iRobot (IRBT 4.64%) is back to playing defense. The robotic cleaning specialist earlier this month cut prices across its lineup in the core U.S. market in response to sluggish demand ahead of the holiday shopping season.
In a conference call following surprisingly weak third-quarter earnings results, CEO Colin Angle and his team explained the rationale behind that move and how it might harm profitability in 2019. Executives also described why they believe the recent slump in the U.S. market isn't indicative of sinking consumer excitement for robotic cleaners.
Let's take a closer look.
It's all about the tariffs
Last year at this time, tariffs were 10% on the List 3 goods, which include robot vacuum cleaners. However, this tariff increased to 25% in May of 2019.
iRobot has been sounding the alarm about Chinese tariffs for several quarters, and executives this week got specific about the impact they see in the industry. The niche had been growing at an over 30% compound annual rate in recent years, Angle said, but has fallen well below that pace today. In fact, iRobot's 7% revenue decline in the U.S. market this quarter still translated into modest market share gains.
That stands in contrast with growth in other countries that aren't caught up in the U.S.-China trade war, with demand in Japan spiking 40%. "Rising tariffs on Chinese imports weigh heavily on consumers, retailers, and suppliers," Angle said.
To drive consumer demand and defend our category leadership, we rolled back prices to pre-tariff levels earlier this month.
iRobot raised prices in July to offset the new 25% tariff rate applicable to its products. But because rivals didn't follow suit, its Roomba and Braava brands were at a disadvantage in the marketplace in August and September. The company reversed that decision in October, and the early figures suggest that sales volumes picked up in response to the price cut. Yet the move will hurt profits.
Moving along to 2020
As we work to finalize our annual operating plan for 2020, we do so with the recognition that U.S. market conditions have changed profoundly during the last year. We have taken and will continue to take the actions that we believe will enable us to protect and advance our technology and category leadership and ultimately emerge from this environment as a stronger company.
-- CFO Alison Dean
iRobot's short-term outlook reflects the difficult selling conditions in the U.S. Gross profit margin should come in well below management's annual target, and sales will be at the low end of the reduced forecast issued just three months ago.
The tech company is adjusting to the new reality in part by accelerating its move to manufacture products outside of China. That shift will take time, though, since just one entry-level product is set to begin production in Malaysia in 2020.
While the trade war disrupts the U.S. industry and sends gross profit margin below 40% in 2020, iRobot is staying busy working on innovations that protect its leadership position. Management says it's not considering cutting corners in these growth areas even if short-term earnings will take a hit.
"While we plan to throttle spending in certain areas," Angle said, "we remain committed to funding the programs, people, and partnerships that we believe are critical to long-term value creation."