Bear thesis: Product inventories within Logitech's distribution network are 2x above pre-COVID levels. According to the thesis, this dynamic has resulted in a $1bn tailwind over the past two years. A reversal in inventory dynamics would have a major detrimental effect on revenue growth leading to a downward revision in estimates.
Logitech is the 6th most shorted stock in Switzerland today (c.12% of shares).
Is an elevated channel inventory problematic?
- Theoretically yes, as write-downs are possible or distributors prefer to liquidate inventory without replacing it.
- The CFO commented positively on the level of inventory in the channels in Q3 2021.
- Also note that Logitech has commented several times on taking market share on the shelves (resulting in higher inventory).
- A very pessimistic scenario on consumer demand on all products could cause concern but this is an unlikely scenario given analyst consensus and the company's management.
- Is Logitech transparent on the subject?
- Yes, management comments and publishes information about its supply chain on a quarterly basis.
- There has also been less promotion in the last year and the creation of buffer inventory for key products at the strategic level.
- Are there any risks of product obsolescence within the inventories?
Probably not, Logitech's products are products that move quickly through the distribution chain.
In addition, Logitech creates inventory for key products that sell faster, have longer life cycles and where the company has strong market share.
So, is the inventory tailwind over the past two years really $1bn?
- Probably not, the data regarding sell-through and inventory within channels comes from third-party sources (distributors). Logitech finds that this data provides an interesting perspective to shareholders, but cannot guarantee 100% accuracy.
- Reducing product promos has a positive effect on net sales that is not seen in sell-through.
- When promotional spending decreases, net sales increase faster than sell-through.
- The opposite dynamic was explained in Q2 2021 (the company was starting from a low promotional base in Q2 2020): "The difference between our net sales and sell-through growth rates was due to higher levels of promotional spend and retail point of sale marketing, compared to the historically low levels last year, and lower channel inventory replenishment versus the prior year."
- There is also audited financial data from Logitech, which also suggests that the inventory situation within channels is likely to be much less unbalanced. Specifically, accruals are expected to be higher, including those related to customer marketing, pricing and promotional programs, in such a case of rapid inventory growth within channels.
- These accruals have been growing in recent years, but not as fast as sales.
As the company keeps on executing, the share price will rise. Current P/E of 16x isn't justified. Quality company at a reasonable price. Buy.