Expensive home audio equipment isn't exactly recession-proof. Sonos (SONO -0.93%), known for its pricey wireless speakers and soundbars, is facing a rough downturn as consumers pull back on spending.
Revenue tumbled 23.9% year over year in the fiscal second quarter, which ended April 1, and free cash flow sank deep into negative territory on rising inventories. An inventory overhang among channel partners, coupled with weak consumer demand, has Sonos predicting a revenue decline between 4% and 7% for the full year.
Against this tough backdrop, Sonos announced on Wednesday that it would be laying off 7% of its workforce. In addition to the layoffs, the company is working to reduce its real estate footprint and rethinking some of its spending. Sonos will take between $11 million and $14 million in charges related to these moves.
Sonos stock didn't change much on the layoff news but has been trending lower since early 2021. It's down 63% from its peak and down 25% since the company reported second-quarter results. Is the company's new-found focus on costs and efficiency a reason to buy?
A strong brand
Sonos sells premium products. The least expensive product it sells is a $139 bookshelf speaker through IKEA, and its higher-end products approach $1,000. Sonos is never going to dominate the home audio market due to this pricing.
However, the company does very well among consumers willing to pay top dollar for a superior audio setup. In the $200+ home theater segment, Sonos' brand scores the top rank, according to NPD. In the $150+ all-in-one segment, Sonos' brand secures the No. 2 spot.
Part of Sonos' success is due to the openness of its platform. The company has over 130 content partners, and its products work with a variety of home automation systems and voice assistants. For some consumers, this openness is a huge selling point.
A big opportunity
Sonos has penetrated just 8% of affluent households in its core markets. There were 14 million households with Sonos products at the end of 2022, and each owned an average of just under three products. Sonos can grow by winning over new households and selling additional products to existing ones.
While the current economic environment makes both challenging, the company has steadily rolled out new products to entice consumers. In fiscal 2023 alone, Sonos launched a compact subwoofer, two all-in-one speakers, a floor-lamp speaker through IKEA, and Sonos Pro, a subscription service for businesses.
In the long run, Sonos sees an opportunity to boost its annual revenue to $2.5 billion. It expects to generate around $1.65 billion of revenue this year, for comparison.
A reasonable price
Sonos is valued at about $2.07 billion. Given that profitability has tanked into the red amid the current downturn, we can't value the stock based on current earnings.
Sonos stock looks reasonably priced based on peak earnings, though. Trailing-12-month net income surpassed $160 million in mid-2021, which would put the price-to-earnings ratio at about 13, based on this number. It's important to note that those profits came during a pandemic-era boom in demand, and there's no guarantee that Sonos will be able to get back to that level of profitability. Prior to the pandemic, profits were minimal.
The good news is that Sonos is more focused on keeping costs down than ever before, so once the economic picture brightens, the company should be able to expand its profit margin. While investing in the stock may not pay off in the short term as Sonos navigates this downturn, the first sign of a demand recovery could send the stock soaring.
