Last year was a tough one for iRobot (NASDAQ:IRBT) shareholders. The robotic cleaning device specialist began 2019 with a bang, posting first-quarter results that extended the positive momentum it had from the prior year, which marked its first $1 billion annual sales haul.
Things quickly got worse, though, as its products were caught up in a U.S. trade war with China and the company was forced to experiment with a new pricing strategy to deal with a badly harmed growth rate and a reduced profitability trend in its core domestic market.
On Wednesday, iRobot will reveal whether its price-cut gamble paid off during the key holiday shopping period and blunted its market share losses. Investors will also get some key information about management's turnaround plan as they look to a new fiscal year.
Let's take a closer look at the metrics to watch in this report.
Breaking down the growth
iRobot's difficult growth story is best illustrated by following its sales volumes, which rose just 8% globally over the first nine months of the year compared with a 21% spike over the same period in 2018. The most recent quarter was especially weak, showing a 7% revenue decline in the core U.S. market just as the company prepared to enter the peak holiday shopping period.
CEO Colin Angle and his team in October announced a major shift in the pricing strategy that ideally would give the company a good chance at fending off value-based rivals. We'll find out this week if that gamble worked, and if iRobot was able to move enough of its new Roomba and Braava cleaning models to avoid inventory clearance sales and protect market share. The U.S. industry declined by nearly 10% last quarter, though, so it will be interesting to see whether it returned to expansion mode over the Christmas shopping period.
The company has logged a significant boost in average selling prices, with consumers paying $305 per robot last quarter compared with $276 a year earlier. However, costs are rising faster, especially as sales trend more toward its newer model launches that are less efficient to produce as they scale up their production volumes. That challenge can be seen in the gross profit margin rate, which dove to 47% of sales last quarter from 51%.
Things are likely to get worse on this score before they get better. iRobot's price cuts, combined with higher tariff rates, might send that margin figure closer to 40%, in fact. Yet investors might take some solace in the fact that earnings are stabilizing -- assuming 2019 operating income reaches management's reduced outlook of roughly $75 million.
iRobot's 2020 year will likely be critical for the business. It will include the company's first new Roomba product introduction into a potentially weak U.S. demand environment, for one. The tech stock also is planning to ramp up production in places like Malaysia so that it isn't so dependent on imports from China.
Those challenges imply that shareholders could hear about major strategic pivots when Angle and his team issue their official 2020 outlook on Wednesday, especially if the U.S. market shrank again in the fourth quarter. Those moves aren't likely to include cuts to iRobot's research and development or marketing budgets, but the company might still need to rethink its expansion plan given the tougher competitive environment it is entering in 2020.