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iRobot Is Getting Hammered by Trade War Tariffs

By Danny Vena - Jul 25, 2019 at 9:14AM

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The robotic vacuum maker lowered its full-year guidance due to the ongoing U.S.-China trade conflict.

Expectations were already pretty low going into iRobot's ( IRBT -3.75% ) second-quarter earnings release. The company had reported decelerating revenue growth in the first quarter, which sent the stock into free fall back in April, losing 23% on the day following its financial report.

That pattern of slowing revenue growth continued after the market close on Tuesday, as iRobot posted worse-than-expected financial results, lowered its 2019 forecast, and warned that the recent tariff increase would pinch results even further. This sent the stock tumbling another 17% as of Thursday morning. Let's take a look at the results and how the trade war is impacting iRobot's business.

A woman, who's sitting on a yoga mat, looking at her dog while the iRobot Roomba S9 robotic vacuum cleans the wooden floor in the foreground.

Image source: iRobot.

Stunted growth

iRobot reported revenue of $260.2 million, up 15% year over year. That result was below analysts' consensus estimates of $268 million, a situation that happened last quarter as well. Operating income plummeted to $5.3 million, down from $13.4 million in the prior-year quarter. This resulted in earnings per share (EPS) of $0.25, down from $0.37 in the year-ago quarter, but better than the $0.03 expected by analysts.

More chilling for investors, however, was that iRobot lowered its guidance for the remainder of the year, the result of the recently increased tariffs. The company now expects year-over-year revenue growth of between 10% and 14%, down from its previous estimates in a range of 17% to 20%. The pain is also expected to hit the bottom line, as iRobot is guiding for EPS in a range of $2.40 to $3.15, down more than 15% at the midpoint compared to its previous guidance.

Tariffs and more tariffs

iRobot's management is placing the blame for the shortfall squarely on the U.S.-China trade war and the resulting increase in tariffs. Lest there be any doubt, the word tariffs was mentioned 29 times during the company prepared remarks during the conference call.

To understand how the trade war is impacting iRobot's business, a little backstory will help provide perspective. In September 2018, President Trump imposed a 10% tariff on a wide range of goods produced in China, which is essentially a tax imposed on the manufacturer. After trade negotiations broke down in early May, the Trump administration increased the rate to 25% on $250 billion worth of goods produced in China. 

Back in February when iRobot released its guidance for 2019, it based its forecast on the 10% tariffs, believing the levies wouldn't "materially impact segment growth." However, the tariffs were increased to 25% in May, which forced the company to raise prices on select products to partially offset the impact of the tariffs. That price hike has created a noticeable slowing of growth in the U.S., which represents roughly half of its revenue.  

CFO Allison Dean now puts the price tag of the increased tariffs for 2019 in a range of $35 million to $40 million.

iRobot CEO Colin Angle explained during the conference call that the company has formally requested an exclusion from the tariffs, saying, "We believe that our position to gain an exemption from the tariffs is compelling."

As a result of the trade war, iRobot is working to diversify its supply chain and move some manufacturing outside of China, as the company reported last quarter, beginning with some of the less complicated components. Initial plans include moving a line of robots to Malaysia, with manufacturing beginning by the end of the year. This will also result in additional costs to move some of the manufacturing to a new location. 

Investor takeaway

Since hitting all-time highs in March, iRobot stock has lost nearly 44% of its value (as of this writing). There is reason for optimism as the U.S. and China are scheduled to resume trade talks next week. Until a resolution is reached, however, the robotic vacuum maker's stock will continue to be volatile.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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