ZAGG's Brag Is a Drag

ZAGG posts a mixed quarter, but returns more money to its shareholders.

Feb 26, 2014 at 9:15AM

"We are pleased to have finished the year with a strong fourth quarter, our third highest in terms of net sales in the company's history," ZAGG (NASDAQ:ZAGG) CEO Randy Hales says in kicking off his company's earnings release after Tuesday's market close.

He may be right about where the period stands in ZAGG's history, but it's certainly a stretch to call this a "strong" fourth quarter.

Net sales for the distributor of tablet and smartphone accessories fell 24% to $66.8 million during the holiday quarter. Sales in all three of its flagship product categories -- invisibleSHIELD screen protectors, tablet keyboards, and iFrogz audio accessories -- declined for the period. That's a pretty resounding failure since those three categories account for 87% of ZAGG's fading net sales.

The problem across all three segments is the same. The market has gotten more competitive. There are cheaper alternatives, resulting in the one-two punch of shrinking gross margins on cascading sales. A year-ago profit has been transformed into a reported loss, and even on an adjusted based we see profitability and EBITDA falling hard.

ZAGG is pleased. Really?

The good news for investors is that ZAGG is confident. It sees a return to sales growth by the latter half of this year, and that will be enough to push all of 2014 into positive territory. That's a pretty bold projection, since the handful of analysts still following the company generally see sales dipping slightly this year. 

Unfortunately it's hard to take ZAGG seriously. It dramatically hosed down its outlook not once, but twice last year. Until it can live up to its optimism, it will be hard to take ZAGG's thesis that new products and distributor resets later this year will drive growth as gospel. 

A positive in all of this is that ZAGG is putting its diminishing cash flows to work. It has just paid off its credit line, and now its board has approved a $10 million buyback. This may not have moved the needle when ZAGG was peaking north of $500 million three summers ago, but the stock has shredded 75% of its value. The buyback will make a difference. It will support the stock. It will make adjusted earnings matter more on a per-share basis. However, don't believe that the turnaround is here until it happens. ZAGG's guidance has been unreliable, and that isn't really a surprise since it's at the mercy of the product life cycles of other companies. Dismiss the hope. Wait for the facts.

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Rick Munarriz has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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