Billabong’s Half Yearly Report; A Consistent Strategic Approach

Billabong management told us at least six months ago that 2011 would be a “transition year” and it is. But the strategy they started to tell us about a few years ago remains intact and they continue to pursue it. As I’ve written before, I generally agree with that strategy and my experience is that companies that pursue a solid strategy over the long term succeed- unless the market environment changes and the strategy doesn’t.

Let’s set the stage a little. All the documents on which this analysis is based can be found here.

First, Billabong has always been protective of its brands. You’ll remember that when the recession hit, they resisted the urge to discount more than most other brands with the goal of maintaining their brand equity. Probably cost them some sales, but gave them better gross margins. My readers know that, in the current economic environment (which I expect we’ll be in for years) I believe in generating gross margin dollars even at the cost of some sales.
 
Second, they are probably done with acquisitions for now. They won’t say never or none, but they aren’t looking and think they have enough opportunities integrating what they’ve bought. Indeed, much of the reason Billabong describes 2011 as a transition year is because of the need to complete that integration and the positive impact they expect it to have.
 
Third, the nature and structure of Billabong has changed as their retail component and owned brands have increased. At December 31, 2010 they had 635 company owned stores. These stores represented about 40% of group revenue for the half year and all that new retail wasn’t owned for the whole six months. The core Billabong brand represents, for the first time, just under 50% of revenues. So Billabong is heavily focused on retail and is a portfolio of brands that needs to be managed. But due to the retail component, they can’t be managed completely in isolation of each other.
 
The final point I want to raise before getting to the analysis is not specific to Billabong and concerns the issues that are mostly of our control, though of course we try our best to manage them. I guess this relates to consistently pursuing your strategy unless the market changes.
 
Everybody who makes anything from cotton knows that cotton prices are at record highs. Billabong CEO Derek O’Neill points out in the conference call that cotton typically represents something like 40% of the FOB price of a garment and that some price increases are inevitable for all companies. It’s in the supply chain where he sees the biggest downside risk to their business. But inflation isn’t just in cotton, and it’s not just in China. With a soft economy, you wonder just how much of those increases you will be able to pass along. I’m pretty clear on what people with stagnant incomes, no jobs, or too much debt who have to choose from more expensive food, gas, or board shorts will tend to pick.
 
Which gets us to the subject of economic recovery, because a little inflation can be irrelevant if the world is growing, jobs are being created and customers are happy. Billabong, like most other companies I think, is assuming some improvement. Or at least they need that improvement to achieve their projected results. Here’s how they put it:
 
“…the Group expects NPAT to be flat in constant currency terms for the full financial year ending 30 June 2011 and, thereafter, assuming global trading conditions gradually improve, in particular in the Australian consumer environment, the Group expects to return to more historic EPS growth rates in excess of 10% per annum in constant currency terms.”
 
Finally, there’s the uncontrollable issue of exchange rates. This is a good time to remind you that the numbers in here are in Australian dollars (AUD) unless I say otherwise.  Between July 1 and December 31, 2010 the AUD strengthened from $US 0.85 to $US 1.02. That’s 20%. So revenues earned in US dollars were worth a lot fewer AUD at the end of the period than at the beginning. The Euro strengthened by about 11.6% over the same period against the AUD. I always felt that if you’re an investor, what you care about is your return in the currency you invested in and expect to get paid in.   But looking at constant currency provides a valuable perspective, and I’ll refer to it in this discussion.
 
Quick Look at the Balance Sheet
 
Let’s do the easy part first. Billabong has always been ahead of the curve in managing their balance sheet in anticipation of their cash flow, acquisition and expected growth requirements. In August, it increased its bank line from US$483.5 million to US$790 million and extended the two segments of the facility by one year to July 1, 2013 and July 1, 2014 respectively. This provided some flexibility, ability to fund acquisitions, lower costs, and general breathing room so opportunities and surprises could be managed.
 
Between December 31, 2009 and December 31, 2010, long term borrowings rose from $397 million to $571 million (remember those are Australian dollars). The number at June 30, 2010 was $405 million so most of the increase came in the six month period. 
The largest was West 49, acquired on September 1, 2010. There were four other acquisitions between July 2 and November 8. Note six to the financial statements reports that the “Outflow of cash to acquire subsidiary, net of cash acquired” was $203.6 million. $94 million was for West 49.
 
