iRobot's (NASDAQ:IRBT) surging growth trajectory seemed at risk after its first-quarter report showed slower vacuum sales and reduced profitability. But executives said at the time that the issues were temporary, and they predicted a rebound would occur over the second half of 2019.
This week, the consumer electronics specialist instead revealed worsening trends for demand and profit. And, while CEO Colin Angle and his team called the challenges "transitory," they acknowledged that the issues will result in lower sales and far weaker earnings than iRobot had initially projected for 2019.
Executives described their reasoning for the downgraded outlook in a conference call with analysts. Below are a few highlights from that presentation.
Holding share in a slowing market
In the United States, we believe that we've maintained segment share year-to-date that is comparable to last year, even as the category's estimated growth did not increase at the rate we had expected. -- Angle
Sales gains were weak in the U.S. market, which accounts for about half of iRobot's business. That challenge caused a sharp growth slowdown, with vacuum device sales up just 10% through the first half of the year compared to 23% at this point in 2018.
Executives placed the blame squarely on Chinese import tariffs, which shot up to 25% in May from 10%. The indirect effects of these price spikes, management said, included lower innovation and marketing spending across the industry. That reduced investment, in turn, put the brakes on category expansion. "We believe that higher tariffs," Angle explained, "compounded by a lack of competitive investment rather than market saturation, are creating a speed bump in the category's growth trajectory."
Signs of life
Our success on [Amazon] Prime Day illustrates that underlying demand for [robotic vacuum cleaners] remains vibrant. -- Angle
To bolster their argument that the robotic cleaning device niche is healthy, executives cited iRobot's recent performance in Amazon's annual Prime Day promotion. Three of the company's devices were featured in that sale, compared to just one in the previous year, and its new Roomba s9 quickly sold out.
Overall, the event produced almost twice the revenue from 2018 and a 50% increase in unit sales. These results support management's reading of the industry's bright long-term outlook, they say.
Making the best of a bad situation
The price increases that went into effect on July 22nd in the U.S. are expected to only partially offset the incremental tariff costs. -- CFO Alison Dean
iRobot raised prices on a few of its models, but that move will only remove some of the sting from the tariffs. As a result, the company now sees gross profit margin falling to between 45% and 46% of sales compared to its prior goal of 48%.
Direct tariff costs should be in the range of $35 million to $40 million, or about double the company's previous expectation. That move helps explain why iRobot lowered its operating income target so aggressively following the second-quarter results.
Expect volatility ahead
The anticipated second half order activity from certain retailers, most notably Amazon, is shifting as part of their efforts to navigate potential tariff exposure. -- Dean
The prospect for a change in tariff rates has convinced many retailers to hold off on making orders in advance of the holiday shopping season. As an example, executives said Amazon traditionally books about 66% of its second-half spending in the third quarter, but this year, it's on track to do just 20%, with the remainder occurring in the fourth quarter.
That order cadence adds risk to the business by packing even more of iRobot's fiscal year around the weeks leading up to the Christmas holiday. These huge changes support management's contention that the market is being temporarily disrupted by tariffs, which suggests its growth rate will bounce back once that cloud is lifted. However, investors should see at least another quarter of worsening sales trends before that rebound happens.