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Garmin Tells Investors Why Profitability Will Fall in 2020

By Demitri Kalogeropoulos - Feb 27, 2020 at 12:00PM

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The GPS tech specialist sees a few spending challenges ahead.

Garmin (GRMN 0.02%) is on a roll. The GPS navigation device specialist recently closed out its third consecutive year of surprisingly strong sales growth and record operating margins thanks to a banner performance across its portfolio over the holiday shopping season.

The company predicted another record sales year ahead for 2020. However, in a conference call with investors, CEO Clifford Pemble and his team explained why they're forecasting a growth slowdown and a rare profitability decline in the new fiscal year. Below are some highlights from that presentation.

A hiker checks her smartwatch at the top of a peak

Image source: Getty Images.

Another great year

We achieved strong double-digit growth in four of our five segments, led by fitness segment with 34% growth, followed by the aviation and marine segments [with] growth of 22%, and outdoor with growth of 16%. For the full year, we achieved 12% consolidated growth [including] double-digit growth in four of our five segments.
-- CFO Doug Boessen

Garmin trounced the upgraded outlook it issued in November so that overall revenue rose 12% to $3.76 billion. The company had entered the year predicting sales gains at about half that pace as revenue ticked up to $3.5 billion.

Executives credited blockbuster growth in the four sales divisions outside of the automotive unit. Two standouts were the fitness segment, which crossed $1 billion in annual sales for the first time, and the marine unit, which just grew into a $500 million annual business. "2019 was a remarkable year of accomplishments," Pemble summarized.

Shifting focus

The fitness, aviation, marine and outdoor segments made up 85% total revenue compared to 81% in 2018. All segments had year-over-year increases in operating income dollars.
-- Boessen

The shrinking auto segment, which accounted for nearly one third of sales in 2016, continues to cede ground in the portfolio to growing segments such as the fitness and smartwatch niches. Not only have these divisions more than offset the declining auto GPS sales, but they've significantly raised Garmin's profitability.

The aviation business carries gross profit margins of 74%, for example, compared to the auto division's 47%. Overall, gross profit margin rose for a third straight year, and operating margin jumped to 25% of sales from 23% back in 2018.

Looking ahead to 2020

We anticipate consolidated revenue will reach approximately $4 billion, up 6% year over year as growth in fitness, outdoor and marine more than offset a slight decline in the auto segment.
-- Pemble

Garmin's 2020 outlook calls for a significant growth slowdown as gains drop to 6% from 12% in 2019. That conservative prediction is likely driven in part by uncertainty around consumer trends, which will become clearer as the year progresses. But Garmin also sees a major headwind in the aviation segment that is expected to be flat.

The tech company also predicted a drop in operating margin that's due to "an increased level of investment to support long-term growth initiatives." That metric is set to drop for the first time in five years, dipping to 23.5% of sales from 25%. The fact that there's no growth expected in the ultra-profitable aviation segment also likely plays a key role in that outlook. That division accounted for 27% of profits last year -- up from 26% in 2019 and 20% in 2016.

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