Please ensure Javascript is enabled for purposes of website accessibility

Garmin Finds Its Way With Solid First-Quarter Results

By Demitri Kalogeropoulos - Updated May 11, 2018 at 8:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The GPS device giant is on track to post another year of improving sales and profitability.

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 0.24%) 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.

A hiker checks her smartwatch.

Image source: Getty Images.

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) 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Garmin Ltd. Stock Quote
Garmin Ltd.
$98.49 (0.24%) $0.24
Fitbit, Inc. Stock Quote
Fitbit, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.