Skullcandy Core Brand Strength Is An Illusion

| About: Skullcandy (SKUL)
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Astro Gaming is the lone hotspot and its continued growth proves that the core business is dead.

Misguided focus on niche women's line that features confusing marketing messages.

Turnaround story predicated on technological advances, but none have been realized.

Piper Jaffray research shows that the brand is experiencing significant erosion among the vital teen market.

Continued decline in digital as evidenced by lower Google search volume and website traffic.

I wrote my last article on Skullcandy (NASDAQ:SKUL) a little over a month ago and it was quite bearish. Since that time the stock has dropped about 15%. I believe that this is just the start of a precipitous decline that will ultimately take Skullcandy stock to new lows. Seeking Alpha Contributor Stan Ackman reminds me that I should consider the positives along with the negatives to provide a more balanced viewpoint when discussing this company. He is right, and there is one big positive to this story. That is Astro Gaming, acquired by Skullcandy in 2011.

In July 2013 I projected Astro Gaming's revenues to be approximately $40 million for the full year. At its current growth rate of 30%-40%, I'd estimate revenues to be about $55 million for 2014 or about a $15 million increase YOY. Coincidentally, the company as a whole projects growth at about 6.7% in sales YOY from $210 million in 2013 to $224 million for this year. So its easy to see that if you take the Astro Gaming growth out of the equation it is obvious that the core brand growth is stagnant and even possibly experiencing declining YOY sales.

That is hardly encouraging for the future. However, I know why Astro Gaming succeeds and the core brand fails. Astro Gaming is its own San Francisco division separated from the resort atmosphere in Utah and they focus on technological advances, something CEO Hoby Darling and interim successor Rick Alden (who dumped nearly $14 million in shares following the Q4 earnings release) predicated the turnaround on but have still failed to deliver. Skullcandy has shifted its focus to gimmicky marketing that makes no sense and targets very niche segments of the population.

Starting with the Winter Olympics, Skullcandy shifted its focus from what should have been logically highlighting their sponsored snowboarding champions like Mark McMorris to promoting rainbow Aviators front and center on their homepage and social media for the duration of the games. I always hate when brands get political, and the Winter Olympics is the world stage and Skullcandy was right there with some of the best athletes under contract to them and yet their focus was on promoting AthleteAlly, an organization that promotes ending "homophobia and transphobia" in sports. Politics and brand marketing mix like oil and water. There are no winners.

Personally I'm not sold on the size of the market of transgender skate boarders that this promotion is likely to appeal to, but besides that the nature of this campaign makes it very risky. Not only with Skullcandy's target domestic "irreverent youth" customer, but it is important to recall that the only growth it still has in the core brand is International. Not every country is as liberal as the United States. Some cultures may find this marketing angle to be very controversial or worse. The logic behind Skullcandy taking this over-the-top stand escapes me, when the obvious marketing play is the slam dunk easy win of focusing their Olympic message around their sponsored athletes and their medal winning achievements. Even more peculiar is the logic behind the new women's line that has taken over the entire website and the majority of its social media for the past week.

OK we get it; its an "irreverent female youth" campaign. Nevermind the fact that the feature product of this line is a colorful version of the perennial non-selling Navigator. I don't know anybody who owns a pair of Navigators and you can find them on Amazon (NASDAQ:AMZN) for under $40. Or you can buy the new floral version for $100 "at select retailers". I would be shocked to see retailers get on board with this sales strategy.

One would guess that when launching the women's line that the company harnessed the power of their connections like Jay Brown, the new Skullcandy director and CEO of Roc Nation? Afterall he manages Rihanna. You can't get more "irreverent" than her. But no; Skullcandy decided to focus on their "muses", a term referring to women who are a source of artistic inspiration. I had to look that phrase up on to find out what it meant, but that didn't stop Skullcandy's outsourced advertising agency from using it as the slogan of its campaign.

Hoby Darling is a great speaker, a lawyer by trade and an accomplished deal maker but clearly not a marketer. I bought the hype myself from the $5s all the way to the $8s before his charm wore off. He promised to be on the forefront of technological innovation leaving investors speculating on all sorts of audio achievements, none of which have materialized. Their best product in my opinion is the Bluetooth Air Raid speaker, which still receives mediocre ratings from the audiophiles. Hoby promised to "amplify" this product but after 6 months I haven't seen any evidence of that other than a few photos posted on Facebook (NASDAQ:FB) of it under a skate ramp or in a Zen garden. The marketing focus of the company has clearly shifted to a highly niche women's line, targeted to the 0.1% of women that know what a "muse" is and embrace multi-colored hair, ironic tattoos and body piercings.

Even more troubling for the company is the latest research from Piper Jaffray that indicates that Beats by Dre and Apple are rising as teen headphone brands and that Skullcandy is fading away, as a distant third. With 56% of teens planning to purchase headphones in the next six months, 46.1% are looking to buy Beats by Dre. Only 9.8% are looking to buy Skullcandy and this is down significantly from 14.3% in the fall of 2012. This is a big problem and not likely to reverse itself anytime soon. Teens are fickle and once a brand becomes "not cool", you might as well stick a fork in it.

Finally, Skullcandy Q1 2014 online Google search volume is down. That is, April 2014 numbers to date are lower than March, which are lower than February and so on. Evidence of a continual decline since the December 2010 peak still exists. Furthermore, website traffic continues to trend down. More specifically, Q1 2014 significantly lags Q1 2013 in traffic. Hoby keeps promising a new digital strategy, but there is no evidence of this actually taking place. Maybe it has been ultimately "edited" out of the master plan?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.