Inevitably, borrowing money has an impact on the balance sheet. Comparing last December 31 with the prior year, we find the current ratio has fallen from 3.81 to 2.27. Higher is usually better. Total liabilities to equity over the same period rose from 0.67 to 1.03. In this case, lower is generally better.
 
I feel obligated to report the change, but the balance sheet is still strong and it’s not like there’s an issue here. We know why it happened, that it was deliberate, and that they adjusted their lines of credit to give them the flexibility to manage it. Balance sheets can never be looked at in isolation from cash flow management. Well managed balance sheets give me a warm, fuzzy feeling.
 
Digging Into the Income Statement
 
Here are the summary numbers as reported. Half year revenues rose 15.7% to $837.1 million compared to the same period the prior year. The gross profit margin fell from 55.7% to 54.4%. Selling, general and administrative expenses rose 20% from $239 million to $287 million. Other expenses were up $33 million to $87 million. Interest expense rose from $12.2 million to $19.9 million.
Profit before tax dropped from $98.4 million to $62.3 million, or 36.7%. After tax income fell 17.9% from $69.7 million to $57.2 million. The income tax provision was down from $28.7 million to $5.1 million. The lower tax rate was largely the result of several one-time events. Without those, the tax rate would have been 24%. 
 
EBITDA (earnings before interest, taxes, depreciation and amortization) fell by 23.4% as reported. Billabong says five factors were responsible for the decline:
 
1)      The very weak retail environment in Australia.
2)      The strength of the AUD against the US$ and the Euro.
3)      The impact of the recent acquisition of retailers (see discussion below).
4)      M & A and restructuring costs of $10.3 million.
5)      An increase in global overhead costs.
 
In constant currency, revenue was up 24.4%, EBITDA fell by 17.3% and after tax profit fell 9.8%.   Revenues would have been $49 million higher. Net income would have been up $6 million. Big currency impact.
 
Billabong reports its business in three segments; Americas, European, and Australasian. Sales in the Americas were up 28.6% as reported and 38.2% in constant currency. In Europe, they fell 4.1% as reported and rose 14.3 in constant currency. In Australasia, it was 12.4% and 13%.
 
As reported, EBITDA in the Americas fell from 13.7% during the period from $33.7 million to $29.1 million. The EBITDA margin was down from 10.6% to 7.1%. In constant currency it fell 5.8% from $30.9 million to $29.1 million and, as a percent, from 10.4% to 7.1%. It was noted that conditions in the wholesale accounts were showing some improvement, but that retailers were still cautious about holding inventory. Good for them. During the conference call it was noted there were “significant declines” in sales to Pac Sun during the six months, with orders for the Billabong and Element brands down 50%.   
 
Reported European EBITDA fell 17.4% from $29.1 million to $24.1 million. The margin dropped from 17.8% to 15.3%. In constant currency, it rose 3.9% from $23.2 million to $24.1 million but the EBITDA margin declined from 16.8% to 15.3%. Growth in this segment was led by the Element, Nixon and DaKine brands.
 
For the Australasian segment, it was reported to decline 32.5% from $59.7 million to $40.3 million. The EBITDA margin fell from 24.9% to 15%. In constant currency, the numbers in this segment were almost the same as reported.           
 
The Impact and Management Challenge of Acquisitions
 
The other expenses line in the income statement includes $7.4 million in acquisition related expenses. West 49 contributed $82 million in revenue and $1.7 in after tax profit to the group for the six months ended December 31, 2010. The other acquisitions (which aren’t broken out separately because, I assume, of their smaller size) contributed revenue of $66.5 million and after tax profit of $6.2 million during the same period. If you take that $148.5 in acquisition related revenue out of the total for the period, total revenue from existing brands was $688.6 million, down 4.5% from the same period the prior year. CEO O’Neill says in the conference call that “…once we strip out the acquisitions, there was revenue growth in the underlying business…”  Strangely enough, I’m guessing both statements may be correct. The difference, which is discussed in some detail during the conference call and below, may come from how you categorize between wholesale and retail during the transition period following acquisitions. 
 
