Maker of the Roomba vacuum gets hit by China tariffs

  • Shares of iRobot, which makes its Roomba vacuums in China, fell more than 14 percent Wednesday after outlining negative effects of tariffs on its earnings call.
  • The 10 percent taxes imposed on Chinese imports make it more expensive for the company to manufacture vacuums and other products, such as pool cleaners.
  • IRobot said it did not pass that cost on to the consumer in the third quarter, so the company had to absorb the cost instead. It didn't rule out raising prices when the tariffs increase in January.
  • The company beat Wall Street's expectations on earnings and revenue for the third quarter but expects lower gross margins in the fourth quarter as a result of tariffs.
iRobot Corp. representatives speak with job seekers during the TechFair LA career fair in Los Angeles.
Patrick T. Fallon | Bloomberg | Getty Images
iRobot Corp. representatives speak with job seekers during the TechFair LA career fair in Los Angeles.

The ongoing trade war between the U.S. and China is taking its toll on iRobot, maker of the popular Roomba vacuum.

Shares of the robotics company, which manufactures its vacuums in China, fell as much as 14 percent Wednesday after executives outlined the negative effects of tariffs and left the door open to raising prices when higher tariffs kick in. The stock is still up more than 4 percent year over year, and 2 percent so far this year.

As part of President Donald Trump's trade negotiations, a 10 percent tariff on $200 billion worth of Chinese goods went into effect at the end of September. The duties are scheduled to increase to 25 percent by Jan. 1.

Those taxes on Chinese imports make it more expensive for iRobot to manufacture the Roomba vacuum and other products, such as pool cleaners. IRobot said it did not pass that cost on to the consumer in the third quarter, and kept price tags stable. But that means the company had to absorb the cost instead.

The Bedford, Massachusetts-based company is "assessing a lot of different scenarios" for how to tackle the January tariff increase, including searching for "cost reduction opportunities." But it did not rule out the idea of passing on some of that price burden to customers.

"A lot of those scenarios do assume some level of potentially passing some of the pricing on to the consumers, but we haven't exactly settled on the final answer yet," Colin Angle, CEO and co-founder of iRobot, said on a call with analysts after reporting earnings. "Our expectations that we set in February would not assume that we carry the full burden of the tariff increases."

The company beat Wall Street's expectations for earnings and revenue in the third quarter but said on the call with analysts that because of tariffs, it expects lower gross margins in the fourth quarter, with full-year gross margins of about 50 percent. The company increased its full-year operating income and earnings expectations despite the "unforecasted" $5 million tariff hit.

"For Q4 2018, we fully took on the burden of those tariffs," Angle said. "At $5 million, we were absorbing ourselves without any price increases going out in 2018."

IRobot also sells its products outside of the United States and highlighted that recently imposed tariffs only affect the business done domestically.

"While the tariffs are challenging and frustrating, they are things that we have a lot of levers to deal with; our market positioning actually is quite favorable relative to the competition, who will also have to be dealing with these same issues," Angle said.

IRobot isn't alone. Talk of tariffs has dominated earnings calls, with more than a third of companies that reported through Tuesday explicitly discussing or answering questions about tariffs.