A Brand Bent on World Domination

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Watch out, Sony (NYS: SNE) ! There's a new kid on the block, and he's sporting Skullcandy (NAS: SKUL) headphones. Branding is critical in the audio sector, and with its trademark skull insignia and catchy motto -- "Every revolution needs a soundtrack" -- a strong identity is Skullcandy's middle name. The company's recent IPO opened the floodgates for investors to profit from its personal audio revolution. But does a flashy image make this stock a good buy?

Creating mass appeal
Skullcandy's success hinges upon targeting consumer influencers like professional athletes and popular DJs. Skullcandy found a niche in the world of extreme sports by hooking up athletes at widely covered events like the X-Games and ESPN's Espy Awards with Skullcandy merchandise.

With high-energy designs aimed at young buyers, the edgy Skullcandy swag had no problem catching on. Soon, every celebrated athlete was sporting the brand. The initial success of these endorsed products has led young consumers to associate Skullcandy's brand with appealing star power, helping to fuel the company's strong sales.

Promising growth plans and distribution
As shrewd product placement raised Skullcandy's profile, the company expanded its distribution through large national retailers like Target (NYS: TGT) and Best Buy (NYS: BBY) , as well as stores selling sports merchandise, like Dick's Sporting Goods (NYS: DKS) and The Sports Authority. The move from specialty outlets to mainstream retailers proved wise: Target and Best Buy each accounted for more than 10% of Skullcandy's total sales in 2010.

Outside the United States, the company distributes its products through 26 third-party companies covering more than 70 countries. Skullcandy plans to continue growing international sales with the launch of select websites featuring localized content and product offerings.

Additionally, Skullcandy hopes to capture more domestic market share by expanding its line of premium headphones by introducing new gaming-specific headphones and speaker-dock models.

Time to face the music
Analysts aren't sure whether Skullcandy can compete with bigger competitors like Sony and Bose. The larger companies have some advantages in brand recognition, but I wouldn't worry; Skullcandy seems to have carved out a nice niche for itself among young consumers. While Sony is No. 1 in headphone sales, Skullcandy already takes the top spot for earbuds.

Focused management and a clearly defined brand presence position this company well for continued success. For one thing, it's a meaningful vote of confidence to know that inside ownership is thriving. Skullcandy founder Rick Alden currently owns 26% of shares, and several of the company's executives own stock, too.

However, Skullcandy's share price has dropped steadily since its IPO. Investors should be even more alarmed by its low margins, and the steady increase in its operating expenses from 2007 to 2010. With the company's selling, general, and administrative expenses growing faster than sales, Skullcandy will need to focus on costs in order to bolster its profit margins. However, the company remains free cash flow-positive and its net loss in 2010 owed only to a one-time $32 million charge.

Despite its shares' downward turn, I still think this company has great potential, and a cult following that will bring it into the black. While Skullcandy has a ways to go before achieving its mission statement of "world domination," its early move on the mobile media market and growing base of youth consumers will continue to carry the brand toward future earnings. All things considered, I'd stay tuned to this company by adding it to My Watchlist.

At the time this article was published Fool contributorTamara Rutterowns shares of Skullcandy and Target. You can follow Tamara on Twitter:@TamaraRutter. The Motley Fool owns shares of Best Buy.Motley Fool newsletter serviceshave recommended buying shares of Best Buy. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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