Sonos Inc. ( (SONO) - Get Sonos, Inc. Report) shares suffered an 18% haircut today as investors react to a year-over-year decline in third quarter sales. Investors are right to sell the stock, it has risen too far, too fast given its challenging outlook.
In a letter to shareholders August 5, Patrick Spence, chief executive officer, says its smart speaker system is so good, and so special that its high end customers continue to choose Sonos over the competition.
Except, that’s not really true. While the company did beat FactSet consensus expectations, sales are down from last year. Sonos revenues fell to $249.3 million, a decline of 4% from last year. And for the coming year the company is forecasting only 1% sales growth.
Further, although Spence says Sonos is the clear winner over the competition, he’s complaining to government regulators that Amazon.com ( (AMZN) - Get Amazon.com, Inc. Report) and Alphabet ( (GOOGL) - Get Alphabet Inc. Class A Report) are selling their smart speaker systems too cheaply.
He says that is illegal. It isn’t.
Sonos does have a plan, though. The company has partnered with Ikea, the Swedish discount furniture company, to sell a lineup of smart speakers. Synfonisk smart speakers combine lighting and contemporary styling. They are also significantly cheaper than the gear Sonos sells at its online store.
Companies have tried a low-end strategy is the past. It is almost always a brand killer. Customers have a hard time paying a premium for brands that show up at discounted prices in major retail chains. Either your product is premium, or it is not. It can’t be both.
For example, Under Armor ( (UAA) - Get Under Armour, Inc. Class A Report) flooded Costco ( (COST) - Get Costco Wholesale Corporation Report) warehouses with lower end versions of its athletic shirts and shoes. When premium versions showed up at Foot Locker ( (FL) - Get Foot Locker, Inc. Report), customers would not pay up. Discounts followed. The brand has been tarnished.
Sonos managers may do a better job that Under Armor. However, whining about competitor pricing should not fill investors with confidence. It’s a good time to reduce exposure.