concerns there.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Actually, I was referring to the management changes at Best Buy. Second question I had, in visiting some of the Best Buy stores this week and in looking for the Astro product, it's not yet on the shelf but it is in the store computer system. When I was talking with the store associates, they weren't familiar with the product. So are there plans for product knowledge education that Skullcandy will be providing to Best Buy so their associates will know about the product, know how to sell the product?

Jeremy Andrus

Yes, great question and let me reverse to the management question, which I misunderstood. Apologies. So the changes at Best Buy management really don't affect our business in any way, shape, or form now. We have seen some changes in Best Buy store format. They've introduced a new format, which, we think, is generally beneficial to our brand. But otherwise, management changes aren't impacting where we are. In terms of Astro, we have done a limited test in 53 doors in Best Buy. It's performed very well. And we have done some product education. We have a retail education group within Skullcandy and we actually view that as very important, particularly in the higher price points. The ability to walk in and educate the blue shirts, the store employees on the brand, on the product, on the technical features. We've done that. I would guess that we've been in 50 doors across the country over the last 30 days. The response has been of great excitement. Like I said in my prepared remarks, it is a category that has had a limited number of players. A limited number of brands. Astro is one that has been -- has generated a lot of excitement at the pro-gamer and hard-core gaming level and we think there's a lot of interest to see their products at retail available to the masses.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Okay. And then the last question I had or have regards International and looking at the International revenue growth, it's still apples to oranges given the change in distribution in Europe. But are you able to look at the number of units sold in Europe either from the old wholesale model with 57 North and comparing that with the number of units that you're selling direct nowadays. Is that a way to look at it, apples-to-apples growth rate on that continent?

Ronald Ross

Yes. Dan, I'll chime in on that part. In fact, yes, we have looked at that. We have the data from the old distributor and we have analyzed really what the apples-to-apples growth is in the region. It's good growth. We expect it and forecast it this year conservatively knowing that there was cleanup to do in the channel. And a lot of work to assess customers and go through that effort. So again, we have been conservative in our projections for Europe. And we are achieving results that are in line with our projections.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Is that faster or slower than the domestic business?

Ronald Ross

The apples-to-apples growth is slightly slower than the growth in the domestic markets. Again, based on our review of NPD data as the gauge for growth. So it is behind that pace. However, again, we are building from a base level really from taking over from the distributor and it's moving along with our projections for that segment of our business this year.

Jeremy Andrus

Yes. Let me just add some color on that. So part and parcel with the strategy was to consolidate and prune our retail channel to some extent. So we really approached the European business with some level of conservatism to begin with. So we're within our plan.

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

And just also a follow-up on Robbie's question earlier. Are you guys able to quantify the dollars that you pulled forward from 3Q with shipping earlier or is that a number that's hard to get your arms around, it's hard to quantify?

Ronald Ross

Yes, it is difficult to quantify the exact number. We have a sense for a range of what that is.

Jeremy Andrus

It's a few million bucks.

Operator

Now we'll open the floor up to Mike Latimore with Northland Securities.

Ryan Macdonald

This is Ryan Macdonald on for Mike. The first one I have is, do you have like -- can you quantify the revenue mix between headphones and ear buds during the quarter?

Ronald Ross

Yes, we can. It's about 60-40, split between on- and over-ear products compared to ear buds.

Ryan Macdonald

Okay. And then the other question I had was, so then the early order for back-to-school that was just solely based on kind of timing of the holiday, is that correct?

Jeremy Andrus

Yes, it is.

Ronald Ross

That's exactly right.

Ryan Macdonald

Okay. I mean, do you have any expectation in terms of the -- are you expecting normal back-to-school seasonality?

Ronald Ross

Yes, we are.

Ryan Macdonald

And then my last question was, I think, you said ASP growth was -- grew in the double-digit range for the quarter?

Ronald Ross

Yes.

Jeremy Andrus

Yes, that's our internal ASP growth.

Ryan Macdonald

Okay. And was that rate faster than the prior quarter?

Ronald Ross

Roughly in line to slightly up from prior quarter.

Operator

Now we'll go to Dave King with Roth Capital.

David M. King - Roth Capital Partners, LLC, Research Division

A lot of my questions have been answered at this point, but maybe just quickly, the revenue guidance, you left that changed, also EPS unchanged. But then you also lowered your gross margin guidance a bit and it sounds like your SG&A guidance is unchanged. So I guess, I'm just wondering what the difference there might be. And whether you're just being conservative on the top line. Or how to think about that?

Ronald Ross

So one thing to point out. We didn't specifically point to a dollar amount of SG&A, just more that it would remain within a certain threshold, which we expect that it will. And the shift in margins as we noted is not significant when you look at really where we were previous to the end of this quarter.

David M. King - Roth Capital Partners, LLC, Research Division

Right. And it sounds like it's also just more on-ear and over-ear, which makes a ton of sense. But then, I figure then that would translate into a little bit higher revenue as well. And so that's I was -- hence, my question.

Ronald Ross

Yes. Which we do expect again point to Jeremy's comments from the gaming business that is coming a little bit stronger than we had forecasted for the back half of the year.

David M. King - Roth Capital Partners, LLC, Research Division

Okay. That's helpful. As far the new products, the Stack Navigator, iCon 3, it sounds like -- you talked a bit about the pricing, I thought that was helpful. And then the timing of the back half, should we expect any of these this quarter or is it more a fourth quarter kind of thing?

Jeremy Andrus

They are predominantly fourth quarter businesses. Some will launch late in the quarter. But from a revenue impact perspective, it will be Q4.

David M. King - Roth Capital Partners, LLC, Research Division

Okay, that's great. And then lastly, Jeremy, I know you're probably sick of answering the question on competition, and I guess, I don't worry so much about the companies that are going after the typical Beats customer. But can you talk about how you think the ones that are going after your core, actions sports customer like, say, [indiscernible] now and then it looks like increasingly solar public and some of those kind of just maybe generally companies that are going after action-sports-type customers, and how you think about it?

Jeremy Andrus

That's certainly not a new dynamic. We've seen that for the last couple of 3 years. We've seen 10, 12 brands sort of come and go. Some of them have stayed and do limited volume within action sports, in that specialty channel. But we continue to believe that we are very well positioned there. That not only is the brand very well respected within independent specialty retail and to that core consumer. But that there's some real favorable economics in a business of our size where we're able to significantly invest in product development, in creating a supply chain platform that we can leverage from a cost perspective, that we can invest in fixtures in those accounts. Look, the headphone category, it's an attractive category. The mobile devices continue to grow domestically and globally. I'm confident we will see new entrants come and go and certainly there's more room -- there's room for more than a single brand. But we continue to have over 90% of that space. It's the lifeblood of our business. We'll continue to focus on it.

Operator

And now I'll turn the call back to you, Mr. Andrus, for any closing or additional remarks.

Jeremy Andrus

That's all for the management side. Thank you. We look forward to being in touch next quarter.

Operator

Ladies and gentlemen, that does then conclude our conference call for today. Thank you for your participation. You may now disconnect.

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