Skullcandy Had $3 Million Inventory Q4 Sitting ‘Idle’ at Seattle Port, CFO Says

Skullcandy spent more than $1.1 million on air freight in Q4 to circumvent the West Coast ports slowdown and deliver headphones and other consumer products to retail for the crucial holiday selling season, Chief Financial Officer Jason Hodell said Thursday on an earnings call. For Q4, the company also estimates it had about $3 million worth of inventory sitting “unfortunately idle” at the port of Seattle while the labor slowdowns continued, Hodell said. “Without the port slowdown, this inventory would likely have been consumed in Q4,” he said. Because the West Coast ports crisis wasn’t resolved until the breakthrough in contract negotiations late February and backlogs were expected to continue for weeks thereafter (see 1502230029), Skullcandy anticipates incurring additional air freight costs that will reduce earnings per share by at least a penny when it reports Q1 results, he said. But "this is a short-term issue,” he said. Skullcandy did $4.4 million in sales through RadioShack in last year’s Q1, but those sales will disappear in Q1 this year following RadioShack’s Feb. 5 bankruptcy filing (see 1502060023), Hodell said. Skullcandy CEO Hoby Darling said Skullcandy worked “closely” with the chain in the months leading up to the bankruptcy filing “to maximize sellthrough by entering into consignment arrangements to protect ourselves while getting product to our consumers through RadioShack.” Skullcandy wasn't on RadioShack's list of top 50 creditors in its Chapter 11 filing, nor generally were other CE vendors, except for Panasonic, Toshiba America Information Systems and Wilson Electronics. “Based on conversations with RadioShack and through monitoring the news flow, we have significantly planned our business down with them for 2015," Darling said. "This is a significant headwind as we did over $14 million of good-gross-margin business with RadioShack last year.” Skullcandy thinks it will be able to “capture a good portion of these lost sales through additional volumes at existing retail partners and by selectively opening new accounts” that serve similar demographics and “geographies,” he said. “However, regaining these sales will likely take beyond 2015 to fully accomplish,” he said.