iRobot's (IRBT 1.80%) business was hit hard by the tariff war between the U.S. and China last year. Spiking import prices hurt the industry and created an opportunity for rivals to steal its market share. The owner of the Roomba robotic vacuum cleaner stood to lose the most from that tough environment, and that challenge was clear as sales volume fell to just an 8% gain over the first three quarters of 2019 compared to a 21% spike in the year-ago period.
On Thursday, the company revealed that management's price cut gamble paid off over the core holiday shopping season and secured a much-needed growth rebound. But now iRobot enters a risky fiscal year that will require execution around pricing, marketing, manufacturing, and innovation just to keep its edge.
Getting back to growth
The biggest dark spot in the third-quarter report was an ominous sales decline in the core U.S. market heading into the key holiday shopping season. The company decided to cut prices in response to the competitive intrusion, and that gambit worked.
Sales in the U.S. jumped 15% in the fourth quarter from a 7% drop last quarter. That success allowed iRobot to reach the top end of management's reduced 2020 revenue outlook. "Our newest pricing and promotional tactics," CEO Colin Angle said in a press release, "played an important role in enabling us to defend our category leadership and hold share in the U.S. despite aggressive price competition."
The profit impact
The cost cuts had a major impact on the bottom line. While iRobot managed higher average selling prices, with customers paying $317 per unit compared to $307 a year ago, that boost wasn't enough to cover increased tariff costs and the extra manufacturing expenses associated with its upgraded product lineup. In fact, the company earned just $169 million of gross profit compared to $187 million a year ago. That translates into an 8 percentage-point drop in gross profit margin, down to 40% of sales.
The company cut costs in other areas to try to cushion that financial blow, but pre-tax income still fell to $25 million from $30 million a year ago.
Another transition year
iRobot executives said that the latest volume numbers show that demand is still healthy for robotic cleaning devices. However, its 2020 outlook points to another disruptive fiscal year ahead.
Sales should rise by about 10% to mark a second straight year of decelerating gains for the tech stock. Gross profit margins will likely again land near 40% of sales compared to over 50% in 2018.
Acknowledging those worsening figures, the management team said 2020 will be a "transition" year that will be impacted by the same tough selling conditions that shaped last year's results. Executives are hopeful that their efforts will put iRobot on a path back toward accelerating sales growth and increasing profitability as early as 2021. It will likely be at least a few quarters before it's clear that this rebound is happening.