Garmin Ltd. expects to report lower sales and margins for the fiscal second quarter ended June 27 due to currency headwinds and growing discounting of fitness trackers, which have fueled rapid growth at its Fitness business.
The new guidance comes more than two months after Sports Executive Weekly reported analysts' rising concerns over how heightened spending on research and development and advertising at its Fitness segment would impact profits.
Based on preliminary information, Garmin said Thursday that it now expects to report second quarter 2015 revenue in the range of $770-775 million with a gross margin of approximately 54 percent.
The year-over-year decline was driven primarily by currency movements negatively impacting sales by $55-60 million year-over-year on a constant currency basis across all consumer segments and a more promotional pricing environment in the fitness segment. Operating margin is expected to be approximately 21.5 percent as the company continues to invest in research & development and advertising. Given an increased tax rate in the quarter, the resulting second quarter diluted earnings per share (EPS) is expected to be in the range of 70-to-72 cents. Garmin does not expect any material non-GAAP adjustments to EPS.
Garmin said it also now appears that second quarter 2015 revenue growth in the fitness segment will slow to approximately 5 percent due primarily to strong channel fill in second quarter 2014. Although sell-in growth was muted, the company said it believes that sell-through volumes across much of its fitness portfolio continue to grow at a more robust pace in 2015. The reduced revenue growth in the quarter, along with promotional pricing, increased advertising investment, and the unfavorable currency movements impacted the operating margin in the fitness segment which Garmin expect to be approximately 21 percent.
Also, Garmin expects to report marine revenue growth for the second quarter of 2015 of approximately 40 percent due to the strength of our new product introductions and related market share gains.
“Revenue performance was in line with our expectations in light of the difficult currency environment caused by a stronger US dollar,” said Cliff Pemble, president and chief executive officer (CEO) of Garmin Ltd. ”However, ongoing weakness of the Euro coupled with a stronger Taiwan Dollar has created further gross margin pressure. Additionally, the current competitive environment in the fitness market necessitates more aggressive pricing with higher advertising expenses. We are revising our full year outlook to reflect the dynamics we face in the current operating environment.”
For the full year, Garmin continues to expect revenue of approximately $2.9 billion, unchanged from prior guidance. While fitness growth slowed in the second quarter, the company expects it will improve in the second half as sell-through trends continue to show growth, the company launches new products and advertising investments kick in.
Thus, Garmin still anticipates full year fitness growth of approximately 25 percent. Total company gross margin is expected to be in the range of 54-55 percent driven primarily by currency movements and promotional pricing. Previously, gross margin was expected to be approximately 56 percent.
With expected increased investments in advertising and research & development, Garmin expects an operating margin in the range of 20-21 percent compared to prior guidance of 23 percent. Given an effective tax rate of 18-19 percent, Garmin now expects pro forma diluted EPS(1) of approximately $2.65 for full year 2015, compared to prior guidance of $3.10. The pro forma EPS excludes the impact of the first quarter loss associated with translation of assets and liabilities held in non-functional currencies by global subsidiaries. The company does not expect a material gain or loss related to translation adjustments for the second quarter of fiscal 2015 and it is not practicable to forecast similar gains or losses for the second half of 2015.
Garmin will report second quarter 2015 results before the market opens on Wednesday, July 29
