Garmin, Ltd. reported sales slid 4 percent in the third quarter, dragging down declines in its Fitness and Marine segments; however, lower freight costs led Q3 earnings to exceed plan, prompting Garmin to raise its EPS outlook for the year. Growth targets were maintained for its Fitness segment but slightly lowered for the Outdoor and Marine segments.

In the quarter ending September 24, sales declined 4.3 percent to $1.14 billion, missing Wall Street’s consensus estimate of $1.21 billion.

On a call with analysts, Cliff Pemble, president and CEO, said revenue was negatively impacted by approximately $70 million due to the strengthening of the U.S. dollar relative to other currencies. Excluding this impact, revenue would have increased by about 2 percent over the prior year. The year-ago period also reflected elevated demand for products supporting outdoor activities tied to the pandemic.

On a proforma basis excluding the impact of foreign currency losses, earnings were down 12.3 percent to $239.4 million, or $1.24 per share, exceeding the consensus target of $1.10. Net earnings reached $210.8 million, or $1.09, against $259.0 million, or $1.34.

Pemble said the cost of goods benefited due to the weakening of the Taiwan dollar. In addition, the cost of freight came down as more products are being shipped by ocean and as rates decline due to excess capacity in the shipping industry. Combined with a favorable segment mix, gross margins reached 58.8 percent, up 40 basis points, to drive the earnings beat.

Operating expenses grew 4.3 percent year over year as growth in R&D and SG&A was partially offset by advertising efficiency. As a percent of sales, operating expenses rose to 37.8 percent from 34.7 percent. Operating income totaled $239 million, down 15 percent from the prior year. Pemble said, “Operating margin was solid at 21 percent.”

Fitness Sales Drop 18 Percent
Fitness segment revenue decreased by 18 percent to $280 million, primarily due to lower sales of advanced wellness wearables and indoor cycling products. When reporting its second-quarter results in late July, Garmin slashed its full-year outlook for the Fitness segment to a decline of 25 percent versus flat sales previously due to softening demand.

Gross and operating margins were 53 percent and 15 percent respectively in the third quarter, resulting in an operating income of $41 million, down from $74.5 million a year ago.

Pemble noted that during the quarter, Garmin’s Fitness segment launched the Index BPM smart blood pressure monitor, which measures systolic and diastolic blood pressure at home or on the go. When paired with our Garmin Connect app, users can see their measurement history and trends alongside other health stats. Garmin also launched the Venu Sq 2 featuring a bright AMOLED display and up to 11 days of battery life, which is nearly double that of its predecessor. Said Pemble, “Considering year-to-date performance in the Fitness segment, we are maintaining our expectation that revenue will decline 25 percent for the year.’

Outdoor Segment Revenue Gains 5 percent
In the Outdoor segment, revenue increased 5 percent to $340 million, driven by growth in adventure watches and InReach devices and services, but partially offset by declines and other product lines. Gross and operating margins were strong at 65 percent and 36 percent respectively, resulting in an operating income of $121 million, slightly down from $123 million the prior year.

“InReach remote communication devices and Response Coordination services have been a strong product category and unique differentiator for the Outdoor segment,” said Pemble.

During the quarter, the Outdoor segment launched the InReach Messenger, a communication-focused device with global text-location sharing and SOS capabilities. Whenever the SOS button is pressed, communication is sent to the Garmin Response Center, which oversees and coordinates a unique response based on the situation. Since launching InReach services in 2011, the Garmin Response Center has coordinated over 10,000 InReach SOS responses in more than 150 countries and on all seven continents for activities ranging from hiking and backpacking to roadside assistance in areas of poor cell phone coverage.

Considering year-to-date performance in the Outdoor segment and current trends, Garmin now expects revenue in the Outdoor segment to grow 17 percent year-over-year, down slightly from the guidance of 20 percent previously.

Marine Segment Revenue Declines 5 Percent
In the Marine segment, revenue decreased 5 percent to $197 million. Pemble said, “The Marine business is highly seasonal and Q3 typically represents the lowest quarter of the year. For the past two years, these seasonal trends have been difficult to predict due to the influence of the pandemic. We believe the market is returning to more typical seasonal trends.”

Growth in operating margins was 56 percent and 23 percent, respectively, resulting in an operating income of $45 million, down from $55 million a year ago.

During the quarter, Pemble began shipping the LiveScope XR system, which operates at greater depths and expands the addressable market for live-action sonar to coastal and deep lake fishing applications. Also launched was the LiveScope ice fishing bundle with real-time imaging, which supports a portable solution for winter fishing. For the eighth consecutive year, the National Marine Electronics Association named Garmin Manufacturer of the Year, and the brand also received five Product of Excellence awards

Given the year-to-date performance and the return of typical seasonality patterns, Garmin lowered its revenue growth estimate for the Marine segment to 3 percent for the year, down from 5 percent previously.

In its other two segments, Aviation revenue increased 4 percent in the third quarter to $188 million while Auto revenue decreased 2 percent to $136 million. Both segments are now expected to expand 7 percent in 2022. Previously, growth targets were 10 percent for Aviation and 5 percent for Auto.

Based on its performance in the first three quarters of 2022, Garmin is adjusting its full-year guidance. The new outlook calls for:

  • Revenue of approximately $4.85 billion, down from approximately $5.0 billion previously;
  • Gross margin of 57.5 percent, up from 56.7 percent previously;
  • Operating margin of 20.7 percent, up from 20.0 percent previously; and
  • EPS of approximately $4.95, up from $4.90 previously.

Photo courtesy Garmin