IRobot Sinks After Abandoning Plan to Pass Along Tariff Costs

(Bloomberg) --

IRobot Corp. slumped to a three-year low after casting aside its strategy to pass along some tariff-related costs to U.S. consumers after the price increase hampered growth.

The maker of the Roomba vacuum cleaner vowed to “aggressively” keep pursuing an exemption from the duty and is diversifying its manufacturing outside of China to trim its costs. The Bedford, Massachusetts-based company on Tuesday narrowed its annual revenue and earnings forecasts and said profitability could suffer into next year.

While competitors absorbed the tariff costs, iRobot raised prices in late July. That move, however, led to “sub-optimal sell-through in August and September,” Andrew Kramer, vice president for investor relations, said on a conference call Wednesday, and contributed to a 7% decline in U.S. sales, even as international sales climbed 25%. IRobot returned to pre-tariff price levels on most of their products, and said U.S. demand has been improving since then.

The overseas growth may provide a glimpse of what the company’s performance could look like minus tariffs, Piper Jaffray analyst Troy Jensen said. “But until US/China trade issues get resolved, we believe iRobot will continue to struggle in their biggest market, making it a hard stock to own,” said Jensen, who rates the stock neutral with a $51 price target.

Shares fell as much as 19% to $44..00 in New York trading, to the lowest intraday price in three years. The company saw similar double-digit declines after citing tariff woes in its past two quarterly reports. The stock has lost 42% so far this year.

The company said it may still take several more quarters before it receives word whether an exemption is granted, as more than 30,000 applications are awaiting review.

IRobot also warned that the tariffs and price roll backs would cut into profits into next year, and forecast fourth-quarter gross margin about 40%, below the average estimate of 44.1% compiled by Bloomberg. And while cutting prices may help iRobot maintain its market share, price-based competition and “price-elastic consumers may be viewed negatively by investors,” JPMorgan analyst Mark Strouse said.

The company plans to move some manufacturing to Malaysia from China to help skirt the tariffs. It plans to start production of one product model there in the new year, and may add additional products as needed, company executives said on the conference call Wednesday.

Still, the company’s attempts to diversify manufacturing outside China is “limited in capacity and unlikely to provide any near-term relief to gross margins,” Piper Jaffray’s Jensen said.

To contact the reporter on this story: Anisha Sircar in New York at asircar@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Will Daley, Courtney Dentch

©2019 Bloomberg L.P.