Yesterday morning’s release of retail data points to a number of items that we believe to be relevant to the consumer electronics space, and Dolby (DLB), in particular. Retail sales, in general, for September were down 1.2% from August and 1.4% below last year (estimates were at a decrease of .07%.) More specifically, September ‘Electronics & Appliance Stores’ sales were down a steep 10.8% (m/m) after being up modestly (2.4%) in August.
For comparative purposes, last year’s September decline was 2.0%. While data for ‘Computer and Software Stores’ or ‘Appliance, TV & Camera Stores’ has not been released for September, the previous month’s gain (+0.9% and +2.8% respectively) in this category was less than in E & A stores; we conclude that it will be down an amount similar to the E & A drop in both categories.
We downgraded DLB on September 16th to a negative because of rich valuation (high multiple), the upcoming economic slowdown, and the then relative stability of the stock. Today we want to remind everyone that DLB is still expensive, and although it’s down about 25% since our call, there is further downside risk given the reality of the downturn. We note that Dolby derives much (currently ~82% - 83%) of its revenue from licensing the Dolby product portfolio to consumer electronics companies that use its technology in their products.
We believe that given the weak economic conditions in the US, and a deteriorating European venue, Dolby will face a more difficult time sustaining revenue growth over the next few quarters. While the Consumer Electronics Association remains convinced that electronics and TV sales will remain strong this year, much of their outlook is both biased and backward looking. Just looking at September’s preliminary data points to a weak consumer spend for the holidays and possibly beyond.
Given Dolby’s concentration in the consumer electronics space, we reiterate our negative view on DLB and remind investors that DLB reports license revenue with a one quarter lag as does DTS (DTSI), a Dolby competitor that just reiterated 3Q guidance.
Disclosure: Avian Securities, LLC, its officers, and employees may from time to time acquire, hold or sell a position in the securities mentioned herein.