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iRobot Investors Brace for a Tough Second Quarter

Demitrios Kalogeropoulos, The Motley Fool

iRobot (NASDAQ: IRBT) CEO Colin Angle stressed to investors this week that the executive team manages the business on an annual basis -- so shareholders shouldn't get too concerned with sales swings in any particular quarter. Light revenue growth in the latest quarter, for example, was partly due to retailers stocking up on inventory ahead of the scheduled tariff-led Roomba price hike at the start of the year.

The robotic cleaning-device giant backed up those optimistic words on Tuesday by affirming its aggressive 2019 outlook. However, in a conference call with analysts, iRobot made it clear that several negative financial trends will combine to make the second quarter an unusually weak one.

That prediction ensures that investors won't have much clarity about 2019 sales and earnings gains for several months. Let's take a closer look.

A man reclines on a white couch as a robotic vacuum cleans a dirty wood floor.

Image source: Getty Images.

Still growing

iRobot's revenue grew 9%, marking a significant slowdown from the 24% gains investors saw over the past 12 months and the 18% spike during the holiday season. The company saw no issue with slumping demand and, in fact, executives said the international rollout of its latest products drove robust consumer takeaway in each of its geographical markets. Still, unit shipments were up by just 7%, compared to 23% in 2018.

Angle said the Q1 results were impacted by several temporary issues, including the timing of product releases and elevated retailer inventory connected to the Jan. 1 imposition of new tariffs. Executives noted that demand for its latest Roomba launches was higher than expected, despite the rising prices, and affirmed their full-year expectations of double-digit revenue growth both in the U.S. and internationally. Yet the weaker results this quarter could also reflect a tougher competitive market that would force iRobot to lower its outlook at some point over the next few quarters.

Profit pinch

iRobot succeeded in pushing average selling prices higher this quarter, but several other factors constituted warning signs about its financial strength. Gross profit margin dropped to 50% of sales from 53%, due to elevated promotional activity. Inventory levels jumped, too, up to $181 million, compared to $112 million a year earlier.

Those results aren't as bad as they might look at first glance. The inventory value jump was impacted by the price hikes, after all. iRobot has been predicting temporarily lower profit margins this year, too, as the sales mix shifts toward newer products and away from older, more cost-optimized Roomba devices.

Still, iRobot expects things to get worse before they get better. Gross profit margin should drop even further over the next few quarters as marketing spending rises and the company allocates more cash toward its supply-chain initiatives. New-product releases in the second quarter will also pressure profits.

Tough short-term outlook

Overall, Angle and his team are predicting that operating income will land between flat to slightly negative in the second quarter, which is a far cry from the 8% to 9% rate the company is targeting for the full year -- or the 10% they're aiming for in the years to come.

Their affirmed outlook implies significantly better results on both the top and bottom lines during the fiscal third and fourth quarters, which will constitute about 60% of the sales base this year. However, the slow start to the year raises the potential for these targets to prove too optimistic. This short-term risk helps explain why the stock fell following the report and erased some of the market-thumping gains shareholders have enjoyed so far in 2019.

Those returns might race right back, but only if iRobot's growth trends improve in the next few quarters.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends iRobot. The Motley Fool has a disclosure policy.