Garmin’s Fitness Sales Grow Nearly Three Times Faster Than Outdoor in Q1

Garmin Ltd. reported net sales of its Outdoor segment reached $66.5 million during the first quarter ended March 26, up 11.9 percent from a year earlier, while sales in its fitness segment jumped 30.0 percent to $56.4 million.

It marked the first quarter in which Garmin broke out its Outdoor and Fitness segments separately. By comparison, net sales at the company’s Marine, Aviation and Auto/Mobile segments grew 24,5 and 20 percent respectively.

Chairman and CEO Dr. Min Kao said the company’s GPSMAP 62, a high-end handheld product, and its Astro dog tracking system performed well globally in the Outdoor segment. The Fitness segment experienced strong demand for high-end cycling products, particularly in Europe. Garmin Fitness continues to focus on leadership in the GPS running watch category with the release of the Forerunner 610. “We anticipate strong demand for this product based upon the enthusiasm we saw at the Boston Marathon in April,” said Kao.

The company said revenues in North America rose 15 percent to $280 million. In Europe, net sales reached $171 million, up 18 percent. In Asia, revenues were $57 million, up 34 percent.

Gross margins in the Outdoor and Fitness segments reached 62 percent and 60.0 percent respectively. The Outdoor segment generated operating income of $24.8 million, down 1.8 percent. Operating income at the Fitness segment reached $15.5 milion, up 8.9 percent.

Gross margin for the overall business was 47% in the first quarter declining from 54% in the prior year largely driven by the automotive/mobile segment. Gross margin strength in the prior year quarter was primarily related to the refined warranty estimate that reduced costs by $22 million. This warranty refinement, combined with the increasing deferral of high margin revenues and costs associated with our bundled PNDs into future periods, accounts for 580 basis points of the total company gross margin decline and 780 basis points of decline in the automotive/mobile segment. End of life promotional efforts also contributed to the lower gross margins in automotive/mobile. We expect gross margins for the automotive/mobile segment and the overall company to improve throughout the year.

Operating margin for the overall business decreased to 15% when compared with 19% in the year-ago quarter with the gross margin decline partially offset by a decrease in operating expenses as a percentage of sales. When considering the refined warranty estimate adjustment of 2010, operating income grew 21% over the prior year.

Total operating expenses increased $16 million year-over-year but declined by 200 basis points as a percent of sales. Advertising expense increased by $3 million primarily due to cooperative advertising which is volume dependent. Other selling, general and administrative costs and research and development costs increased by $6 million and $8 million, respectively, on a year-over-year basis.

The research and development investment is across all segments and highlights our commitment to product innovation across our diversified business model. Like 2010, we believe that the first quarter will represent the low point for operating margins and with increased sales volumes during the remainder of the year, profitability levels are expected to improve.