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How Garmin Plans to Win the Holiday Season

By Demitri Kalogeropoulos - Aug 19, 2018 at 9:30AM

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Highlights from the GPS device giant's latest earnings call.

Garmin's (GRMN -0.41%) business is looking up. That's been true for about two years now, but the GPS device and wearables specialist recently announced even stronger growth on both the top and bottom lines.

In a recent conference call with Wall Street analysts, CEO Cliff Pemble and his team added context for investors on those operating trends. Management also explained why they feel confident heading into the critical holiday shopping season.

Below are a few highlights from that discussion.

A hiker adjusts her smartwatch.

Image source: Getty Images.

Lessening the impact of the auto segment

"The fitness, marine, aviation, and outdoor segments delivered 94% operating income in the second quarter 2018 compared to 84% in the second quarter of 2017." – CFO Doug Boessen

Garmin's automotive segment continues to post lower sales and falling profitability as the dashboard GPS device market declines. Yet despite a 19% revenue slump from that division, the company produced an 8% sales increase overall. In fact, big gains in its fitness, outdoor, marine, and aviation divisions reduced the auto segment's share of total sales to 20% from 27% a year ago. And nearly all of Garmin's operating income came from those growing product categories in the most recent quarter.

Fitness is looking better

"The basic activity tracker category continued to decline during the first half of 2018. However, the impact on our fitness segment was more than offset by growth in other categories." – Pemble

The consumer shift away from cheaper activity trackers is having a much smaller impact on Garmin's business than it is for peer Fitbit (FIT). Investors can credit its wider portfolio of advanced wearable products for that success.

This segment grew sales by 24% and is projected to grow by 10% for the full year with gross profit margin of around 56% of sales. Fitbit, on the other hand, is predicting lower revenue for the year and its gross profitability has been 43% of sales over the past six months.

Winning with smartwatches

"Outdoor [segment] revenue increased 4% on a year-over-year basis driven by growth across all product categories. While this growth rate is below recent trends, we feel it is a remarkable accomplishment considering the strong growth we experienced in Q2 of 2017 driven by the initial channel fill of the fenix 5 series." -- Pemble

Garmin's outdoor segment includes many of its most innovative wearable devices, including the fenix smartwatch franchise. This is a highly competitive category, where strong execution around product design and marketing is required for a company to gain traction, but Garmin is keeping up with rivals like Fitbit. Executives believe the segment will grow by around 13% for the full year, thanks in part to upgraded offerings such as the new "plus" models from its fenix 5 line,  which include mobile pay, music, and color map capabilities.

Boosted guidance

"In light of this strong performance, we are raising our projected revenue to $3.3 billion for the year, up about 6% over 2017. Gross margin is projected to be 58.5% for the year, which is unchanged from the previous estimate. Operating margin is projected to be 21.5%, which is a slight improvement over our previous guidance." -- Pemble

Executives didn't adjust their full-year forecast after a surprisingly strong first quarter report, but now that half of the fiscal year is in the books, the management team is feeling more confident.

Sales are now expected to rise by 6% to mark a solid acceleration over last year's 2% boost. Profitability is still on track to expand for the third straight year, but the forecast now is for a slightly faster pace, with operating margin projected to rise to 21.5% from the prior 21% target.

That prediction assumes healthy sales growth from each of its non-automotive product divisions. However, with retailers already stocking up ahead of the holiday shopping season, and with the competitive landscape looking favorable, Garmin executives are optimistic about their chances at grabbing more than their share of key GPS device markets during the key holiday shopping season that will finish 2018.

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