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Sonos, The Gap, Genuine Parts, Target and A. O. Smith highlighted as Zacks Bull and Bear of the Day

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For Immediate Release

Chicago, IL – December 2, 2021 – Zacks Equity Research Shares of Sonos, Inc. (SONO - Free Report) as the Bull of the Day, The Gap, Inc. (GPS - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Genuine Parts Company (GPC - Free Report) , Target Corporation (TGT - Free Report) and A. O. Smith Corporation (AOS - Free Report) .

Here is a synopsis of all five stocks:

Bull of the Day:

Sonos is successfully challenging tech titans and growing its share of the expanding consumer technology market. SONO beat our Q4 FY21 estimates several weeks ago and lifted its guidance despite international supply chain bottlenecks. Sonos might also strike a nice chord with some investors because it’s trading around $30 a share.

Small Speakers, Loud Results

Sonos shipped its first product in 2005 and helped usher in the modern, higher-end speaker age. Today, the speaker company competes in a somewhat crowed connected speaker space alongside Bose and other audio-focused firms, as well as global powers such as Apple and Google.

Sonos specializes in wireless and multi-room sound systems and aims to attract music and movie lovers alike with a growing amphitheater of offerings. The Santa Barbra, California-based company doesn’t attempt to be a voice assistant speaker firm, though its devices can be set up for Amazon Alexa or Google Assistant. Instead, Sonos attracts consumers who want big, high-quality, dynamic sound.  

Sonos sells a range of sleek, connected speakers, subwoofers, soundbars for TVs, and more, normally in black or white. The company earlier this year entered the popular portable smart speaker market with its new $179 mass-market Roam speaker, which is now its lowest-cost device. It also sells what it calls architectural speakers that can be built into walls or ceilings.

A big portion of Sonos business comes from repeat customers who added to their collections for a home theater or connected speakers throughout the home. Its baseline speaker starts at $179 and packages can be over $2,000.

The firm is slowly building out its non-speaker business. This includes its $7.99 a month, ad-free Sonos Radio HD that it launched last November, which it pitches as “the highest quality sound of any radio streaming service.”

2021 Overview

Sonos posted impressive fiscal 2021 results (period ended on October 2) on November 17. The company’s full-year revenue soared roughly 30% to $1.72 billion and its adjusted earnings skyrocketed from $0.67 to $1.77 a share. It also crushed our Q4 earnings estimates, having posted adjusted EPS of +$0.08 a share vs. the Zacks consensus estimate that called for a -$0.11 a share loss.

Sonos FY21 gross margin climbed by 4.1% to 47.2% and its free cash flow came in at $208 million, up from $129 million last year. The company also boasts a strong balance sheet, closing last year with $640 million in cash and equivalents alone ($1.14 billion in total assets), against total liabilities of $569.7 million and zero long-term debt.

As we touched on earlier, Sonos has amassed a growing and loyal customer base, with households up 15% last year to 12.6 million. “We consistently see our existing customers adding more products to their systems, and with every new household that we add, that flywheel begins…” CEO Patrick Spence said in prepared Q4 remarks. 

“Total products per household increased to 3.0, underscoring the power of our model and we are poised to drive further increases in customer lifetime value as we continue to innovate and introduce new products and services.”

Outlook

Sonos is coming off its best year since it went public in 2018, posting 30% revenue growth, driven by increased home-focused spending. This topped FY20’s 5% top-line expansion and 11% in 2019. And Sonos executives raised their 2022 guidance, confident the speaker firm can work through the messy global supply chain. 

Sonos said it is in the midst of “powerful momentum” that pushed it “ahead of schedule” on its fiscal 2024 financial goals. The company said it’s “confident in” its “ability to deliver an approximately 13% revenue CAGR, 45% to 47% gross margin, and 15% to 18% adjusted EBITDA margin through fiscal 2024.”

Sonos faces near-term setbacks as it comes up against a hard to compete against stretch, coupled with rising costs and other economic headwinds. Still, Zacks estimates call for Sonos revenue to climb 14% this year and another 12.3% in FY23 to reach $2.19 billion. Its adjusted earnings are projected to slip 27% this year before bouncing back in FY23.

Despite the somewhat disappointing bottom-line outlook, its fiscal 2022 and 2023 consensus estimates are up 10% and 6%, respectively from where they were prior to its release. This is part of consistent upward revisions over the last two years and Sonos has easily topped our bottom-line estimates in the trailing four periods.

Price Movement and Valuation

The speaker firm’s strong results in mid-November were received without much fanfare and SONO has fallen over 8% in the last month. The recent downturn is part of a substantial drop since the end of August when many growth names first started to fade. Sonos did make a brief comeback alongside the market, but it is currently trading 25% below its late summer levels and nearly 30% under its April records of $44 a share.

Even with the fall, Sonos stock is up 140% in the last two years to nearly double its industry. Sonos does trade below both its 50-day and 200-day moving averages, which might scare off some investors. But it is closer to oversold RSI levels than neutral. This means some buyers might start to step in soon.

The pullback has recalibrated its valuation in a big way, with Sonos trading right near its own year-long lows at 23.7X forward 12-month earnings. This marks a 50% discount to its own highs during this stretch and it comes in not too far above its industry’s average and the S&P 500.

Bottom Line

The high-quality speaker firm’s bottom-line revisions help it land a Zacks Rank #1 (Strong Buy) right now, and four of the six brokerage recommendations Zacks has are either “Strong Buys” or “Buys.” The company is also returning value through a recently-increased round of stock buybacks. On top of that, SONO’s current Zacks consensus price target marks 52% upside to Wednesday’s closing levels.