Now, let’s talk about the impact on sales and margins when a brand acquires a retailer that was a customer before it was acquired. First, revenues no longer get recognized when the brand ships its product to the retailer. The retailer has to sell that new inventory before it’s recognized as revenue by the consolidated entity. On the other hand, Billabong immediately starts recognizing sales of inventory held by the retailer as of the closing date. But if Billabong has previously sold some Billabong branded product to, say, West 49 and the product’s still in the West 49 store after the closing date, what happens? Billabong has already recognized the sale of that merchandise and taken it out of their inventory. It comes back into their inventory at the acquisition date, but at what cost? You can’t go back and adjust your financial statements based on an acquisition that occurs the next period. I guess you bring it in at the acquired company’s cost. Okay, I’ll stop. I don’t want to go all debit and credit on you. But you can see that there’s some delay in recognizing sales and the increasing gross margin.
 
And these retail acquisitions start out with lower margins than Billabong is use to earning. Before they can really influence that, according to CEO O’Neill, “…we have to sell the inventory on the floor, the inventory in the warehouse and also the inventory on order by the previous owners before we get the opportunity to affect the mix of product on the floor and generate additional wholesale margin through the sale of company owned product to the stores. So that means we have to get through one or two inventory turns of existing product from third party suppliers before we can start to realize the benefits of owning retail.”
 
Changing the product mix on the floor and getting better margins sounds so simple, but it’s pretty complex as I’ve pointed out previously. Billabong has to decide how much of which of its owned brands it can carry in the stores. Obviously, they make more money on those brands. Are they going to reduce the footprint of the brands their retail carries that they don’t own? By how much? How will those other brands react to that? CEO O’Neill says, “As far as the third-party brands go, I think we are still having a lot of discussions in terms of who’s coming with us over the medium term.” I’ll bet they are.
 
You can see why these acquisitions have a lot to do with why management calls 2011 a transition year.
 
Critical Factors
 
As you think about the things that will influence Billabong’s success, where should you focus? First, on the economy. Billabong appears to be counting on some improvement there to meet its goals. Well, why should they be different from the rest of us? I hope we get that improvement, but I’m not certain it will come quickly.
 
Second, as I discussed above, they’ve got some non-trivial work to do to realize the benefits of their retail acquisitions. It’s easy to buy a company. It’s hard work to achieve the benefits you projected when you bought it. We’ll get a better sense of how it’s going in six months or so. I was glad to see the discussion in the conference call about the progress they are making in consolidating four computer systems, warehouses, and back office functions into one. I don’t know the details, but there’s typically some money to be saved and efficiencies to be gained there.
 
Some of those efficiencies come in getting product to market a little faster and having to hold less in inventory, and I suspect that requires those integrated systems. That was also a subject of the call, but this isn’t the first time Billabong management has focused on it.
 
Accomplishing that requires that things go smoothly in the supply chain. Billabong has some concerns not just about the price of cotton, but about labor shortages and shipment delays.  Once again, this is a concern we all share.
 
Finally, with no acquisitions expected in the near future and the economy improving slowly at best, you have to ask where growth will come from. Every company that protects its brands through control of distribution eventually runs up against this. Where can you sell without diluting your brand equity?
 

My sense is that Billabong, while they wouldn’t trumpet it from the roof tops, knows sales increases are harder to come by than they’d like. But they believe that can accept slower top line growth in exchange for vertical margin, system efficiency, and certain savings you can sometimes achieve when your brands are well positioned and cautiously distributed. If they do think that, well, I agree with them

 

Thoughts on the SIA Show in Denver- It Doesn’t Get Any Better Than This

Before my friends at SIA get too cocky over the title, they should know I’m referring to our industry’s current business environment as well as the show. Granted, I was a bit of a slow convert to the move from Vegas to Denver, and I still miss playing blackjack with friends, but overall I’m glad they made the move.

There were the usual opportunities to see friends I don’t see often enough, get some new perspective,  and see some great new product (and be mildly amused at some other new products that I’m guessing won’t be back next year). If the snowboard section continued to lead the way in sheer noise and excitement, the ski section wasn’t as far behind as it has been in the past. That ski/snowboard distinction ought to start (is starting, I think) going away.

I want to remind you all that no matter how good a job SIA does, it wouldn’t have been nearly as successful a show if, as an industry, we weren’t firing on all four cylinders. I’m saying four because there are four things that went right for us this season that I want to review.
 
The first, of course, is snow. Pretty much great in North America (with the exception being here in the Northwest where, unfortunately, I live). Europe got good early snow I’m told, though it tailed off after that. We all know that when it snows, we’re great managers.
The second thing was a consumer who, if still cautious, isn’t quite as scared to death as they have been the last year or two. The purse strings were a bit more open.
 
