Skullcandy’s new line featuring Supreme Sound

There aren’t many brands that can say they defined a category in action sports, let alone the consumer electronics industry. In fact, it would be safe to say there’s only one that's done both—Skullcandy. While that's great for their résumé, those are dangerous accolades. The consumer electronics market is awash in money, and success breeds imitation from cutthroat, deep-pocketed players that circle at the slightest hint of blood.

Skullcandy (NASDAQ: SKUL) has done an excellent job of getting itself noticed by the heavy hitters, and has more sites on its back than an elk on hunting season’s opening day—a fact that has helped its stock tumble since the brand went public last summer despite double-digits sales growth. But Skullcandy is not content to rest on its laurels, and is in the midst of reinventing itself, putting strategies in place that will not only serve as body armor, but give the big guys a run for their money and market share.

CEO Jeremy Andrus, who took the helm in March, 2011, has set his own sights on becoming one of the heavy hitters, and has recruited a new team of young, but deeply experienced talent in all facets of the company, and is refocusing the brand's positioning as a product, design, and image-focused entity to create Skullcandy 2.0.

 Take a tour of Skullcandy’s headquarters…

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…then follow the jump.

Skullcandy’s booth at the Consumer Electronics Show

The Birth of Supreme Sound

Launched in 2003, Skullcandy built its name on cutting-edge designs with great colors and logos, but the underbelly was the reputation that its product fell apart quickly. While it was good enough to get them to this point, with increasing competition, management knew it couldn’t stay competitive without a change of course to bring  product quality in line with that of its message.

The first step in this quest was creating a team with the depth to realize the vision. On a recent trip to Park City, Utah, we met with Skullcandy's executive team, including a whole host of fresh faces where Training Manager Nick Stagge was the veteran with two years under his belt. Skullcandy has solidified its team, bringing in action sports and audio industry veterans like Jamie Oman to handle product development, R&D, quality, and sourcing, and hired VP of Global Marketing & Creative Nate Morley, Director of Sports Marketing Tom Czarnowski, Global Category Manager Khari Gates, Director of Inudstrial Design Pete Kelly, and last but not least Director of Electrical & Acoustical Engineering Tetsuro Oishi, PH.D, who is heading up the push to enhance Skullcandy's sound and is coming out of the gates hot.

"One of the latest innovations that our team has been working on is a new proprietary sound profile called 'Supreme Sound'," explains Andrus. "Supreme Sound is a unique audio profile that is proprietary to Skullcandy. "Supreme Sound creates a superior audio experience by combining a unique mix of audio lows, mids, and highs and can be describe as 'attacking bass,' combined with 'precision' highs, and a natural vocal expression. We applied for a patent for Supreme Sound and will continue to educate consumers and our retail partners about the unique performance qualities of Supreme Sound."

Oishi, who spent the last four years as senior acoustic engineer at Bose before joining Skullcandy last July, has outlined three phases for getting Skullcandy where it needs to be on the product front. First is simply improving the audio quality.

"We need to build a foundation to support Supreme Sound for the long term," says Oishi. While he says it will take one to two years to really get there, the new product for '12 is well on its way. The app that the brand has created to compare the new Hesh 2.0 headphone with the original Hesh, a flagship of Skullcandy's line, is very impressive. I'm far from an audiophile, but the difference between the two was instantly recognizable.

Skullcandy is also working to greatly improve its line’s value proposition. Despite the significant increase in quality and technology, Skullcandy is only raising prices slightly at retail by around $5 to $10. The new Hesh 2.0 will sell for between $60-$70, and boasts an audio profile that normally emanates from $150 headphones.

The second phase is creating new core technologies that translate across different products. "We need technologies we can use over multiple products, where we can own the IP [Intellectual Property]," continues Oishi. "We need that for recognition on the engineering side and more importantly to make a statement and protect it."

The final phase for the next 3-5 years is creating advanced concepts and R&D that push the limits in all of the categories Skullcandy is in. The brand sees itself as driven by the portability of music thanks to smartphones, and its goal is to drive innovation not just in headphones, but other complimentary categories such as Bluetooth, wireless, noise canceling, smart phone docks, and gaming—it recently purchased Astro Gaming to step up its, ahem, game in that realm.

"We need to build the 'wow' factor," adds Oishi. "When customers use our products, we have to create an exciting moment. We also need to understand the problems customers face, and meet their needs before they even know they need them."

Skullcandy’s upcoming DC and Giro collabs

Bringing It Home

A major milestone on the road to Skullcandy 2.0 is bringing all product development and R&D in house. The move to ensure quality control, better protect designs and patents, and speed up time to market is well underway, and everything on store shelves by the end of the year will have been developed in Skullcandy's Park City, Utah headquarters.

Set across the valley from The Canyons ski resort, the building offers a great view of the mountain, and with ample coping and swimming pool themes, the layout looks ready to session on any one of the skateboards that line the walls. But the most impressive part of the building lies behind closed doors, where we had to turn off our cameras, to see the industrial design, product development, and cramped R&D facilities.

