From Hype to Gripe: Critics say SLS has paid price for misguided retail campaign

Investors who held onto shares of the Ozark-based speaker manufacturer after it was delisted from the American Stock Exchange in late 2006 didn’t think the stock price could sink any lower. Then it did.

SLS (SLSZ: PK) literally became a penny stock in late April, when shares dipped to a historic low of 1 cent and spent most of May there. But June started with abnormally robust trading, and shares closed June 4 at 7 cents.

This is the same company that four years ago launched a major marketing campaign powered by celebrity endorsements from Sting and recording impresario Quincy Jones. Then in 2006, SLS Chairman and CEO John Gott appeared on “The Apprentice” alongside the show’s star, real estate dealmaker Donald Trump.

Later that year, though, SLS stock took a terrible tumble after pilot projects featuring its Q-Line home theater systems at Wal-Mart and Best Buy fell flat. The outcome stunned investors, many of whom also were proud owners of the company’s patented ribbon-driver loudspeakers – a product praised by audiophiles far and wide.

Click here for a timeline depicting the rise and fall of SLS.

“It was too good,” said Steve Guttenberg, a New York-based freelancer who reviewed SLS speakers for CNET Networks after testing them out at an electronics trade show in Indianapolis.

Despite its superior sound quality – or more likely because of it – SLS never became a household name, Guttenberg said. Well-known electronics manufacturers spend millions of dollars advertising to those more concerned about brand names than the nuances of high fidelity, he added.

“Plasma TVs essentially sell themselves,” Guttenberg said. “Speakers require more floor space. They require more knowledgeable sales staff. It’s hardly SLS’ fault. They’re a relatively small company. It’s a completely unknown brand.”

Shareholder Larry Atkinson, a machinist from Auburn, Wash., echoed Guttenberg’s assessment.

“I think it’s just name recognition,” he said. “(SLS) could be the Ron Paul of stereos.”

In the dark

Few people – other than Gott and his 31 employees – really know what SLS is up to these days.

Gott confirmed in an e-mail that the Ozark plant is still cranking out speakers, but he said SLS is in a “quiet period” due to Securities and Exchange Commission regulations regarding the company’s financial statements.

After SLS was delisted from AMEX, its shares were briefly traded on the Nasdaq Over-The-Counter Bulletin Board. In April 2007, though, the company notified the SEC that anemic cash flow had precluded it from paying outside auditors to review financial statements for the required 2006 annual and 2007 first-quarter reports. The following month, SLS was bumped from the OTC Bulletin Board for delinquent reporting, and its shares are now trading on Pink Sheets.

Shareholders haven’t had insight into the company’s financial condition since November 2006, when SLS announced a $1.7 million third-quarter loss and a $7.6 million net loss for common stockholders in the first nine months.

There was, however, a bright spot.

Due to a large single shipment of Q-Line systems, revenues in the third quarter of 2006 were $1.26 million for a gross profit of nearly $393,000, according to SEC filings.

Atkinson, who bought 5,000 shares of SLS at about 25 cents apiece in early 2006, is hopeful the company is gearing up for a new product launch, possibly later this year.

“I think they’re doing something and just not telling anybody,” he said. “The company is either going to go bust, or they’re going to go big.”

Online message boards are atwitter with speculation as SLS shareholders debate the company’s future – and take jabs at Gott. One shareholder who received a personal response from Gott posted excerpts from the CEO’s dispatch on the board earlier this year.

“What I can say is that if and when SLS is able to again report what we have been doing for the past year and a half, most of the creators of the mystery novel will probably choke on their Big Chief notepads,” Gott wrote.

SLS shareholder Ryan Porter, a lawn-and-garden salesman in Seattle who at one time owned as much as 150,000 shares, said updates on the company’s financial performance and any changes to its business plan would be greatly appreciated.

“Any piece of information would help, and there isn’t any out there,” said Porter, who initially invested about $8,000 in SLS shares when they were about $2.15 apiece. “You want to know what’s happening with the company. Your money’s in there.”

Back on track?

When SLS’ mass-marketing efforts floundered, company officials again focused on their niche customer: the discerning audiophile.

In September 2006, SLS entered a vendor agreement with The Nationwide Marketing Group – the country’s largest consumer electronics buying group – that enabled the company to sell its consumer product lines at more than 2,800 independent retailers in more than 7,500 U.S. locations.

Mike Decker, vice president of electronics for North Carolina-based Nationwide, said SLS systems remain quite popular, particularly at 1,200 electronics retailers in Nationwide’s network.

“The success our members have enjoyed with SLS has been very favorable,” he said. “Our members still say it’s the best speaker system available, whether it’s the floor-standing speakers, whether it’s the in-walls or in-ceilings. I can personally testify to that. I have some in my kitchen ceiling. They are unbelievable.”

In October, SLS announced a similar distribution agreement with SED International Inc., an Atlanta-based provider of computer hardware and consumer electronics. “We look forward to working with the SED team through their coast-to-coast warehouse network,” SLS Sales Director Don Stroh said in a news release.

Porter and Atkinson said SLS probably should have bypassed the celebrity-heavy retail marketing blitz and focused more on its wholesale business, but both conceded they were poised to cash in on the hype.

“It seemed like they were about to break into the mass-merchandise channel,” Porter said. “They had the technology. For a while there, they had the money. … That’s what prompted me to continue buying up. And, of course, the price kept falling and that made it easier to buy more. If I only would have known.”

Porter said he knew the company was in trouble after the Best Buy venture flopped. Hundreds of thousands of dollars spent on the marketing effort seemed like a waste of resources, he said.

In the private response that was later posted online, Gott addressed ongoing criticism about the company’s failed effort to bolster its brand awareness by entering big-box retail stores.

“Had SLS been able to fund the additional $15 (million) to $20 million that we had deemed necessary to address the consumer electronics marketplace, that venture should have been a very big success and there wouldn’t be people dreaming up the ridiculous assumptions that they post on the boards,” he wrote.

Porter said he’s not bitter about SLS’ downward spiral, but he’s hopeful Gott and his management team have formulated a plan to rebound from past missteps.

“It’s important to note – with every company – you’re not going to grow unless you try new things,” Porter said. “And a lot of times when you try new things, it doesn’t work out. Every business goes through an event when things don’t go so well. I believe (Gott’s) learned. Hopefully, he’s got enough momentum to keep the company going and get us out of this.” [[In-content Ad]]