Investors showed their dissatisfaction with iRobot's (NASDAQ: IRBT) latest earnings report by sending shares sharply lower -- the consumer tech specialist's stock is now just barely ahead of the market year to date. It had been up nearly 60% before the announcement.
That dramatic swing was likely a reaction to the weak sales volumes and falling profitability the Roomba maker posted in the first quarter, in addition to iRobot's prediction that the second quarter will show even worse earnings trends. However, management was clear in a conference call with analysts that the slowdown had nothing to do with competitive struggles. CEO Colin Angle and his team also believe they'll meet their 2019 outlook on both the top and bottom lines, although most of those gains won't come until later in the year. Let's look at what management had to say in their earnings call.
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A solid start to the year
We manage the business on an annual basis and encourage investors to view us accordingly.
-- CEO Colin Angle
iRobot's growth pace slowed as compared to the prior quarter, which is no surprise given its consumer focus and the importance of the holiday season. Still, it was a bit jarring to see unit volume gains drop to just 7% compared to 23% in the previous 12 months. Inventory levels spiked, too, which is normally a warning sign that demand isn't tracking closely with executives' targets.
Angle and his team said there were less-worrisome explanations for the weak operating metrics, though. Sales gains were impacted by the timing of product rollouts and pricing changes the company made in response to new tariffs. The inventory jump was also driven by these temporary issues, executives explained. Altogether, they still see full 2019 going according to their initial plan, with sales rising at a double-digit rate both at home and in international markets.
Gross margin was 50% for the first quarter compared with 53% in Q1 2018. The 300 basis point decrease was due primarily to pricing and promotional activity, particularly as we transition in the new products. We expect Q1 will be the highest gross margin quarter for 2019 and we still expect gross margin for the year to be approximately 48%.
-- CFO Alison Dean
Management had warned investors to expect weaker gross profit margins this year as the company absorbs the impact from higher tariff rates. The product mix is also shifting toward newly released Roomba models that are less efficient to manufacture than the established devices.
Those trends lowered gross margin to 50% of sales from 53% and will likely result in additional declines in future quarters, executives said. iRobot is still on track to meet their forecast of around 48% for the year, compared to 51% last year and 49% in 2017. Still, investors can't rule out that at least some of that decline is due to spiking competition, which may eat away at profits in future years.
A tough period ahead
All in, operating income for Q2 could be break-even to slightly negative, however we expect to deliver operating income in the second half of the year, sufficient to meet our full year operating income expectations.
iRobot confirmed its full-year outlook that calls for solid sales growth and healthy overall profitability in 2019, but that forecast highlighted a key risk for shareholders over the next few quarters.
The fiscal second quarter will include even stronger financial headwinds than the first one did, likely leading to near zero operating profits. While iRobot might still go on to meet or exceed its targets, investors won't have a clear picture of its market share trends until the months leading up to the holiday shopping season. Until then, the company is likely to announce weak pricing and profit metrics. But if things go according to plan, the fiscal third and fourth quarters will more than make up for iRobot's slow start to the year.
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