Not all of Garmin's (GRMN +2.65%) GPS devices enjoyed strong demand over the holiday season. But as a group, they powered the company's second straight year of modest sales growth even as profitability expanded. Garmin also issued a forecast for another year of improvements on both the top and bottom lines in 2018.
More on that bright outlook in a moment. First, let's take a closer look at the fourth-quarter results.
Image source: Getty Images.
Edging past expectations
Sales rose 3% to $888 million over the holiday quarter, which translated into full-year revenue of $3.09 billion. That figure was slightly higher than the upgraded guidance that management had issued in early November. Pulling growth down was a 14% decline in its automotive segment and a fitness division that just barely increased as consumers shifted their spending away from basic activity trackers. On the plus side, Garmin posted double-digit gains in its outdoor, aviation, and marine divisions.
The growth in the outdoor division was especially good news since those feature-rich products, including smartwatches, carry some of the company's highest profit margins. Thanks to the shift toward those hit devices, overall gross profit margin rose to 56.2% of sales from 54.7% a year ago.
The news only gets better as you move down the income statement: Operating profit also expanded at a faster rate than sales. An elevated tax burden pushed bottom-line profitability to 15.6% of sales from 15.9%. However, income before taxes rose to 20.3% of sales from 19.6% last year.
More growth ahead
In 2018, Garmin expects its automotive segment to continue to decline as consumers shift their spending away from aftermarket GPS navigation units. The fitness segment should recover to a flat result following last year's 7% decline, management predicts, as the company releases more powerful tracking devices to tap into the demand for feature-rich products. Both the outdoor and aviation divisions are projected to rise by 13% while the marine segment expands by 18%.
Image source: Getty Images.
Put it all together, and CEO Cliff Pemble and his team expect sales to rise by about 4% to $3.2 billion, thanks mainly to innovative-device launches. "We are entering 2018 with a strong product lineup, and we see many opportunities ahead," Pemble told investors during the fourth-quarter conference call.
Management is forecasting a third straight year of improving profitability, too, with gross margin rising to 58.5% of sales from 58% last year and 56% in 2016. Operating margin should march higher for a third straight year, ticking up to 21% of sales from 18.6% two years ago.
A bright outlook
Garmin's profit forecast calls for just a 4% earnings uptick in 2018, which might be the main reason why investors responded harshly to the quarterly earnings report. Yet there's nothing in these results for investors to worry about. The holiday figures demonstrate that Garmin's diverse product portfolio can deliver healthy sales and profit gains through a wide range of operating conditions. They also show that the company is succeeding at rapidly innovating so that its devices stay ahead of changing consumer demands.
After all, in the past two years Garmin has navigated plunging demand in its auto portfolio and a significant shift in consumer preferences in fitness-tracking devices -- all while keeping sales and profitability marching higher. Those wins are evidence of a strong, well-run business that likely has a bright future ahead.
