Garmin Inc. reported second-quarter earnings slid 24.3 percent to $137.8 million, or 72 cents a share, due to slower growth in its fitness division and the strong U.S. dollar's impact on foreign results.
In mid-July, Garmin had warned that 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.
Companywide sales eased 0.5 percent to $773.8 million with unfavorable currency movements reducing revenue by approximately $59 million in the quarter. Gross margins fell to 54.2 percent to from 57.1 percent while operating profit fell 23.8 percent to $166.7 million. Profits were impacted by downward pressure from unfavorable currency movements, a more competitive pricing environment, and continued investments in advertising and R&D.
Fitness sales growth plummets
In the Fitness segment, revenues rose 5.3 percent to $158.6 million, which compares to a gain of 30.6 percent seen in the first quarter. While the growth rate is below that of recent quarters, Garmin experienced significant sell-in during the second quarter of 2014 as it established retail presence in the mass-market activity tracker category. Currency headwinds also disproportionately impact fitness and outdoor due to the geographical revenue mix.
Said Cliff Pemble, Garmin’s president and CEO, on a conference call with analysts, “In summary, while the growth rates slowed in the second quarter, we believe that the underlying foundation of the segment is solid.”
Gross margins in the Fitness segment eroded to 55.8 percent of sales from 65.1 percent, impacted by unfavorable currency movements, and product mix shifting towards lower margin products. Operating income was down 47.4 pecent to $32.1 million, further impacted by increased R&D in advertising investments that Pemble said will” position us for long-term success.”
In the second quarter, Garmin began deliveries of the Forerunner 225, which incorporates risk-based heart rate. Said Pebble, “We are pleased with the initial demand for this exciting new running watch.”
Other new introductions for the Fitness segment during the quarter was the Edge 520, which adds Strava segment integration and smart notifications when paired to a smartphone. Another launch was the Varia family of cycling products, including smart lights and radar, which are new product categories for Garmin.
Garmin officials still expect growth in the Fitness segment to expand 25 percent in the year, helped by ome additional product launches that are coming into the back half of the year and a stronger level of seasonality in the back half due to the promotions in the fourth quarter
Fighting Fitbit
Asked if Garmin was losing traction in the space given that Fitbit showed a 180 percent gain in its first-quarter revenues, Pemble said Garmin is still a “fairly new entrant to the market in the past year” and has already established itself as the number two position on a global basis, “some countries stronger than others.” He added, “So we feel so far we've made good progress.”
From a product perspective, Garmin is focusing on increasing the number of sensors in its product to improve the Fitness line’s functionality. The increased advertising spend is also expected to raise brand awareness in the category.
“We are new to the category, so we're letting people know that we have great solutions in the category,” said Pemble. “And we do see movement based on what we've been doing so far.”
Outdoor Segment accelerates
In the Outdoor segment, sales rose 4.0 percent to $110.3 million, accelerating as forecast, as supply constraints eased and strong demand was seen for its wearable devices.
Gross margins in the Outdoor segment were about flat at 60.6 percent versus 60.9 percent a year ago. Operating income rose 6.1 percent to $37.4 million. While gross margin was comparable to the prior year, it is still below historical levels, impacted by an inventory reserve in the second quarter of 2014 as well as unfavorable currency movements.
“Our wearable devices have performed well in 2015, and our flagship product is the Fenix 3,” said Pebble. “This device appeals to a broad range of customers, from those looking for multi-sport features to those who are more interested style. We see growth opportunities in the outdoor wearable category, and we are making additional investments to capitalize on the opportunity.”
He added, “During the quarter, we introduced touch screen technology into our best selling eTrex Series. In addition, we introduced a new model of our Rino communicator product series. We expect these products will perform well in the back half of 2015.”
In its other segments, the biggest gain came in Marine, helped by a good response to new products and the Q314 acquisition of Fusion Electronics. Sales jumped 40.6 percent to $103.7 million while operating profit advanced 35.4 percent to $23.9 million.
The Aviation segment’s sales grew 5.1 percent to $102.3 million with its growth rate slowing due to a decrease in new aircraft sales. Aviation’s operating profits slid 3.2 percent to $27.4 million. The weakest segment was its largest segment, Auto, with a decline of 14.6 percent to $298.9 million. Operating income in the Auto segment slumped 39.9 percent to $44.9 million.
In its updated guidance provided in mid-July, Garmin lowered its EPS of approximately $2.65 for full year 2015, compared to prior guidance of $3.10. Garmin said the global currency situation is expected to continue to create downward pressure on revenue growth and profitability for the remainder of the year. In addition, Garmin expects to incur higher advertising costs in the back half of 2015, in order to further solidify its position in key markets.
Revenues are continue to be expected to raeach approximately $2.9 billion this year, unchanged from previous guidance despite the approximately $160 million of currency driven impact that is now built into the forecast.
