IRobot to Take $35M-$40M 2019 Hit in 'Direct Tariff Cost,' Lowers Revenue Guidance
The May 10 hike to 25 percent in the List 3 Section 301 tariffs on Chinese imports (see 1905060015) prompted iRobot Wednesday to raise its full-year 2019 estimate of the “direct tariff cost” to the company to a range between $35 million and $40 million. IRobot previously estimated it would take a hit of between $20 million and $25 million, based on the List 3 tariffs staying at 10 percent. Shares plunged 16.9 percent Wednesday, closing at $74.51.
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There’s “elasticity to demand associated with price,” said CEO Colin Angle on a Q2 call Tuesday, explaining why the tariffs forced iRobot to downgrade its 2019 revenue guidance to a range between $1.2 billion and $1.25 billion from $1.28 billion-1.31 billion. “The tariffs have caused iRobot and others in the category to increase their price, and that has slowed down the rate of growth in the industry.” IRobot on Monday raised pricing “across the board,” but the increases “are expected to only partially offset the incremental tariff cost,” said Chief Financial Officer Alison Dean.
Top iRobot retail customers, including Amazon, are shifting their “anticipated second-half order activity” to later in the year to lower their “potential tariff exposure,” said Dean. Roughly two-thirds of iRobot’s second-half 2018 revenue from Amazon came in Q3, she said. “This year, we expect just 20 percent of second-half revenue from Amazon’s U.S. operations to be generated in the third quarter.” IRobot's Q3 revenue is expected to decline slightly year-over-year as a result, she said. “Since substantially more of Amazon’s expected second-half orders are now expected to ship in the fourth quarter of this year, we now expect Q4 year-over-year revenue growth to be more substantial than in prior years.”
There’s “no benefit to a retailer” of “loading up” inventory in Q3 with product on which pricing already has been raised, said Angle. “What you’re seeing is retailers holding out some hope” that tariffs will be lifted later in 2019, he said. “In the current environment, the only certainty is what exists today. Were the tariffs to go away, if they’ve already brought in product, they would be holding product at a higher cost basis than they would be if they had deferred that position and took that inventory in post-tariffs.”
Angle thinks iRobot has a “compelling case” for List 3 tariff exclusions, but he can’t predict when a “decision on our application will be forthcoming,” he said. The Office of the U.S. Trade Representative is granting List 1 tariff exclusions with a “reasonably good batting average,” he said. “This is not a fast process.” List 2 exclusion applications closed in December, and USTR hasn't granted exemptions, he said.
The company plans to begin production of entry-level robotic vacuums in Malaysia by year-end as a hedge against the tariffs on Chinese goods, said Dean. “Product coming off the line in Malaysia will actually be more expensive than the same product produced in China, at least initially,” she said. “The line labor rates are a little bit less expensive, but the management labor rates are a little bit more. More importantly, most of our components supply is in China, and we will have additional costs to get those components to Malaysia for production.”