Audio products maker Sonos, (NASDAQ:SONO) shares are trading around its pre-pandemic levels but underperforming the benchmark S&P 500 index. The maker of speaker systems experienced a rug pull starting a week ahead of the Apple (NASDAQ:AAPL) iPhone 12 launch event.
Sonos and competitor Logitech (NASDAQ:LOGI) speaker products were pulled from both brick and mortar and online Apple Stores signaling Apple’s own focus on speakers evidenced by The HomePod Mini. Sonos shares took a quick dive bottoming out the daily stochastic to coil back towards the $14.79 Fibonacci (fib) level. The Company is benefitting from the tailwinds of the work, learn and entertain at home trend combined with the home improvement and renovation trend. Prudent investors that understand this perfect storm of end user demand can watch for opportunistic pullbacks heading into the holiday shopping season.
China Tariffs
Sonos makes most of its products in China exposing the Company to U.S. Tariff impacts. The COVID-19 disruption to supply chains during the height of the pandemic should be alleviated for the most part heading into Q4 earnings.
U.S. Tariffs are expected to cost Sonos $33 million for FY 2020. The Company was able to gain exemption from Section 301 List 4A but needs to gain an extension or bear a 7.5% tariff moving forward. Plans to shift part of its supply chain to Malaysia have been pushed to mid-2021.
Q3 FY 2020 Earnings Release
On Aug. 5, 2020, Sonos released its fiscal third-quarter 2020 results for the quarter ending June 2020. The Company reported an earnings-per-share (EPS) loss of (-$0.52) excluding non-recurring items versus consensus analyst estimates for a loss of (-$0.22), missing estimates by $0.28.
Revenues fell (-4.2%) year-over-year (YoY) to $249.31 million beating analyst estimates of $234.38 million. The shortfall was due to the effects of COVID-19 impacting retail store closures and supply chain disruptions leading to inventory rebalancing.
However, the digital direct-to-consumer (DTC) channel was able to offset much of the loss in retail store distribution enabling the Company to improve gross margins by 60bps. They were also able to sell higher-end products like the Arca soundbar. The Company ended the quarter with $329 million in cash and cash equivalents. Sonos raised its Q4 2020 revenue guidance to $290 to $305 million versus consensus analyst estimates of $282.04 million.
Conference Call Takeaways
Sonos CEO, Patrick Spence, provided color on the quarter during the Q2 2020 earnings conference call. While the physical retail store distribution channels were shuddered, the Company experienced a 299% YoY increase in DTC digital sales.
Listening hours rose 40% YoY for the quarter, due to consumers spending more time at home. The Company saw strong demand for the newest products including Arc, Five and Sub launched in June.
The Arc premium soundbar saw a dramatic increase in preorders versus its launch two-years ago. The Sonos S2 operating system was launched to enable next-gen products and experiences that focus on personalization.
The Company continues to buildout its rich intellectual property (IP) portfolio receiving dozens of patents every year with a commitment to protecting them through litigation. Sonos was successful against Denon and recently won litigation against Lenbrook Industries for their Bluesound products. As a result, Lenbrook settled through a multi-year licensing agreement “associated with all Blue OS enabled solutions worldwide”.
The Company remains confident in its litigation with Google (NASDAQ:GOOGL) and the International Trade Commission with a trial set for February 2021. This wildcard could result in a huge windfall.
Apple Schmapple
The sell-off into the Apple iPhone event revealing the rollout of The HomePod Mini appears to be more an offensive play on Amazon (NASDAQ:AMZN) Echo smart speakers and Google Smart Home products.
While the removal of third-party speakers from Apple stores may restrict one distribution point, the product doesn’t threaten Sonos’ higher-end speakers. Bank of America upgraded shares of SONO to a Buy with an $18 price target after the event.
With consumers still expected to stay home under the threat of another COVID-19 surge and the evolution of the new telework phenomenon, consumer demand for electronics and upgrades should bolster Sonos top-line this holiday season. The pent-up demand for Sonos’ new products combined with its galvanized supply chain should have prudent investors watching for opportunistic pullback entries.
