Brutal competition in the consumer electronics industry tends to hold back profitability for all but the most innovative companies. Rapidly changing tastes, meanwhile, can crush even a successful player if it relies too heavily on one product or a single device lineup.
Garmin (GRMN 3.56%) is navigating those challenges better than most industry participants. With help from a wide portfolio that spans fitness wearables, GPS-enabled hiking watches, and products aimed at fishing fans and aviation enthusiasts, the company showed this past week how its business approach can deliver steady revenue and profit growth in a tough selling environment.
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Solid revenue growth as profitability improves
Sales jumped 11% to reach $711 million. As has been the case for the past few years now, Garmin's automotive division shrank as that industry niche contracted. But the company easily offset that decline with solid growth in its fitness, outdoor, aviation, and marine segments.
A 20% spike in the fitness wearables niche was particularly good news, considering rival Fitbit (FIT +0.00%) saw its unit volume plunge during the period. Like Fitbit, Garmin has noticed a dramatic shift in consumer demand toward more premium trackers like smartwatches. Yet Garmin's bigger product line scratched that itch for fitness fans thanks to popular new releases like the Forerunner and Edge franchises. Its lineup allowed fitness sales to rise 20% even as Fitbit's revenue fell 18%.
Garmin managed healthy profitability, too. Gross profit margin jumped to 60% of sales from 58% a year ago, mainly thanks to a shift toward fully featured smartwatches and fitness trackers. Gross profit in the fitness segment -- 58% of sales -- was just slightly below the company average. It also compares favorably to Fitbit's 47% gross margin.
The company held the line on overall operating expenses. While directing more cash toward research and development, advertising spending dipped. As a result, overall operating income improved to $142 million, or 20% of sales, from $117 million, or 18.2% of sales, a year ago. "We are pleased with our first quarter results," CEO Cliff Pemble said in a press release, "and look forward to launching new, compelling products throughout the remainder of the year."
Affirming a steady outlook
Executives took a cautious approach to their 2018 outlook. Given that the first quarter is Garmin's seasonally slowest period, the recent 11% revenue spike wasn't enough to nudge management from its full-year target, which predicts 4% gains in both sales and profits this year. Garmin still believes it will post its third straight year of improving profitability as gross margin rises to about 59% of sales from 58% last year and 56% back in 2016.
A lot will depend on how enthusiastically consumers react to its steady stream of new product introductions -- especially during the critical holiday shopping sales period in the fourth quarter. It's possible that any number of those devices fail to gain the traction that management had hoped they would.
However, Garmin's diverse portfolio, its strong track record for quick innovation, and its healthy finances all suggest this company will continue to outpace other industry participants. That bright potential, plus a dividend payment that currently amounts to a 3.5%-plus annual yield, could make the stock an attractive option for investors seeking exposure to the wearables market.
