Every time a popular, game-changing product hits the market, there are companies that piggyback on its success with less ambitious products. When video game consoles arrived, companies were eager to make controllers and other accessories. For personal computers, companies produced mice, keyboards and speakers. For smartphones and tablets, they created a variety of protective cases, Bluetooth keyboards, and headphones.
Yet what happens to these accessory makers when their core product fades away or cheaper competitors flood the market? In this article, let’s examine accessory makers Logitech International SA (USA) (NASDAQ:LOGI), Zagg Inc (NASDAQ:ZAGG), and Skullcandy Inc (NASDAQ:SKUL) to see what happens when a company fails to roll with the punches.
Over the past five years, PC accessories maker Logitech International SA (USA) (NASDAQ:LOGI) has lost over 70% of its market value. Logitech was once a solid tech investment, piggybacking off the growth of the global PC market with its mice, keyboard, controllers, speakers, headphones and other peripherals.
However, Logitech International SA (USA) (NASDAQ:LOGI) was not tough enough to withstand the global financial crisis, which took its toll in 2009, and the company was unable to maintain profitability. The arrival of Apple Inc. (NASDAQ:AAPL)’s iPad in 2010 and other Google Inc (NASDAQ:GOOG) Android tablets then dealt a critical blow to the PC industry, which has been losing market share ever since. IDC forecasts that global PC shipments slumped another 11% during the second quarter of 2013.
Last quarter, Logitech International SA (USA) (NASDAQ:LOGI) reported a loss of $0.23 per share, down from a profit of $0.17 in the prior year quarter. Revenue also slid 12% year-on-year to $469 million. Both Logitech’s profit and revenue missed analyst projections. Total retail sales, which account for 87% of Logitech’s top line, declined 10% from the previous year. Sales were dragged down by a 25% decline in the EMEA region and a 2% decline in the Americas, although sales in Asia rose 2%.
Sales of PC gaming accessories declined 43%, audio wireless and wearable sales dropped 39% and remote control sales slid 33%. However, sales of keyboards and other desktop accessories edged up 4%.
Logitech International SA (USA) (NASDAQ:LOGI)’s fastest growing product category was its tablet accessories, which reported 332% year-on-year growth to $30.8 million. While this indicates that Logitech’s products are steadily evolving, it may be too little, too late, considering that the segment only comprises 6.6% of the company’s top line.
Logitech will need to cull some of its non-performing products to streamline its operations going forward. This means that gross margins, which already declined from 36.4% to 33.5% last quarter, will come under further pressure as it initiates more markdowns.
Logitech International SA (USA) (NASDAQ:LOGI)’s steep decline in audio and gaming device sales is a dire warning for the new kid on the block, headphone manufacturer Skullcandy Inc (NASDAQ:SKUL), which went public two years ago. Skullcandy Inc (NASDAQ:SKUL) is best known for its massive, colorful headphones, which cost $60 to $180 each. The company also sells smaller earbuds, backpacks, iPhone/iPod cases, clothing and footwear.
Skullcandy has yet to release its second quarter earnings, but based on the stock’s 19% decline over the past six months, investors are not confident that the company’s top and bottom lines can keep growing. Increased competition from higher-end names like Bose, cheaper, high-quality headphones from Beats Electronics (Beats Audio), and a myriad of other products from other companies all make growth difficult.
Last quarter, Skullcandy Inc (NASDAQ:SKUL) sorely disappointed investors after reporting a loss of $0.23 per share, down from a profit of $0.05 per share a year earlier. Revenue declined 30.5% to $37.1 million. For the current quarter, Skullcandy expects to report a loss of $0.03 per share on a “low to mid-20%” decline in revenue. Although those numbers are marginally higher than analyst estimates, they certainly don’t indicate a turnaround for the company.
Yet Skullcandy Inc (NASDAQ:SKUL) has recently taken some moderate steps to regain the confidence of investors. The company appointed Hoby Darling, a former Nike executive, as the new CEO in March. Darling has since promised that the company will better align its product lines, expand internationally, and focus more on a gaming audience.
I hate to burst Darling’s bubble, but in my opinion, international markets are already saturated with headphones, and Skullcandy Inc (NASDAQ:SKUL)’s high price point won’t be appealing in emerging markets. In addition, the gaming industry is still in a precipitous decline, as seen in Logitech’s earnings.