In a post-earnings interview with yours truly, Zebra Technologies ' (ZBRA 2.14%) CEO Bill Burns provided valuable insights into consumer spending behavior. Reflecting on the company's Q2 performance and future outlook, Burns delivered some useful hints about the state of the American economy.
Zebra's financial performance
Zebra Technologies reported a solid Q2, beating the consensus analyst estimates with adjusted earnings of $3.18 per share on $1.22 billion in top-line sales. Your average analyst firm would have settled for earnings of roughly $2.80 per share on revenues near $1.18 billion.
It wasn't exactly a triumphant march. Sales increased just 0.2% year over year and adjusted earnings per share came in 3.3% lower. However, Zebra's management followed up with some good-looking projections for the next quarter. Sales growth should reaccelerate to an approximate 27% jump while earnings were targeted at roughly $3.15 per share -- up from $0.87 per share in the year-ago period.
NASDAQ: ZBRA
Key Data Points
I don't mean to give you whiplash, but that guidance was less bullish than it seemed at first glance. The third quarter of 2023 was the weakest report in Zebra's recent history, featuring a 30.6% revenue dip and leading up to multi-year stock price lows. So Burns cautioned me not to get too excited about the big sales jump, because it's more of a return to normalcy than a big win.
But the second-quarter report was solid overall. The company's cost-cutting efforts are paying off and Zebra's effective sales teams delivered top-line results above management's expectations. Mobile computing is driving this recovery, dampened by lower interest in data-reading infrastructure hardware and code-printing systems. As Burns explained on the phone, Zebra's customers are still adjusting to the overly enthusiastic system builds they executed during the COVID-19 pandemic, which was followed by disastrous inflation trends and a shaky economy.
Consumer spending behavior
In our call, Burns highlighted several key factors influencing consumer spending:
- Shift from goods-based to services-based economy: During the COVID-19 pandemic, people splurged on home goods like they were going out of style -- because, well, they were stuck at home. Think computers for remote work, home gym equipment, and DIY projects. But as life returned to normal, so did spending habits. Consumers are now favoring experiences like travel and dining out over buying more stuff for their homes, which probably saw serious upgrades in recent years.
- Impact of higher interest rates: Burns pointed out that higher interest rates are putting a damper on new home sales. When people aren't buying new homes, they aren't buying the furnishings and appliances that come with them. So, fewer new homes mean less spending on all those home goodies. "And if they've upgraded their homes, bought new TVs, all those things during COVID, then they're not going to buy them now if they're not changing residences or moving somewhere else," Burns said.
- Increased spending on experiences: So instead of spending money on trackable goods, everyone's itching to get out and about. Burns noted that many Americans are spending their money on experiences rather than gear. Travel is back in vogue, with a notable number of Americans vacationing in Europe this summer. This shift means less spending on physical products but more on making memories. Generally speaking, this economic trend weighs on Zebra's business results, since the company is so deeply involved in tracking physical goods.
Market reaction
Following the upbeat earnings report, Zebra's stock climbed to two-year highs. Investors seem to appreciate the company's strong performance and optimistic outlook, even if the comparable period of 2023 set up a very easy jump this time.
All things considered, Zebra is emerging from several years of tumultuous market chaos to set a new standard for a calmer era.
"We grew the annual business from 2016 to 2019 by about a billion dollars," he recalled. "In 2021, the business grew a billion dollars in a single year. And then growing on top of that, as our customers continued to build capacity, thinking that wanting to buy online and have it delivered to their homes, that would all continue."
That was the mentality of the goods-based economy that drove Zebra's revenue growth in the coronavirus era. Now, the secular return to a service-based economy is hitting the reset button on Zebra's business model.
"And now we're growing from there," Burns concluded.
Zebra's strategic outlook
Zebra Technologies is not only weathering the storm of past market chaos but also setting the stage for future growth. With a solid Q2 performance and strategic focus on adapting to shifting consumer behaviors, the company is headed toward a normalized valuation. Trading at 70 times earnings and 41 times free cash flow might seem high, but these metrics should settle down as the company laps a couple of weak reports from fiscal year 2023.
Based on the recent quarter's annualized run rate, the P/E ratio is a more attractive 27.6x. This, combined with a strong Q2 performance and optimistic projections, makes Zebra a solid long-term investment. Positioned at the heart of the e-commerce, healthcare, manufacturing industries, Zebra should get back to a full trot someday soon.
