iRobot (IRBT -2.84%) recently announced a much-needed return to sales growth during the critical holiday season quarter. Yet that rebound marked just the start of a rebound path that might produce at least one more year of sluggish results before revenue gains accelerate and operating margins begin climbing again.
In fact, as CEO Colin Angle and his team explained in a conference call with Wall Street analysts last week, operating results are likely to look particularly bad in early 2020 before improving late in the year. Let's take a look at some highlights from that presentation to investors.
iRobot is making the best of a bad situation
We executed well on all the major elements of our strategy while navigating challenging market conditions in the U.S. and intense price competition in [the Europe, Middle East, and Asia geography]. -- Angle
Fourth-quarter results exceeded management's targets on growth, profitability, and earnings, mainly thanks to positive consumer response to the price cuts the company implemented before the holidays. The U.S. market grew 15% to mark a nice turnaround from the 7% decline last quarter.
Still, the impact of price-based competition and tariff costs was unmistakable. iRobot lost market share in Japan in Q4 and only achieved 11% total sales growth for the full year compared to its initial target of between 17% and 20%. Profitability dove to roughly 40% of sales from 48% in 2018 and 51% in 2017.
iRobot is moving manufacturing
Entry-level Roomba robots made in Malaysia are now being shipped in the U.S., and we plan to begin producing a second Roomba product in Malaysia in the second half of 2020. -- Angle
iRobot is making good strides at diversifying its manufacturing base outside of China so it can eventually reduce its tariff exposure. Most of the portfolio will be accessible through Malaysia by the end of 2021, management said, with about 30% of volume likely to come from that country in 2020.
Things will get worse for iRobot before they get better
We expect Q1 revenue will be down from the prior year but anticipate showing low to mid-teen growth in each of the next three quarters. -- CFO Alison Dean
iRobot sees a long runway for growth ahead, especially in the U.S. market, where robotic vacuum cleaner penetration is low. However, management sees the same negative trends that hurt results last year affecting 2020. These should result in another transition year, with growth landing at near 10% and operating margins trending well below recent peaks of around 48% of sales.
Investors' patience will be tested over the next few months, given that elevated inventory levels at retailers are likely to contribute to lower sales in the fiscal first quarter. Revenue growth should accelerate for the tech stock in the second half of the year. The challenge is the fact that shareholders won't have a clear idea of whether to expect a sales and profitability rebound in 2021 for at least a few more quarters. In the meantime, they'll likely see growth closer to 10% than the 20% the company initially targeted for 2019.