Garmin Ltd. is shifting more advertising and R&D resources to its Fitness and Outdoor segments after seeing how quickly new innovations by those businesses boosted sales and profits in the first quarter.
Revenues at the company’s Fitness segment grew by nearly $28 million, or 38 percent, to $100.3 million in the 13 weeks ended March 29 with the Forerunner 220 and 620 continuing to make strong contributions and a solid mid-quarter launch for Vivofit. Gross margins improved to 64 percent and operating margins rose 600 basis points to 33 percent, respectively, as mix shifted to new products and sales growth outpaced research and development and advertising growth.
“We are currently experiencing a period of strong growth fueled by new products,” Garmin’s President and CEO Cliff Pemble said of the Fitness segment. “We see additional opportunities we can capture in both the short and long term. With this outlook in mind, we have increased our R&D investment in fitness to support future innovation, and a robust pipeline of new products and services that are yet to come.”
Pemble cited the recent launch of the Garmin Vivofit, a wristband that tracks the wearer’s daily activities, and the Edge 1000 cycling computer, which features a large touch screen display and smartphone connectivity, as innovations that drove growth in the quarter and will continue to do so through the balance of 2014.
Fitness bands, or activity trackers, emerged as a red hot market at the Consumer Electronics Show in January. Garmin CFO Kevin Raukman estimated the market could sustain sales of 10 million units a year and that Garmin does not foresee cannibalization of the higher priced Forerunner sports watches.
“It's not either/or,” Raukman said. “We're going to get growth from both of those sub-segments.”
Pemble added, however, that fitness bands, which retail for between $79 to $180, will weight on margins at the Fitness segment over time.
At Garmin’s Outdoor segment, revenue grew 10 percent during the quarter, or the low range of its 10 to 15 percent guidance, due largely to the disappointing launch of its first action camera, the Virb. Strong sales of the company’s dog and golf products sustained gross and operating margins at 61 percent and 28 percent, respectively.
Garmin is ramping up promotional spending on the Virb in a bid to gain shelf space with big box retailers short term and increasing R&D spending to ensure it has a robust product pipeline over the long term.
“We are determined to win market share in the category with our innovative products and future enhancements,” said Pemble. ”We're in a few of the smaller outdoor retail stores, but we have yet to get placement in some of the larger big-box retailers. Product placement has, obviously, been an issue. The existence of entrenched competitors in this market is a factor.”
While Pemble did not name any specific competitors, he was clearly referring to GoPro.
Garmin’s R&D spending increased 10 percent in the quarter, when the company shifted more resources to aviation, fitness and outdoor from its marine and automotive/mobile segments. Advertising also increased 10 percent as Garmin launched campaigns to support new products in outdoor and marine. Selling, general and administrative expense increased by 4 percent, but declined as a percentage of sales in the quarter.