iRobot (IRBT -0.55%) recently announced surprisingly strong sales and profit figures as part of its fiscal second-quarter earnings report. The consumer electronics specialist described robust demand for its premium products as consumers around the world began prioritizing home cleaning.
Yet while the growth uptick has executives feeling confident that iRobot will expand overall sales in 2020, there are some major risks that could impact profitability during the second half of the year and into 2021. CEO Colin Angle and his team explained some of those factors in a conference call with analysts, and below we'll look at a few of the main highlights.
A global acceleration
In the U.S., we've seen our year-to-date sell-through growth rate more than double since our Q1 conference call. Robust online growth and the gradual reopening of brick and mortar retail stores in various countries has accelerated [the Europe and Asia segment] sell-through growth into low double-digit territory, while Japan has returned to positive sell-through growth thanks to strong early summer campaigns.
The signs of improving momentum were clear from a few metrics, including accelerating demand across several geographies. But one big takeaway was that iRobot's premium industry position is a major asset.
Products on the higher end of its range, priced at $500 or above, were hits in a generally strong industry niche as consumers did most of their shopping from home. That success helps explain why launches like the Roomba i7, which incorporates digital integration and artificial intelligence (AI), are dominating the sales charts in developed markets like the U.S, Europe, and Japan.
Risks around the holiday season
There is significant uncertainty about second-half demand as economic recovery around the world proceeds at different paces, government stimulus programs subside, competition remains aggressive, and retailers continue to carefully manage their inventory.
The holiday season is always a risky time for iRobot's consumer-focused business because even small deviations in projected demand can have a big impact on sales and profits for the year. That volatility is being amplified in 2020 by additional uncertainty regarding economic growth trends, government stimulus measures, and the cash position of many retailing partners.
iRobot still sees a path toward modest overall sales growth for the year, but investors should take that prediction with a grain of salt while bracing for potentially significant outlook updates over the next few months.
A weak profitability outlook
The reinstatement of tariffs and higher 2021 Malaysia [cost] premium are looming as a material headwind to our gross margin in 2021.
There's less uncertainty around iRobot's weak short-term profitability outlook. While management is hoping to get another temporary exclusion on its imports from China, which would avoid 25% tariffs, that penalty is still scheduled to resume starting in January at the latest, but could begin impacting costs as soon as Aug. 1.
Meanwhile, its Malaysian production lines, which will eventually diversify manufacturing away from China, are seeing several extra cost pressures related to COVID-19. As a result, it's likely that iRobot will be struggling with weak gross profit margin well into 2021.
That temporary earnings pressure isn't coming from rival robotic vacuum producers, which makes it less of a concern for investors. But it still adds another big question mark around iRobot's profit potential over the next year or so.