With apologies to some of the marketing types who want to believe they can influence consumer behavior more than I think they can, I would point out that those two factors are pretty much out of our control.
 
The next factor, which we can control to some extent as long as we invent something, is new technology. This season has seen the ascendance of all sorts of new rocker and camber technology, which aside from giving us something new to sell, makes it easier and more enjoyable to slide on snow. I don’t think we’ve had this kind of breakthrough in a while. It gives our customers a reason to buy, and may encourage them to replace existing equipment.
 
But I suppose we can’t expect, and perhaps wouldn’t even want, a big breakthrough every year. We need a couple of years to take advantage of those breakthroughs when they come along. So let’s characterize this cylinder as sort of controllable, but not reliably present every season.
 
And that leaves us with inventory levels, which are absolutely, positively, completely, and irrevocably under our control. Not so much as an industry. Let’s be realistic- a company’s management will control its inventory and distribution because they believe it’s the best thing for the company; not due to some altruistic concern for “the industry.”
 
A company can control its inventory. And apparently most of them did last year to the benefit of all of us. I wrote about the benefit of inventory control as it relates to conversion and participation at the show after SIA’s breakfast on that subject.
 
In the recent past, we haven’t always done quite so well at inventory control. Greed, misplaced competitive zeal, entrepreneurial ego, a misreading of market conditions and prospects or some combination of all of these has caused some companies to produce too much and try to sell it in the wrong places. This has had a negative impact, in some cases, on the whole industry.
 
Now, having been beat up by the recession, we all seem to have come to the conclusion that it’s really, really bad to have left over inventory in a one season business. Maybe we’ve even figured out that losing a few sales and creating a little product scarcity is way better than having to dump a bunch of stuff at the end of the season or carry it over to the next. The best companies have even crunched the numbers around some lost sales, leaner inventories and better, higher margin sell through and have figured out that, depending on company specifics, they are better off on the bottom line and on their balance sheet in spite of leaving some sales on the table.
 
But fear fades and greed is eternal. I don’t expect anybody to “take one for the industry,” in planning their growth and managing their inventory. But I do think it will be in all of our interests if, as individual companies, we recognize there are both short and long term benefits to constraining growth and product supply just a bit in the interest of the bottom line.
 
That way, the next time we aren’t firing on all four cylinders, we’ll just have to change the spark plug wires, not rebuild the engine.   

 

 

Skullcandy Going Public; What We Can Learn From Their SEC Filing

It’s always interesting when a company in the industry decides to go public. They’ve got to drop their drawers and provide you, in their S1 filing, with information you could only speculate about previously. If you want to see it, the whole thing is here.

As of last week, Skullcandy’s drawers are well and truly dropped. Since I returned from the excellent SIA show in Denver, I’ve been through the complete filing. I’ll review the numbers with you, but what’s more interesting to me is their market positioning and strategy.

They’ve grown quickly by recognizing and exploiting the “…increasing pervasiveness, portability and personalization of music.” They stylized what had been a commodity product and connected action sports, youth culture and music in a way it hadn’t been done before. Rick Alden and his team get all the credit in the world for recognizing and capitalizing on an opportunity that was staring us all in the face.

The question for me is whether Skullcandy can retain its “first mover” advantage against companies like Sony and Nike as they inevitably expand their distribution to grow, which they will have to do as a public company. That’s the intriguing part of the discussion, but let’s go over the numbers first.
 
Historical Financial Results
In 2005, Skullcandy (hereafter known as SC) had revenue of $1.33 million. Over the next four years, its revenues were $9.1, $35.3, $80.4, and $118.3 million for the years ended December 31. Its 9 month revenues for 2009 were $70.7 million compared to $95.9 million in the first 9 months of 2010. Domestic sales represented 72.5% and 81.1% of revenue for 2009 and the first 9 months of 2010 respectively. During both these periods, Target and Best Buy each represented more than 10% of their net sales. SC products are also sold in Radio Shack, Fred Meyer, Dicks, and The Sports Authority in additional to independent retailers and specialty chains.
 
Their gross profit percentage has been north of 48.5% for 2007-2009. It was 48.2% for the first 9 months of 2009 and 51.4% for the same period in 2010. That increase in 2010 was largely the result of domestic sales, with higher margins, growing compared to a temporary decline in lower margin international sales. They had a now resolved dispute with their European distributor that cost them a few million in revenues.
 
