iRobot Plunged as Tariff Hurts US Sales
Oct 23, 2019 by InvestorDestination Team
At the opening bell, shares of iRobot (NASDAQ: IRBT) plunged more than 20% today after the company announced its 3rd quarter results. The company beat its earnings and revenue guidance for the quarter but lowered its full-year EPS guidance from $2.40 - $3.15 to $2.60 - $2.80.
The company's challenges can be blamed on the trade war between the US and China and increased competition in the RVC category. iRobot manufactures the majority of its products in China. As the trade war escalated, a 25% tariff was imposed on all goods. The company unsuccessfully tried to pass the higher cost to consumers. Now, to defend its market share, the company has decided to absorb the tariff cost, which is impacting its profitability.
| Q3 2019 | Q3 2018 | Growth | |
|---|---|---|---|
| Revenue (in millions) | $289.4 | $264.5 | 9.4% |
| GAAP Net income (in millions) | $35.5 | $31.9 | 11.3% |
| GAAP EPS (diluted) | $1.24 | $1.12 | 10.7% |
Its results are not as bad as the market's reaction. Its revenue growth was driven by a 25% increase from international markets, highlighted by a 27% growth in EMEA and a 40% growth in Japan, more than offsetting a 7% decline in US sales. However, last year the company delivered more than 40% growth in US sales and 23.6% overall revenue growth for the year. When the stock price was dancing around $120, investors might have expected that growth to continue. This year the company is expecting overall revenue growth of around 9%.
The company is planning to move its manufacturing out of China. Even before hiking the price of its products, it was already selling its products at premium price. As the competition is intensifying, it is defending its market share at the cost of short-term profitability, which is the right strategy for the company.
It is an innovative company that makes consumer products. If the current trade war results in a recession, it will negatively impact consumer spending.
The global household penetration of robotic vacuums is still extremely low, in the single digits. Despite a high barrier to entry, other players can enter the market. When the industry is at the beginning stage of explosive growth, other players will enter the market. Right now, that is what happening in this industry. However, iRobot’s strategy is to distinguish itself as a premium player and the market leader. The company is innovating and diversifying its product portfolio by prioritizing R&D spending. Continuing to grow 40% a year is not realistic, but it has much room to grow.
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