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iRobot Shifts Into Defense Mode as the Holidays Approach

iRobot (NASDAQ: IRBT) investors had low expectations heading into the robotic device manufacturer's third-quarter earnings report. The company lowered its growth and earnings outlook earlier in the year while warning about the disruptive impact of tariffs on profitability and the timing of orders from major U.S. retailers like Amazon.

Its actual results announced on Tuesday showed that these challenges contributed to worsening sales and earnings trends that again caught management by surprise. As a result, CEO Colin Angle and his team slashed iRobot's profit outlook while reducing revenue guidance for a third consecutive quarter. 

More on that dimming forecast in a moment, but first let's look at the latest operating metrics.

A robotic vacuum at work

Image source: Getty Images.

Sales fell in the U.S.

The growth slowdown that started to show up in iRobot's last two reports accelerated over the summer months. Unit sales rose 4% year-over-year in the third quarter, bringing volume growth down to just 8% over the last nine months. At the same point in 2018, heading into the core holiday shopping season, iRobot's year-to-date volumes were up 21%.

The U.S. market was the source of all of the demand problems as sales fell 7% here despite the fact that a major retailer sped up the timing of its holiday-season shipments to come in the third quarter rather than the fourth quarter. Revenue jumped 25% in international markets that aren't being impacted by the U.S.-China trade war. Globally, revenue rose 9% to mark a stark change from the near-30% increase shareholders witnessed just a year ago.

Price cuts are coming

Bowing to the new reality in its biggest market, iRobot made some aggressive pricing moves that harmed earning power this quarter. Gross profit margin fell to 47% of sales from 51% a year ago. Average selling prices are still rising in 2019 -- up to $306 per unit from $289 last year. However, the higher costs of production for the new vacuum and mopping models reduced overall profitability.

Management was clear that the move was consumer-driven as shoppers rejected iRobot's attempt to pass along higher tariff costs. "Sell-through following our late July price increases was suboptimal," Angle explained. As a result, "we elected to roll back our pricing to pre-tariff levels on most of our products," he said.

Bumping up against tariffs

The price adjustment should help the tech stock protect its leadership spot and enter 2020 in a decent inventory position. It will hurt annual operating earnings, though, which are now on pace to land between $75 million and $80 million. Executives had been calling for profits of as much as $118 million earlier in the year.

Almost all of iRobot's problems can be tied to the trade war between China and the U.S., but that's not much consolation for shareholders who have seen the company's sales and earnings momentum hit a wall. The scale of the industry slowdown also raises questions about how quickly the robotic cleaning device niche might rebound when tariffs are finally lifted.

Unfortunately, investors won't have a better reading on that potential until after iRobot announces its official holiday-season sales and inventory metrics in early February of next year.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Demitrios Kalogeropoulos owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and iRobot. The Motley Fool has a disclosure policy.

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