Why Garmin Is Bullish On Post-Coronavirus Opportunities

By Eric Smith

<span style="color: #969696;">Garmin Ltd. might have withdrawn its fiscal 2020 guidance due to coronavirus-related economic uncertainty, but the Olathe, KS-based maker of wearable technology and at-home fitness products emerged from the first quarter with an unusual abundance of confidence.

The company, which on Wednesday reported a 12 percent increase in sales and strong operating income growth for Q1, is as well-positioned as possible for the post-coronavirus world now beginning. As the economy reopens, Garmin has its sights on taking market share and tapping into emerging consumer trends.

Nowhere is that more evident than in its outdoor and fitness segments, the latter of which includes Tacx, the company’s recently added line of interactive and connected bike trainers.

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Garmin’s outdoor segment grew 14 percent and its fitness segment grew 24 percent in the first quarter, and the company is now eyeing exponential growth in both as the country emerges from stay-at-home orders while also viewing exercise and other activities differently than it did before.

“We are optimistic for the long-term as the markets we serve and the products we offer are well-positioned to succeed in a post-pandemic world,” Cliff Pemble, Garmin’s president and CEO, told analysts on Wednesday’s earnings call.

Pemble first outlined Garmin’s playbook for dealing with the coronavirus, which began impacting businesses midway through Q1. The first priority was employee safety.

“Most of our employees can work from home, and we’ve taken steps to protect those who continue to work within our facilities,” Pemble said. “Our employees adapted to these new circumstances with speed and resilience, and I’m super proud of their response to this challenge

Second was strengthening the company’s supply chain, which was the initial impact for Garmin and most other companies since the outbreak began in China where many consumer products are made.

“In the early days of the virus outbreak, our supply chain teams were working hard to ensure we would not be affected by the widespread industrial shutdowns that were occurring in Asia,” Pemble said. “I’m pleased to report that our supply chain is healthy, and we’ve not missed any opportunities due to COVID-19-related disruptions. This is remarkable considering the unprecedented disruption occurring in global supply chains.”

Third was identifying and prioritizing opportunities. “The crisis is often defined by its challenges, but we are looking through the lens of opportunity,” Pemble said. “We’ve accelerated efforts to increase our mix of online sales with business partners and on garmin.com. We have plenty of inventory, allowing us to capture market share.”

And fourth was “using this opportunity to refine our product road map priorities to make sure we have the right products now and after the crisis fades,” Pemble added.

Garmin executed those strategies and tactics quite well in the first quarter. Companywide, Garmin reported total revenue of $856 million, with fitness, marine, outdoor and aviation collectively increasing 17 percent over the prior-year quarter. Operating income increased 17 percent to $177 million.

GAAP earnings per share in the quarter was 84 cents while pro forma EPS was 91 cents, representing 25 percent growth over the prior-year quarter.

“The first quarter of 2020 was remarkably strong continuing the momentum from last year,” Pemble said. “The economic uncertainty and impact on consumer behavior caused by the COVID-19 pandemic affect every business, and we are no exception. Accordingly, we are withdrawing our fiscal 2020 guidance. However, we are optimistic for the long term because the markets we serve and the products we offer are well-positioned to thrive in the future.”

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<span style="color: #969696;">Let’s break down each segment, starting with outdoor.

The 14 percent growth that Garmin saw in its outdoor segment was driven by significant contributions from adventure watches. Gross margin and operating margins were 64 percent and 27 percent, respectively, resulting in 12 percent operating income growth.

“Time in the outdoors is highly compatible with healthy social distancing,” Pemble said. “And we believe that interest in outdoor activities will increase in the future. We already have a great lineup of products that support a broad range of outdoor activities. And in the coming months, we will strengthen our position by introducing compelling new products and new categories.”

Garmin’s 24 percent growth in the fitness segment was driven by strength in advanced wearables and contributions from Tacx. Gross margin and operating margins were 50 percent and 14 percent, respectively, resulting in 71 percent operating income growth.

“A positive outcome of this crisis is the increasing focus on personal fitness, health and wellness,” Pemble said. “People recognize that good health is an important defense against contracting the virus. And they’re looking for tools that can help them improve their health. Our fitness products are highly relevant today and will remain so in the future.”

Nowhere is that more evident than the in-home fitness category, which Garmin entered last year with the acquisition of Tacx, maker of indoor bike trainers, tools and accessories, as well as indoor training software and applications.

Garmin is in the process of “building a brand-new manufacturing facility at Tacx to handle the increased demand there,” according to CFO Doug Boessen.

Pemble added, “The backorders on our Tacx products are very strong. We’ve not been able to supply all of the demand that we’re seeing there. So we’re working hard, as Doug said, to increase our capacity and hopefully then be able to get ahead of the demand curve that’s occurring. People talk about a second cycling season, if you will, or indoor cycling season as people are more interested in staying indoors for a while, and we expect strong sales to continue. And then, of course, as our factory comes online, we’ll be able to deliver more volume.”

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Garmin’s other divisions also notched impressive gains in Q1. Revenue from the marine segment grew 22 percent in the first quarter driven by its innovative chart plotters and advanced sonars. And revenue from the aviation segment grew 10 percent in the first quarter with contributions from multiple product categories.

Despite Garmin’s optimism, investors remain wary of the company amid the coronavirus, which has seen many of the company’s channel partners—especially smaller specialty retailers—close their doors over the last month or longer. Shares of Garmin (Nasdaq: GRMN) are down about 20 percent since mid-February.

Photo courtesy Garmin