IRBT's Brutal Day

IRBT took it on the chin today after lowering its earnings guidance, replacing its CFO, disclosing potentially impaired financial investments, taking a $1.8 million hit from Linens 'N Things, and disappointing analysts who had banked on iRobot lowballing its earnings for the year, vs. downgrading.

I think the sell-off is vastly overblown. The company is now selling for near parity with annual sales, and is getting closer and closer to being a takeover target at these prices, given the hundreds of millions of military contracts it has in hand and the substantial brand value it has generated on the consumer side. The new CFO is a red herring issue. And despite a consumer recession (which is not exactly news, folks), Roomba sales were still through the roof compared to a year ago. If it weren't for the hit from LNT, sales and profits for the full year would barely budge.

And, most importantly on the plus side, the company is FINALLY starting to realize the tremendous opportunities available for its products overseas, particularly with the plummeting dollar, growing sales 500% year over year even BEFORE opening up its new DIRECT sales channels in Europe next month in Great Britain and Germany, which will result in improved margins, lower prices and more sales. There is a vast untapped market of time-sapped professionals across the globe with dirty homes that need cleaning. I was particularly encouraged to hear on the conference call that Japan has now emerged as the top foreign market, beating out South Korea. Japan is a perfect market for iRobot, but for whatever reason the company had heretofore failed to make much of a dent there. There is no reason why the company can't make the overseas business into half of consumer robot sales within a couple of years. The company also reported new sales of its PackBot line in places like Australia, but my guess is that the U.S. military will continue to provide about 90 percent of its military funding. Of note, the company said it expects large orders for the xBot/PackBot FasTac robot shortly, although that is a lower margin product than its PackBot 510 robot. Demand for PackBots and production of PackBots continues to soar, although margins are a bit under pressure as cheaper variants are likely to get more traction. Analysts on the call seemed to be disappointed that there wasn't more talk of upside surprises from sales of the iRobot Warrior (one has been sold for mine clearing), or potentially the SUGV early, which faces a crucial September go/no-go decision from the Army. (iRobot Chairwoman Helen Greiner said the SUGV is going excellently so far, but a decision on sales would likely mean production largely in 2009). iRobot CEO Colin Angle seemed a bit flummoxed and surprised by the hostile tone of the analyst questions, and defensively said that the military side of the business is just where they want it to be.
At any rate, at least for another year, the iRobot story will still be one of future promise, and revenue growth, and not of profits here and now. The company has several problems that it must address, including the impairment of some of its financial investments that are not selling at face value (the company took a $2 million charge but anticipates recouping that in the future because the investments are backed by the government). The company also has to keep its eye on the consumer ball, and ride herd on shaky retailers like Linens 'N Things (Sharper Image, another iRobot customer, already went into bankruptcy, but that didn't cost iRobot directly because they had only received product on a cash basis). There are no guarantees that other iRobot retailers will not experience financial difficulty, although LNT and Sharper are probably in a class all their own. There is also at least a small chance that LNT will be able to avoid bankruptcy and start paying off its vendors like iRobot, but I wouldn't count on it. (Yet another reason for iRobot to open its own branded stores!)

Remember, at any rate, the name of the game is buy low and sell high. We're getting low.

Tags: iRobot, robot