For those readers unfamiliar with the name iRobot (IRBT), it is the owner of the brand Roomba: an autonomous vacuum. The Roomba cleans your floor while navigating around clutter and furniture and then returns to its charging dock once finished.
Its demand surged during the pandemic, but the company is now facing headwinds due to global supply chain problems, which might put pressure on the stock in the short term. I am neutral on IRBT stock. (See Analysts’ Top Stocks on TipRanks)
Steady Numbers for the Third Quarter
iRobot delivered better than expected numbers for the third quarter of 2021, ending October 2, 2021. Revenue for the third quarter grew 7% to $440.7 million, higher than the $413.1 million in the corresponding quarter of 2020. Revenue for the first nine months of 2021 of $1.1 billion was up 25% from $885.6 million in the same period in 2020.
In Q3, the company saw sales go up 15% in EMEA (Europe, Middle East, and Africa), 5% in the U.S., and 2% in Japan.
Analysts estimated an EPS (earnings per share) of $0.7, but the company clocked in a handsome $1.67. However, this was lower than the $2.58 number it clocked in for the same period last year.
Why Is Supply Chain a Problem for iRobot?
iRobot, just like other companies across industries, doesn’t manufacture all its parts in North America. There is a global semiconductor chip shortage, and disruptions in the South China sea along with a global container pile-up across ports hasn’t helped iRobot.
Warehouse, distribution, and truck driver shortages have made this into a perfect storm for companies, and it is expected that it could take at least six months, if not more than a year, for things to get back to normal.
On July 29, in its second-quarter earnings call for 2021, IRBT CEO Colin Angle said, “Unfortunately, the reality of the current supply chain environment is forcing us to tell a different story for the second half of the year. Quite simply, the supply side of our business is not currently able to keep pace with demand for our products. Since our call in May, we have seen further deterioration in our ability to source the requisite volume of semiconductor chips used to manufacture our floor cleaning robots.”
On October 29, in its third-quarter earnings call for 2021, Angel said the situation hadn’t improved much and that “it only takes one chip to stop us from building a robot in certain circumstances.”
iRobot’s gross margin for the third quarter of 2021 declined by 11 percentage points compared to the same period in 2020. More than 60% of the decline was due to tariff costs of $14 million and supply chain headwinds.
The company expects the same in the fourth quarter too. Angle stated that the company’s gross margins would decline in the fourth quarter of 2021 compared to the corresponding period in 2020. He said, “Approximately half of the decline in our anticipated Q4 ’21 gross margin versus the fourth quarter of 2020 will be driven by higher supply chain costs followed by tariffs, changes in pricing between this year and last, and shifts in product and channel mix.”
Longer shipping timeframes, delays in shipping, and other related logistical issues will pose a challenge in fulfilling orders for Q4 2021. iRobot has revised its outlook lower for FY2021 to range from $1.55 billion to $1.59 billion.
The company also said, “In addition to scaling back our top-line ambitions, we also began implementing a range of cost austerity actions to mitigate approximately $55 million in higher-than-expected costs associated with sourcing raw materials, procuring the integrated circuit components necessary to produce our robots and shipping our products.”
No Tariff Relief
Apart from added shipping costs thanks to supply chain disruptions, the company will also be impacted by tariffs in 2021. iRobot was hopeful that it would be granted Section 301 tariff relief in the second half of 2021. However, that hasn’t happened yet.
While the U.S. Trade Representative recently restarted a targeted tariff exclusion process for Section 301 duties, the process is unlikely to be finished in 2021. Moreover, the company believes that the reinstatement will only refund tariffs paid since October 12, 2021, not all of 2021.
This will add anywhere between $42 million to $43 million into iRobot’s cost structure. The company expects an EPS of $1.15 to $1.74 for 2021 because of this development. If the tariff reinstatement had been granted for the whole of 2021, EPS guidance would have been $1.24 to $1.27 higher.
Wall Street’s Take
Turning to Wall Street, IRBT has a Hold consensus rating based on three Holds and one Sell assigned in the past three months. The average iRobot price target is $71, implying 20.8% downside potential.
Conclusion
There is no denying that smart machines like the Roomba are the future. However, it might be prudent to wait for a quarter or two to see how the global supply chain mechanisms play out.
It will take some time before the whole logistical issue is solved and it might be possible to buy IRBT stock at a lower price. Analysts clearly think that IRBT stock is currently overvalued.
Disclosure: At the time of publication, Hashtag Investing did not have a position in any of the securities mentioned in this article.
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