Garmin (GRMN +2.95%) stock has tracked right along with the market so far in 2020, first swooning as the S&P 500 dove in late March and then rallying right back to positive territory in early July. Investors appear to believe the GPS device giant's growth will be dependent on the economic health of key markets like the U.S., Europe, and China in the quarters to come.
But Garmin has a chance to set a more positive tone for its sales and earnings outlook when it announces fiscal second-quarter results before the market opens on Wednesday, July 29. Let's look at some key metrics to watch for in that report, including management's updated guidance for the rest of 2020.
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Bracing for a tough quarter
The hesitation on the part of investors so far this year can be tied to expectations for a brutal second-quarter sales result. While revenue jumped 12% in the prior quarter and extended the tech company's winning streak into early 2020, that announcement only included the selling period that ended on March 31. That means all the most intense impacts of retailer closings and social distancing will be captured in this upcoming report.
Garmin warned back in late April of a significant sales decline this quarter, and most investors who follow the stock are predicting revenue will dive 29% to $659 million. The consumer-focused parts of its business, which span smartwatches and fitness trackers, could be the hardest hit as retailers temporarily closed their doors through most of April and May.
Staying profitable
Garmin in late April withdrew its 2020 financial outlook that had called for a fourth straight year of improving earnings and strong operating margin. However, CEO Cliff Pemble and his team said at the time they believed the company would earn a modest profit during the worst of the COVID-19 pandemic's business impact.
Look for operating margin to fall significantly from the 21% rate the company notched in Q1. Garmin likely generated some unusual expenses related to supply chain disruptions. The more important metrics to watch going forward describe its inventory pressure heading into the key holiday shopping season. There's some seasonality to its business, which means Garmin might have had to cut prices on a few of its products or even write off some inventory.
The holiday lineup
The good news is Garmin's outlook is almost sure to predict a rebound from the sales slump that the business suffered in Q2. All the major economies around the world have reopened to some extent in recent weeks, and the tech company is likely delivering for customers across growing segments like smartwatches, aviation and boating.
The recessionary economic environment could complicate management's hopes for a quick return to overall sales gains, and so investors will be listening for comments about the latest demand trends in late Q2 and early Q3. Garmin's strong start to the year implied it would notch another year of near double-digit sales gains and improving operating margin.
COVID-19 likely scrapped those two targets, but we'll get a key update on Wednesday that indicates whether investors can expect a return to form for the business in 2021.