While impressive, this is just the beginning. Underneath Skullcandy's second-floor offices, they are busily building out the ground level to house a new lab for these functions and boast a full rapid prototyping set up that can take designs from idea to shelf-ready in as little as a week for an ear bud, and the plan is to have all systems go by mid-March.

Skullcandy is also taking hold of its sourcing reins to increase quality and diminish costs and gray market products, but most importantly to further its goal of improving quality

"One of the keys has been consolidating our supply chain," explains Global VP – PD, R&D, Quality & Sourcing Jamie Oman, who cut his teeth running product development, performance, and R&D at Oakley across multiple categories..  "Sourcing is critical to executing and increasing quality. We're in the process of dropping three factories. As part of 2.0, we're telling partners exactly what we expect, or we're cutting ties. Instead of keeping up, we want to be the leader and we're building the foundation to do that."

Oman admits that in the past, Skullcandy's sourcing was very cost driven, and the brand often took what it could get to fulfill orders. Oman says when he came on, the quality of the brand's marketing was a ten, but the product quality was merely a two.  Global Category Manager Khari Gates, who joined the team from adidas, agrees but says a paradigm shift has taken place bringing the product in line with the marketing.

Jeremy Andrus

Another piece of the brand's strategy to convey its message of quality is a redesign of its packaging. "The new package tells a refined, modern brand story and a graphically enhanced brand story," explains CEO Jeremy Andrus. "The message is updated to focus on quality. It's also cheaper to produce and more environmentally friendly."

While naysayers may put this down as whitewashing the same product, VP of Global Marketing & Creative Nate Morley says 2.0 is far from superficial. "The updates are across the board and focus on higher quality in all things related to the brand. This isn't just cosmetic, it provides a look that is much cleaner and better conveys the quality."

Director of Industrial Design Pete Kelly adds, in language that echoes a certain recently deceased consumer electronics guru; "We define ourselves with our design language in all ways."

Skullcandy is releasing several innovative new products later this year.  Core Collaborations Manager Zack Leader shows us the new Cassette, featuring collapsible, interchangeable speakers for $49.99. Solid.

The Message Matters

While creating better product is a huge push at Skullcandy, they are definitely not forgetting their marketing roots.

"Skullcandy was a lifestyle audio brand, now we're a performance lifestyle audio brand," sums up Czarnowski of Skullcandy 2.0 and it's his and Nate Morley's job to convey that message to the masses.

One of the first ways it's megaphoning the mix of style, performance, and quality is by overhauling its approach to athlete marketing. "We want to align with athletes that speak to a certain level of quality and performance," explains Morley. "Before our strategy was breadth, now it's more focused on telling that story."

"Our partnership with elite athletes and musicians continues," explains Andrus, but the brand is consolidating its number of sponsored athletes from 170 down to 60 "with a focus on the best athletes in key categories." Andrus, who said that two major areas of focus will be basketball and skateboarding, added that a number of new athlete announcements would hit shortly.

Perhaps the most important customers that Skullcandy needs to get up to speed are its retail partners. They know the brand better than most and are well versed on its legacy quality issues, but Skullcandy is pouring its efforts into getting them up to speed on just what 2.0 means.

From in-store listening stations to a dedicated senior level training manager in Nick Stagge, the brand is covering its bases. "Messaging and education for retailers is incredibly important, and we have some really strong plans in place to tell the 2.0 story," says Stagge. "There is so much power in the kid on the sales floor's hands. Our goal is to spend more time on the sales floor—that's a big focus going forward—to really explain what we're doing, and make those guys fans."

But Where are the Results?

Since going public last summer, with its stock released at $20 before climbing to $24 on its opening day, Skullcandy has beat analysts' expectations all three quarters, but you wouldn't know it by the stock's performance since then. It hasn't broken the $20 mark again, is currently trading in the low $14 range, and has dipped as low as $11.79.

The cause most likely is that investors see the audio industry as too competitive, with easily mimicked technologies. Other than Dolby Labs, with its numerous enforceable patents, audio brands are seen as commoditized losers.

Skullcandy has taken note and another pillar of 2.0 is covering its assets religiously. The brand currently has 12 patents in the works, and once approved, this will nearly triple its total number. More importantly, it has already begun working with a team of lawyers to aggressively enforce and escape the commodity trap.

According to financial statements, Skullcandy is targeting adjusted earnings to grow 10% to 20% to between $1.10 a share and $1.20 a share for 2012. It also says net sales should grow by 18% to 27%.

Wandering through the office, situated in the heart of an amazing resort town, Founder Rick Alden's vision of independently reshaping the industry is alive and well. The Skullcandy team knows what needs to be done, and continues to do it in its own way, at a level that we predict will continue to beat analysts' expectations for years to come.