As feared, the fight for supremacy in the rapidly growing fitness tracking market is costing Garmin Ltd. dearly.
The company disclosed Thursday that preliminary figures show sales growth at its Fitness segments slowed to 5 percent in the second quarter ended June 27 as retailers continued to work through inventory. The company said growing discounting of fitness trackers and currency headwinds caused a sharp drop in the company's margins during the quarter.
The news lead to an 11 percent overnight drop in the company's stock which opened Friday at a new 52 week low amid speculation that the company's Vivo line of fitness trackers was losing the market share battle to Fitbit and other brands. Fitbit, which went public at about $30 a share June 18, hit a new high of near $48 in trading Friday morning.
Garmin's Fitness segment sales grew 79 percent in the second quarter of 2014 as it began shipping its fitness trackers. The segment's quarterly sales have since grown 31, 70 and 43 percent.
On Thursday, Garmin said it expects slower revenue growth, promotional pricing, increased advertising spending and the unfavorable currency movements will halve operating margin at the Fitness segment to 21 percent in the second quarter compared with year ago levels.
Although sell-in growth was muted in the most recently concluded quarter, Garmin still anticipates full year fitness growth of approximately 25 percent as sell through improves during the balance of the year.
Garmin disclosed the numbers Thursday ahead of its July 29 earnings call for the second quarter. The company now expects to report total second quarter 2015 revenue in the range of $770-775 million with a gross margin of approximately 54 percent. That compares with revenues of $777.8 million and gross margin of 57 percent in the second quarter of 2014.
GRMN expects currency movements to negatively impact sales by $55-60 million year-over-year on a constant currency basis across all consumer segments. Companywide operating margin is expected to fall 650 basis to approximately 21.5 percent reported a year earlier as the company continues to spend on R&D 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, compared with $1.02 in the second quarter a year ago. Garmin does not expect any material non-GAAP adjustments to EPS.
On the positive side, 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. A year ago, Marine revenue grew just 1 percent.
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 the Fitness segment would impact profits.
For the full year, Garmin continues to expect revenue of approximately $2.9 billion, unchanged from prior guidance. 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 expects pro forma diluted EPS(1) of approximately $2.65 for full year 2015, compared to prior guidance of $3.10.
