Investors were bracing for some tough operating results from Garmin (GRMN +1.16%) for the second-quarter period that captures the most intense economic effects of the pandemic to date. It was easy to imagine how retailer closures and consumer behavior changes would push sales and profits down dramatically in April, May, and June.
But the GPS device specialist's report easily surpassed those low expectations. In fact, Garmin's growth wins suggest it could boost sales in some big categories in 2020 while generating lots of cash.
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Navigating toward a beat
Sales trends worsened in each of Garmin's key product categories, as expected. But the scale of the drop was surprisingly small. The company's fitness division grew 17% to mark just a modest deceleration from the prior quarter's 24% spike. This segment benefited from strong demand for Garmin's latest premium wearable devices.
Sales in the marine, outdoor, and aviation divisions all slowed, too, but weren't as heavily affected by COVID-19 challenges as investors had feared. As a result, overall sales fell 9% compared to the over 15% drop that Wall Street was expecting. "Garmin delivered strong second quarter financial results in a period filled with unprecedented challenges," CEO Cliff Pemble said in a press release .
Finances are on track
Garmin's finances showed the strain of some of those challenges, but were still surprisingly good. Gross profit margin fell by just a single percentage point, to 59% of sales. Operating margin took a bigger hit, declining to 22% of sales from 27% a year ago, but that slump was partly driven by a temporary spike in research and development spending. It also didn't help that the aviation division, Garmin's most profitable niche, shrank 31% in the period.
The company still managed to stay profitable, as management predicted it would in late April. Adjusted earnings fell 22% to $0.91 per share. Garmin generated $142 million of free cash flow and ended the quarter with $2.7 billion of cash on the books. "We believe these results affirm the resilient nature of our business," Pemble said, "and the strong utility of our products."
The holiday season
Executives didn't issue a detailed outlook for the fiscal third quarter or the full 2020 year. But management did predict that the aviation segment will see continued pressure from slumping demand in that niche. Any shortfall in this segment would have an outsized effect on profitability, since aviation products carry some of Garmin's highest profit margins.
The other consumer-focused divisions, including smartwatches, marine products, and fitness devices, will enjoy strong support from new product launches and significant marketing spending. But investors will have to wait for clarity about how Garmin will perform during a holiday shopping season unlike any in recent memory.
Thanks to the COVID-19 pandemic, the tech company appears set to generate its first annual decline in sales and operating margin in several years in 2020. Yet several important product categories are growing, and the overall business remains profitable. Those are both positive signs, suggesting a quick rebound might be in the cards starting in 2021.
