Why Shares of Skullcandy Inc. Crashed Today

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Skullcandy tumbled on Wednesday after the company provided weak earnings guidance after reporting decent first-quarter earnings. At 2:30 Wednesday afternoon, the stock was down 24%.

So what: Skullcandy managed to beat analyst estimates for revenue and meet analyst estimates for EPS for the first quarter, but these results weren't enough to counteract soft EPS guidance. The company guided for Q2 EPS between $0.01 and $0.03, well below the $0.06 analysts were expecting. For the full year, Skullcandy expects EPS between $0.36 and $0.40, while the consensus analyst estimate is $0.40.

Skullcandy managed to grow sales during the first quarter, with revenue up 18% year-over-year, but the company still posted an operating loss of $3.6 million for the quarter. Gross margin fell 600 basis points year-over-year, and the company managed to hit EPS estimates only by reducing operating costs as a percentage of revenue.

Skullcandy does expect to grow sales by 13%-15% during 2015, and by 7%-9% during the second quarter, but the weak earnings forecast was enough to send the stock tumbling.

Now what: Skullcandy is in a tough business where brand matters, making headphones and other accessories, and the company's profitability has declined significantly since 2011, when EPS reached $0.92. After revenue took a dive in 2013, revenue growth is certainly a good sign for the company, but its profit margins are a fraction of what they used to be.

Even after the decline in the stock price today, Skullcandy trades at about 22 times the high end of its full-year guidance. With gross margin collapsing during the quarter and weak earnings guidance, a stock price collapse of this magnitude seems justified.

The article Why Shares of Skullcandy Inc. Crashed Today originally appeared on Fool.com.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Apple and Skullcandy. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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