Selling, general and administrative expenses, as a percentage of sales, have risen every period. They were 20.8% in 2007. They rose to 22.4% in 2008 and 22.9% in 2009. In the first 9 months of 2009 they were 26.4%. The number was 31.5% in the first 9 months of 2010.
 
Typically, you might see that percentage decline with growth after a certain point. I’m thinking (and I can’t ask SC because they are in what’s called the “quiet period” that follows this kind of SEC filing) that they recognize that first mover advantage doesn’t last forever and they are trying to maximize their market penetration before players with a lot more resources than they have start to catch on and catch up. They state that of the $11.5 million increase for the first 9 months of 2010, $4.1 million was for advertising and marketing. Advertising costs by themselves for the years ended December 31 2007 through 2009 were $922,000, $3.55 million, and $3.1 million respectively. Interesting to see that decline in 2009. 
 
When they talk about their athlete and musician sponsorships, they list snow, ski, skate, surf, moto, wakeboarding, BMX and Bike teams totaling 83 athletes. There is also a five member NBA crew, a 21 plus music family, and 24 members of the DJ family. But they go on to note that, “The majority of the individuals and groups listed above do not have contractual relationships with us but support our brand by wearing our products and participating in Skullcandy events and marketing activities.” I guess that means that the majority are people they flow product to and hope that product shows up being used by the personality.
 
Income from operations has risen each year. There was an operating loss of $274,000 in 2005. There were operating profits of $954,000, $9.8 million, $21.2 million and $30.4 million from 2006 through 2009. But as a percentage of revenues operating income has declined. It was 27.8% in 2007, 26.4% in 2008 and 25.7% in 2009. For the first 9 months of 2009 and 2010, it fell from 21.7% to 19.9%. With the rise in selling, general and administrative expenses and the sales to more price sensitive customers, I suppose that’s not a surprise. Given their distribution and apparent growth plans, I’d expect some further decline in that percentage. 
 
Interest expense was fairly low the first three years of SC’s life. It rose to $586,000 in 2008 and to $8.9 million in 2009. During the first 9 months of 2010 it was $6.6 million compared to $6.5 million in the same period of 2009. Well, growth takes capital and SC raised some pretty expensive money. Notes payable to related parties totaled $27.5 million at the end of 2008 and $52 million at the end of 2009. Stockholders’ equity was $20.7 million at the end of 2008 and fell to negative $18.6 million at the end of 2009. Cash was $19.4 million at the end of 2008 but only $1.7 million at the end of 2009.
 
You can see the rationale for going public. It will clean up the balance sheet, get rid of most of the interest expense, and give them growth capital. It was probably either that or sell the company.
 
Net income was $13 million in 2008, up from $6.3 million the prior year. In 2009, net income was $13.5 million, only slightly above the prior year in spite of increasing revenue from $80.4 to $118.3 million. You can see the impact of the rise in interest expense there.
 
Market Positioning and Strategy
Here it is in a nutshell: “We believe the increasing use of portable media devices and smartphones, and the growing popularity of action sports, support our anticipated long-term sales growth.”
 
Now let’s look at what they see as their competitive strengths as they describe them and, as possible, talk about each. These competitive strength statements are quotes from SC’s filing.
 
Leading, Authentic Lifestyle Brand. Skullcandy fuses music, fashion and action sports, all of which permeate youth culture. We believe the power of our brand has driven our strong market share.
 
Fair enough. Their success to date would suggest they’re right about that. But of course somewhere between lots to all successful brands in our industry would make more or less the same statement. And all those companies, at some point in their growth, have run into difficulties (not necessarily insurmountable) associated with distribution and the size and resources of their competitors as they’ve stepped away from action sports and into fashion. Why might SC be different?
 
They would probably make two arguments. First, that with each of Best Buy and Target accounting for over 10% of their sales, they’ve leaped over the distribution issue without damaging their brand and have placed SC in those channels before their hugely larger and stronger competitors could get there with comparable offerings. Second, they’d point (they do point!) to the continuing growth in portability they are taking advantage of.
 
My perception is that all products in our industry that have pushed their distribution have ended up with some competitive pressure on their prices and the extent of that pressure has been dependent on the speed and extent of their distribution.   At some point, growth requires that you end up selling to customers who are more utilitarian and price conscious and less concerned with “cool.”
 
