The latest business report from Zebra Technologies (ZBRA +0.37%) had its highs and lows, akin to a zebra's distinctive black and white stripes.
Zebra's dark side
The downsides were hard to ignore. The company expected sales of approximately $1.32 billion, roughly 10% below the year-ago quarter. But clients in the retail and logistics sectors ordered fewer barcode readers, supplies, and support services than expected because of the ongoing economic pressure.
So top-line sales in the second quarter fell 17% to $1.21 billion instead, with painful ripple effects across the income and cash flow statements. Adjusted earnings landed at $3.29 per diluted share, 29% below the second quarter of 2022 and a penny below the midpoint of management's guidance range.
Looking ahead, Zebra lowered its full-year revenue guidance from a 4% drop to a 21% retreat. Free cash flows are now expected to be negative in 2023 as a whole, down from a cash profit near $500 million in the first-quarter guidance section.
Addressing economic pressure
Zebra is still dealing with financial fallout from the COVID-19 pandemic. The weak orders in the current market represent the downside of the accelerated infrastructure builds e-commerce retailers performed in the lockdown era of 2020 and 2021. Now, many of Zebra's clients realize that they expanded their next-generation inventory management systems too quickly, so there's no need to buy new equipment while the underlying business grows into an oversized back-end structure.
So Zebra is taking action in response to this challenging market. The cost-cutting program it initiated three months ago has been accelerated, targeting annual cost savings near $65 million. The restructuring will rely on a near-standstill of new hires plus a voluntary early retirement program, CEO Bill Burns said on a phone call with The Fool.
Image source: Getty Images.
Finding the silver lining of Zebra's dark stripes
Let's slide over to Zebra's brighter side. This report wasn't all doom and gloom.
Gross margins increased by 200 basis points year-over-year, widening from 46% to 48%. The premium shipping costs that have been weighing on Zebra's business in the pandemic period have finally faded out, erased by a healthier shipping industry and Zebra's efforts to work around components in short supply and getting heavy equipment back on ocean liners instead of airplanes. Premium shipping expenses are expected to be effectively zero in the third quarter, down from a peak of $60 million in the first quarter of 2021. Combined with the stepped-up cost-cutting program, the normalized shipping pipeline should help Zebra widen its profit margins in 2024 and beyond.
The company is also leaning into the artificial intelligence (AI) frenzy of 2023. Zebra's AI tools range from machine vision tools to machine learning-based asset management assistance.
"Our system even learns from workforce planning, such as when it notices a recurring schedule change," Burns said. "For instance, if an employee consistently doesn't work on Thursdays and often has someone else cover their shift, the system learns and adjusts accordingly."
NASDAQ: ZBRA
Key Data Points
Bulls and bears are chasing Zebra down Wall Street
Zebra's second quarter had some ups and some downs. Market makers focused on the darker spots, driving the stock price 17% lower on Tuesday. That knee-jerk reaction makes sense, given Zebra's disappointing sales trend and negative cash flow projection.
That said, I would understand if you wanted to treat this sharp price correction as a buying opportunity. Zebra is a fundamentally robust business with a comfortable cash cushion and a long history of strong and consistent profits. Zebra's business is navigating through some speed bumps right now, but treating this temporary slowdown as a permanent breakdown is a mistake.
Zebra shares are trading at a modest 2.3 times sales and 16 times forward earnings right now. So if you have been interested in Zebra's game-changing business infrastructure technology for a while but deterred by a pricey stock, this might be the market dip you've been waiting for.