Bear of the Day:

The Gap shares tanked following its Q3 financial release on November 23. The apparel chain fell victim to the all too familiar hyper congested global supply chain that raised costs and hampered its revenue.

What’s The Story?

The Gap is a specialty apparel giant, with brands that include its namesake, as well as Old Navy, Banana Republic, and Athleta. The company’s sales fell 16% last year and dipped 1% in 2019. Clearly, covid crushed its business, as people didn’t need to get dressed up for much. That said, The Gap’s sales have fallen on a YoY basis in four out of the past six years.

The company’s Q3 sales came in essentially flat compared to the year-ago period. Along with lackluster revenue, The Gap missed our adjusted EPS estimate by 45%. Wall Street also focused on the fact that executives said “constrained inventory” cost the company $300 million in lost sales and added $100 million in “air freight costs.”

The Gap’s updated guidance disappointed investors in a big way. Its Q4 Zacks consensus EPS tumbled from +$0.41 a share prior to its release all the way down to an adjusted loss of -$0.12 a share. Meanwhile, its FY21 and FY22 adjusted earnings estimates are down roughly 35% and 19%, respectively compared to where they were before The Gap reported on November 23.

Bottom Line

The Gap’s downward earnings revisions trends help it land a Zacks Rank #5 (Strong Sell) at the moment. The stock has also plummeted 30% since its third quarter release, as part of a 50% decline in the past six months.

The Gap’s rough guidance, which includes the all-important holiday period, forced some analysts to cut their price targets. Investors should also note that GPS shares are somewhat heavily shorted right now, at about 14% of the float. Therefore, it’s likely prudent to stay away from The Gap, at least for the time being.

Additional content:

3 Top-Ranked Dividend Aristocrats to Invest in December

U.S. stocks suffered on Nov 30, with all three major bourses closing in the red after Fed Chair Jerome Powell indicated that the central bank might consider withdrawing monthly asset purchases as the threat of inflation increases. Powell’s hawkish remarks built pressure on the stock market, which was already affected by the omicron variant of coronavirus and its impact on the broader economy. Notably, the Dow and the S&P 500 closed in the negative territory for the month of November.

Thus, to fend off the current market volatility, it’s imperative for investors to place bets on dividend aristocrats, for their risk-adjusted returns, in December. Some of the solid choices are Genuine PartsTarget and A. O. Smith.

How the Benchmarks Performed

On Nov 30, the Dow and the S&P 500 slipped 1.9% each, while the tech-laden Nasdaq dropped 1.6%. To put things into perspective, all the 11 sectors of the S&P 500 ended in the red. Communication services declined the most, followed by utilities.

For the month of November, the Dow and the S&P 500 declined 3.7% and 0.8%, respectively. Meanwhile, the Nasdaq eked out gains. But, Black Friday’s omicron-inspired selloff dragged Nasdaq down considerably from its recent highs.

What’s Impacting the Markets?

Recently, in testimony before the Senate Banking Committee, Powell said that he no longer considers inflationary pressure as “transitory” and that he considers speeding up the tapering process.

Powell’s remarks raised speculation among investors about acceleration in interest rate hikes in the near future, resulting in gyration in the markets. After all, it’s the Fed’s accommodative policy that helped stocks chug along so far amid the pandemic.

Powell’s shift in tone somehow caught the market off-guard. At the same time, investors remained anxious about the spread of omicron, leading to government restrictions and its potential impact on economic growth. Moderna has already raised doubts about the vaccines’ effectiveness on the variant.

3 of the Best Dividend Aristocrats to Buy Now

Given the aforesaid headwinds, the stock market is expected to gyrate in the month of December as it did in November. Hence, it’s wise for investors to invest in dividend aristocrats. They are unperturbed by any market volatility and, at the same time, boast solid fundamentals.

These companies have increased dividends for a considerable period of time and are known to have a better-quality business. These stocks also possess a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Genuine Parts Company is widely known for distributing auto replacement parts across many countries. It also distributes industrial replacement parts as well. Genuine Parts has made some commendable strategic buyouts to expand its geographical footprint.

Genuine Parts presently has a dividend yield of 2.45%. The company has raised its dividend for a staggering 65 successive years. The Zacks Consensus Estimate for its current-year earnings has moved up 4.8% over the past 60 days. Genuine Parts’ expected earnings growth rate for the current year is 27.3%.

Target is now an omnichannel entity. The company, to keep pace with the changing retail landscape, has made a considerable investment in technologies and has modernized the supply chain.

Target, at present, has a dividend yield of 1.44%. What’s more, Target has raised its dividend for 49 consecutive years. The Zacks Consensus Estimate for its current-year earnings has moved up 2.8% over the past 60 days. Target’s expected earnings growth rate for the current year is 39.9%.

A. O. Smith is known for manufacturing both residential and commercial water heating equipment. A. O. Smith is benefiting from its capital deployment strategy and robust liquidity position.

A. O. Smith currently has a dividend yield of 1.39%. It also has raised its dividend for 26 successive years. In fact, A. O. Smith has raised its dividend in the past five-year period at a CAGR of above 22%, citing a Sure Dividend article.

The Zacks Consensus Estimate for its current-year earnings has moved up 5.8% over the past 60 days. A. O. Smith’s expected earnings growth rate for the current year is 35.2%.

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