The bigger the market, and the more attractive the opportunity, the sooner you attract competitors and the stronger they are. Nike stumbled around in action sports for a while before they got it right, but they did get it right. Skate brands will tell you what happened when the Chinese decided they could make skateboards and the market was big enough to warrant the effort. 
 
Are headphones somehow different because they’re an electronic product even though SC has positioned itself as an action sports company? At the end of the day, there’s no easy answer and it’s a question of SC’s ability to implement its strategy. It always is. How do they stay an “authentic lifestyle brand” as they grow?
 
Brand Authenticity Reinforced Through High Impact Sponsorships. We believe we were the first headphone brand to sponsor leading athletes, DJs, musicians, artists and events within action sports and the indie and hip-hop music genres. We believe this has increased our brand awareness and reinforced our credibility with our target consumers.
 
It’s an element of faith in our industry that sponsorships matter and SC seems to have done a hell of a job here. But there’s nothing stopping Sony or Nike from doing the same thing in SC’s market. Nike in particular does know a few things about sponsorship.
 
Track Record of Innovative Product Design. Our company was founded on innovation, and we employ innovative materials, technologies and processes in the design and development of our products.
 
One of the things that particularly impressed me was their focus on getting product to market quickly. I think that’s key. The company has gone from one SKU in 2003 to over 1,200 as of September 30, 2010. Note that 1,200 SKUs translate into basically 20 models with various colors and graphics. Headphone represented 87% of gross sales for the 9 months ended September 30, 2010. It was 90% in 2009.   SC talks about having utility patents on certain features and technologies and about having filed for others. They aren’t specific and I suppose they shouldn’t be. But I’d love to know if any of these offers a proprietary advantage in the market.
 
Talking about their product, they note that, “…Two of our manufacturers together accounted for 72% of our cost of goods sold in 2009 and 73% of our cost of goods sold for the nine months ended September 30, 2010. Each of these manufacturers is the sole source supplier for the products that it produces.” They have 19 independent manufacturers in total. They are working on developing some more sourcing flexibility and have opened an office in Southern China. Good idea.
 
Targeted Distribution Model. We control the distribution and mix of our products to protect our brand and enhance its authenticity.
 
Now wait a minute. I know what works and doesn’t work in distributing a product has changed, and I know the company’s been around since 2004, but as they describe it, it sounds like SC’s distribution is being targeted with a blunderbuss. They could explain it in a much more positive way.
 
Essentially, I think SC management believes, due to the nature of the product and the market, that they can be “cool” in Best Buy and that some of the distribution constraints that would apply to other action sports products don’t apply to head phones. They may be on to something. Not to get the lawyers in an uproar, but I suggest you say that in the S1 if it isn’t too late. The assumption, or the hope at least, may be that SC can eventually be almost anywhere headphone are sold without damaging the brand. This isn’t really targeted distribution as we think about it in our industry. But that doesn’t mean it isn’t carefully thought out.
 
Growth is not just anticipated to be through domestic retail. They expect to increase their international penetration, which was slowed by a dispute with a distributor in Europe (now resolved) and sell more on line. Current on line sales are 4% of revenues. They have started to add premium products selling well above the $10 to $70 retail prices of existing product. Finally, they expect to branch out in to complementary products such as cases and speaker dock models. The first of these will be out this summer.
 
Proven Management Team and Deep-Rooted Company Culture.
 
From what I’ve read and know, I’d have a hard time saying anything but, “Yes, they do.”
 
When the public offering is complete, they hope to have raised up to $125 million.  SC will use about $45 million of the proceeds to pay down debt. The balance will be “for working capital and other general corporate purposes,” which is what these things always say.
As I said when I started, Rick Alden and the Skullcandy team have done a great job identifying and taking advantage of a market opportunity that, in hindsight, looks obvious. Hell, they all look obvious in hindsight. I think the key to being able to continue their growth while keeping their profitability up is as simple, and as difficult, as keeping SC cool in Best Buy and other places as their distribution grows.
 
They are going to run into some heavy duty competition and I’m not aware that they can make a technically superior product. Or at least they don’t talk about it in the S1. But you know what? If you’re successful in business you run into competition, and that’s just the way it is. Skullcandy has done about the best job I’ve ever seen of using their first mover advantage and I look forward to watching this play out.