So far in 2020, iRobot (IRBT -0.18%) shares have been down by more than 30% -- and higher by over 70%. That huge gap reflects wide investor uncertainty around the tech business. On one hand, it is facing major challenges this year, including a price war with rival robotic cleaners. On the other, iRobot has received a big demand lift as consumers spend more time around the home in recent months.
That shift in behavior has shareholders feeling optimistic heading into the second-quarter earnings report set for Tuesday, July 21. But let's dig in to see how investors will know whether that confidence was warranted.
Getting back to growth
There was a lot for investors to dislike about the company's first-quarter report in late April. Sales fell 19% to mark the first time in several years that iRobot took a step backward. Worse yet, growth has been on an almost unbroken decelerating trend since peaking at 50% at the end of 2017.
The volatility in the stock this year has been mostly driven by changing expectations about the prospects for a return to growth. The company first suggested that this rebound would be at least another quarter away before dramatically upgrading its outlook in mid-June. As it stands now, CEO Colin Angle and his team are predicting sales will land between $260 million and $270 million, compared with $193 million a year ago. Reaching or exceeding that target would mean iRobot has fixed key supply bottlenecks and is capitalizing on increased consumer demand for home cleaning and maintenance products.
Management's midquarter update predicted that iRobot would also return to profitability in Q2 after generating an operating loss of $20 million last quarter. But Tuesday's report will contain the critical details that describe its true financial health. These include gross profit margin, which dove to 41% of sales last quarter from 52% a year ago, and selling expenses, which jumped to 48% of sales from 38%. Investors will want to see both of these trends improve this week.
The company should discuss its market-share position, too, and those comments will be especially important as interest spikes in its niche of robotic vacuums and mopping devices. The numbers that might support management's claim of a healthy market position will include sales volumes and average selling prices.
Looking out to the holidays
The COVID-19 pandemic has impacted some major aspects of the business, including by scrambling iRobot's release schedule and temporarily cutting shopper access to its products at physical stores in April, May, and June. These issues are the main reasons why the company is still predicting that overall revenue will decline this year despite the recent demand spike.
On Tuesday we'll get important details on that outlook, such as retailer demand levels heading into the critical holiday season. The company's longer-term strategy still involves expanding its manufacturing base to more geographies outside of China, cutting costs, and bulking up its product portfolio beyond a handful of vacuuming and mopping devices.
By pushing shares to a new 2020 high in recent days, tech investors are betting that these moves will help keep the company on top of a growing industry even as it moves into the mainstream and dozens of new competitors emerge. But first iRobot has to show that its brutal first-quarter report was just an outlier in an otherwise impressive expansion story.