Sonos: Update of Q2 2022

SONO-Sonos, Stocks

Sonos Inc designs, develops, manufactures, and sells audio products and services. It distributes its products in over 50 countries.

Last May 11th, it presented its results for its second quarter of 2022 (which ended on April 2nd; the start of its fiscal year is at the end of September). They disclose an increase in revenue of more than 20% year-over-year and a bit of tension in the margins due mainly to the rise in the price of some components. The growth was driven by solid demand for their products and supply availability during this quarter. But even though they still have ended the quarter with a backlog pending to fulfill.

COVID-19 is still delaying the availability of products, which can be holding up additional sales. Moreover, it is causing an increase in component, shipping, and logistics costs, as well as longer lead times (due mainly to new lockdowns in China). The pandemic has also delayed their planned move to Malaysia to diversify the supply chain.

The conflict between Russia and Ukraine has caused further disruptions, but it didn’t have a material impact on their supply chain.

Sonos speakers revenue represented 79.5% of total revenue. It grew 18.8% year over year, driven by the introduction of Roam in April 2021.

Talking about capital allocation, they have repurchased shares for a value of $74.5 million for the first half of the year.

Call

In the call commenting on these results, Patrick Spence, CEO of Sonos, made the following remarks:

  • The 20% year-over-year revenue growth is even more impressive if we consider that it is being compared with a 90% year-over-year growth last year and was constrained by supply.
  • He announced three innovations.
    • Ray: the new compact soundbar with new acoustic innovations that deliver balanced sound, crisp dialogue, and solid base
    • Sonos voice control: the first voice experience purpose-built for listening and controlling your music on Sonos
    • Sonos Roam: the ultra-portable smart speaker
  • They confirm that the demand for their products is strong regarding the macro environment. And it was even before the stimulus last year.

Outlook

  • They reconfirm their revenue guidance of $1.95-$2 billion for 2022 (continued 20-27% growth during the second half of the year). Based on three reasons:
    • Consumer demand signals from Q2 (offset by supply constraints)
    • Strong new product introductions
    • Pricing actions taken last September
  • Lower gross margin due to the increase in costs: 45.5-46% for the remainder of the year
  • Adjusted EBITDA in the range $290-$310 million (-2.5%)
    • Adjusted EBITDA margin in the range of 14.9-15.5%.

My takeaway

  • Currently, Sonos has 11.73% in short interest.
    • I don’t think these shorts expectations are specific to this company. Most public companies in the US discretionary consumer sector are bearing short positions.
  • It seems probable that there will be some decrease in the demand. The big question is if the market is already discounting it or if it will be more than what is discounted.

Is Sonos undervalued?

Challenging to know in the short term, but based on its long-term goals for 2024:

FY2024 Financial Targets -$2.5B Gross Margin 45-47% Adjusted EBITDA Margin 15-18%

They would get an EBITDA of $412.5 million. With a conservative multiple of 10 (given the potential growth of this company), we would get an Enterprise Value of $4,125 million.

If we add the estimated net cash by analysts for that year ($1,170 million), we get an estimated value of $5,295 million. Which, divided by the number of diluted shares (139.64), gives us a share target price of $37.9.

From the current price of $19.97, this would give us a potential gain of 89.8% in two years.

David Makuen, CEO of Citi Trends, highlighted the company’s achievements in the fourth quarter and throughout fiscal year 2022. He emphasized the following points:

  1. The company achieved a healthy gross margin of 39.1% in 2022 and reduced operating expenses by 9% compared to 2021.
  2. The company managed its inventories well and ended the fiscal year with a better-than-expected cash position of nearly $104 million and no debt.
  3. Citi Trends has been investing in enhancing the in-store experience and its infrastructure, and now 13% of their stores reflect the improved CTX experience.
  4. Despite a challenging economic environment, the strong balance sheet enables the company to invest in key product categories to continue delighting customers with fresh, exciting products at affordable prices.

For 2023, the company will focus on four main priorities:

  1. Driving comparable store productivity, focusing on opportunities to capture market share in areas such as footwear, beauty, kids’ apparel, and juniors and missy ladies’ apparel.
  2. Managing inventory and maximizing margin, expanding select categories, recouping sales in specific categories, and broadening the brand’s appeal to new multicultural families.
  3. Controlling SG&A expenses and leveraging the balance sheet, using analytics to eliminate unnecessary costs and establishing solid controls for spending decisions.
  4. Executing technology enhancements, continuing to develop the technology infrastructure to improve operational efficiency across the business.

However, the first quarter of 2023 has had a slower start than expected due to unfavorable economic factors affecting Citi Trends’ customers. The company remains cautiously optimistic and expects an improvement in the economic situation throughout the year.

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