Small Cap Audio Stock Skullcandy (SKUL): The Short Squeeze is On (HAR, KOSS & PAMT)

Yesterday after the market closed, small cap audio stock Skullcandy Inc (NASDAQ: SKUL) reported earnings and began rising in after hours trading, meaning its worth taking a closer look at the stock along with the performance of other audio stocks like mid cap Harman International Industries Inc (NYSE: HAR) and small caps Koss Corporation (NASDAQ: KOSS) and Parametric Sound Corp (NASDAQ: PAMT). I should mention that in late 2012, Skullcandy had the dubious distinction of being the market's most shorted stock (see: Long Live the Shorts or the Short Squeeze? SKUL, AM & UBNT) with short interest of 86.47% and there would still be a lot of shorts out there who might start feeling the squeeze (Note: SKUL is at least no longer on the HighShortInterest.com list)

What is Skullcandy Inc?

Small cap Skullcandy calls itself the original lifestyle and performance audio brand inspired by the creativity and irreverence of youth culture as the company designs, markets and distributes audio and gaming headphones and other accessory related products under the Skullcandy, Astro Gaming and 2XL by Skullcandy brands. Skullcandy's products are sold and distributed through a variety of channels in the US and approximately 80 countries worldwide. It should also be mentioned that Skullcandy was founded in 2003 by Rick Alden, the creator of several successful action sports companies and a lifelong industry enthusiast.

As for potential audio stock peers, midcap Harman International Industries Inc designs, manufactures and markets a wide range of audio and infotainment solutions for the automotive, consumer and professional markets supported by 15 leading brands (including AKG®, Harman Kardon®, Infinity®, JBL®, Lexicon® and Mark Levinson®); small cap Koss Corporation markets a complete line of high-fidelity headphones, speaker-phones, computer headsets, telecommunications headsets, active noise canceling headphones, wireless headphones, and compact disc recordings of American Symphony Orchestras on the Koss Classics label; and Parametric Sound Corp designs and markets premium audio peripherals for video game consoles, personal computers and mobile devices under the brand Turtle Beach.

What You Need to Know or Be Warned About Skullcandy Inc

Yesterday after the market closed, Skullcandy announced 4th quarter results where net sales for the quarter sank 28.4% to $72.2 million from $101.0 million for the same period the year before while North America net sales decreased 30.3% to $57.6 million and international net sales fell 19.9% to $14.7 million. These results are consistent with the company's previously stated strategy to "significantly cut sales to the off-price channel, aggressively enforce its MAP pricing online, and control inventory levels with its customers." Net income came in at $3.6 million verses $11.5 million while as of December 31, 2013, the company had cash and cash equivalents totaling $38.8 million verses $19.3 million at the end of 2012 along with no outstanding debt.

So why are shares rising in after hours or premarket trading? Those results were apparently better than expected and show signs of a turnaround at the company which had admitted to falling behind audio trends in a market that's extremely competitive. An overvalued IPO, less than stellar financial results and mobile phone makers bundling audio headphones with their products has not helped matters either. However, the earnings call was a long one as shown by the earnings call transcript (which is available on Seeking Alpha here) which contained a few things worth noting as the CEO detailed management's efforts or vision to turn things around. 

To begin with, the CEO noted that Skullcandy will test a segmented product line that focuses on its entry level price points with Walmart in mid-Q2. He cited the fact that many of the company's competitors (including Beats, Apple, Sony, Bose, Yurbuds and Monster) already sell their products at Walmart plus it's the store in many towns, where there's no other or very limited Skullcandy distribution, especially throughout the South and Midwest:

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.

In addition:

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.

When asked about the competitive landscape in audio, the CEO noted:

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.

He also added:

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.

Share Performance: Skullcandy Inc vs. HAR, KOSS & PAMT

On Thursday, small cap Skullcandy fell 1.33% to $7.43 for a market cap of $206.39 million but the stock is rising some 22%+ in after hours trading. Skullcandy has a 52 week trading range of $4.80 to $8.60 a share plus the stock is up 3% since the start of the year, up 19.4% over the past year and down 62.3% since July 2011.

Here is a look at the performance of small cap audio stock Skullcandy verses midcap Harman International Industries and small caps Koss Corporation and Parametric Sound Corp: 

As you can see from the above chart, Skullcandy has been an underperformer while Koss Corporation has had a relatively flat performance while Harman International Industries and Parametric Sound Corp have trended upward.   

Finally, here is a look at the latest technical charts for all four audio stocks:

The Bottom Line. I certainly would not want to be one of the Skullcandy shorts betting against a turnaround when the market opens in a few hours, but that does not mean I and investors should be running out and investing in a small cap audio stock that still has plenty of competition out there along with changes in consumer tastes or technology which could derail a turnaround.