Garmin (GRMN 0.09%) investors had low expectations heading into the Q2 earnings release. The tech producer was likely to report a growth hangover compared to booming results a year ago. Earnings might be pressured by soaring costs as well.
Garmin's actual results didn't even live up to those modest hopes, though, mainly because of weak demand in one of the company's biggest selling divisions. Some of that slump was expected, but the scale of the demand shift convinced executives to project a weaker fiscal 2022 than they had forecast back in April.
Let's take a closer look.
Sales trends suggest trouble ahead for Garmin
As expected, sales gains slowed compared to the 9% increase that Garmin announced in Q1. But the deceleration was sharper than most investors had projected.
Rather than falling by 1%, revenue declined 6% following a sharp increase a year ago. Garmin saw a reversal of many of the demand spikes it enjoyed in earlier phases of the pandemic. That shift hit the fitness segment the hardest, where sales plunged 32%.
Executives said consumers are less interested in advanced wearables and cycling products than they were back in 2021. "Markets continue to normalize following two years of pandemic-driven growth," CEO Cliff Pemble said in the press release.
On the plus side, Garmin posted growth in all its other sales categories, including the outdoor segment that's home to its premium smartwatches. The aviation segment, which delivers high margins, accelerated its sales gains, too.
Garmin's earnings declined
Higher aviation sales weren't enough to protect earnings in the second quarter. While gross profit margin held steady at 59% of sales, indicating success at raising prices, Garmin's operating income fell to 24% of sales compared to 28% a year ago.
The company spent more on research and development, wages, and other selling expenses while advertising spending held steady. Finances were hurt by a strengthening U.S. dollar, too. Overall, non-GAAP earnings dropped 14% to outpace the 6% sales decline.
Garmin reduced its 2022 outlook to reflect the weaker demand trends and the tougher profit environment. Revenue is now likely to land at about $5 billion, not the $5.5 billion that management had predicted back in late April. Earnings guidance was also lowered.
Executives described a bullish long-term outlook, supported by the company's packed release calendar for new products. Garmin is also in a good inventory position, and likely won't need to slash prices to support sales volumes.
Still, it is clear from this update that Garmin's new product launches will land in a tougher selling environment for at least the second half of 2022. This fiscal year will likely mark the tech company's seventh consecutive year of sales growth, on top of a 19% surge in 2021. Yet sales will increase by only about 5% in 2022, and profitability is expected to decline.
Garmin is transitioning back toward its more normal expansion pace, implying that the surge in pandemic-related interest in areas like wearable fitness and boating is ending. That's not a good reason to abandon the stock, but it does mean that investors should lower their short-term expectations around earnings growth.