Robotic cleaning devices are moving into the mainstream, which is great news for industry leader iRobot (NASDAQ:IRBT). But that growth has attracted a flood of competition lately, which has investors worried that the company could lose its prime market perch or give up some of its hard-won profitability.
iRobot's second-quarter results showed no evidence of that bearish scenario though. In fact, CEO Colin Angle and his team raised their full-year sales outlook after posting surprisingly strong operating numbers in late July. A lot depends on the company having a strong holiday season, especially for its new lineup of vacuuming and mopping products.
Investors will get a key update on the health of that product line, in addition to a few other important growth metrics, when iRobot announces its third-quarter results on Oct. 23. Let's take a closer look at what to expect.
A fresh look at demand trends
Widening consumer demand for robotic vacuums forms a key pillar of the iRobot investing thesis, and its recent sales figures back up that bullish idea. Demand trends were healthy last quarter, with revenue spiking 24% thanks to strong sales volumes for its 600 and 900 series Roomba devices.
Executives said in late July that results were especially positive during Amazon Prime Day, the e-tailer's heavily marketed annual sales event that occurred at the start of iRobot's fiscal third quarter. The success implies that the company is well positioned to defend its dominant market share this year, but Tuesday's results will include key details about those demand trends. Most investors who follow the company expect iRobot to announce a 19% sales increase to around $245 million.
Surging sales alone won't be enough to demonstrate iRobot's operating strength. The company also needs to show evidence of pricing power in the face of rising competition.
The two metrics to watch on this score are gross and operating profit margins. Gross margin jumped to 52% of sales from 49% last quarter, which suggested that low-cost rivals aren't forcing iRobot to slash prices to stay competitive. Executives have predicted a 51% figure for full-year 2018, too.
After allocating a large chunk of revenue toward sales and marketing, and another significant portion to research and development, iRobot's operating margin should land at 8% this year. Several challenges could threaten this result, though, including tougher competition that might show up in higher marketing costs. iRobot could also lower this outlook due to spiking costs from trade war challenges.
Back in July, executives teased two new products that the company would be releasing in the weeks to come to prepare for the holiday shopping season. "Stay tuned," Angle told Wall Street analysts at the time. Since then, iRobot has launched two premium vacuuming models, including a 7-series that, thanks to an automated disposal base, can allow for weeks of automated cleaning without any input from the owner.
The company has had a few weeks to gauge retailer interest for its latest product lineup, and that response will play a major role in its updated outlook for the year. As of late July, that prediction stood at sales of between $1.06 billion and $1.08 billion. Its new product releases should account for around 25% of that revenue figure, so iRobot needs these launches to go well as it looks to push annual sales past the $1 billion milestone for the first time.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Demitrios Kalogeropoulos owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and iRobot. The Motley Fool has a disclosure policy.