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ZAGG Inc.: Restructuring Plan Can Unlock Value

Jun. 11, 2020 6:06 AM ETZAGG Inc (ZAGG)3 Comments


  • ZAGG reported Q1 earnings, which were significantly impacted by the COVID-19 pandemic, forcing an inventory write-down leading to a large loss.
  • It has initiated a new restructuring plan, which includes exiting some categories to focus on higher-margin products and improve profitability.
  • The company expects continued weakness through Q2 and the remainder of this year but has seen improving trends as retail channels reopen for business.
  • We think the stock has value supported by the company's leadership position in core segments with products recognized for quality.
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ZAGG Inc. (NASDAQ:ZAGG) designs and distributes accessories for smartphones and tablets, best known for its cases and screen protectors marketed through several brands. The company reported its Q1 earnings highlighted by a significant impact from the COVID-19 pandemic as several retail channels closed amid global lockdown restrictions. Expected weakness in smartphone sales for the remainder of the year has further pressured the stock, which is down by over 50% in 2020. Recognizing the challenges, we think the ZAGG has value with a reset of expectations following the deep selloff. A recently announced restructuring plan to focus on the most profitable categories through a more streamlined product portfolio can help unlock value. The outlook has improved, and we're bullish on the stock.

(Source: Finviz)

ZAGG Q1 Earnings Recap

ZAGG reported its Q1 earnings on May 28 with a GAAP EPS loss of -$2.54, which missed by $2.22, or negative $76 million of income. This included an inventory writedown of $45 million and a $19 million goodwill impairment charge. Revenue in the quarter at $91 million increased by 15.5% year over year but missed expectations by $1.7 million. Management highlighted the revenue gain, explaining trends were strong through the first half of March before the deterioration of the coronavirus outbreak which forced the closure of retail stores where its products are sold.

(Source: Company IR)

With the inventory writedown recognized as a "cost of sale", the gross margin ended at negative 21% compared to 30% in the period last year. Excluding the writedown, the "adjusted gross margin" was 28%, pressured by COVID-19-related costs towards the end of the quarter. Favorably, operating cash flow was positive at $5.8 million.

Management observed a steep drop-off in sales in the final weeks of the quarter across both wholesale and direct-to-consumer channels. While not directly mentioned, a major

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This article was written by

Dan Victor, CFA profile picture
Expert market insight that gets the direction right

BOOX Research is now Dan Victor, CFA

15 years of professional experience in capital markets and investment management at major financial institutions.

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Analyst’s Disclosure: I am/we are long ZAGG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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