Alas, poor Garmin! I knew him, Horatio, a fellow of infinite
jest, of most excellent fancy. He hath bore me on his back a
thousand times, and now how abhorr'd in my imagination it is!
My gorge rises at it.

-- Hamlet, Act 5, scene 1 [with apologies to the Bard]

Indeed, I'm guessing there are quite a few gorges rising among Fools invested in Garmin (NASDAQ:GRMN) this week. The world leader in personal GPS devices reported its second-quarter earnings news Wednesday, and as of this writing, Mr. Market has already disgorged two-and-a-quarter billion dollars worth of Garmin's market capitalization.

Splash!
What made 23% of Garmin's market cap disappear? Here's a quick rundown:

  • Q2 sales increased 23% to $742 million, which was short of Wall Street's predictions, but better than TomTom managed (19% growth).
  • Garmin's outdoor/fitness segment led the way with 54% growth, while the all-important automotive segment was also ahead of trend at 24%. However, Garmin missed the boat in marine sales, which slipped 11%.
  • Long-predicted gross margin erosion finally reared its ugly head, with the gross falling 470 basis points to 45.8%.
  • Profits still increased 21% on a net basis, but only because Garmin profited from selling off its Tele Atlas shares when TomTom ate the company. Back out this one-time item, and Garmin fell short of expectations. (To recap: TomTom now owns Tele Atlas. Nokia (NYSE:NOK) owns the other GPS map provider, Navteq. Garmin owns bupkis, and buys its maps from Nokia.)
  • Garmin also announced that it's delaying introduction of its GPS-enabled nuvifone -- the smart phone that was expected to take on Motorola (NYSE:MOT), Palm (NASDAQ:PALM), Apple (NASDAQ:AAPL), Research in Motion (NASDAQ:RIMM), and Nokia later this year. It could be mid-2009 before we get to see the gizmo.
  • And to top it all off, no nuvifone sales means no nuvifone revenue and no nuvifone profit. Accordingly, Garmin walked back its guidance for the year. We're now looking at approximately $3.9 billion in sales for 2008, 25% operating margins thereon, and perhaps $4.13 per share in profits.

Aside from that, Mrs. Lincoln, how was the play?
So to sum up, Garmin missed on earnings and profits, pulled the launch date on a key growth driver, and issued an earnings warning. Sure, it could have been worse (see last week's earnings report from its chip supplier SiRF (NASDAQ:SIRF).) Still, after this litany of horrors, investors should count themselves lucky they're down only 23% post-earnings -- because wouldn't you know it? The news gets worse.

Remember how I mentioned that Garmin only grew its net because of the one-time gain on its unloading of Tele Atlas shares? Well, absent that gain, profits would still only have shrunk 6% (to $0.94). Relative to TomTom's 24% decline in net profit, you might almost call Garmin the winner of this round.

"Almost?"
Viewed from another angle, Garmin did much worse than the 6% decline in its "accounting profits" suggests. You see, so far this year, Garmin has generated all of $200 million in free cash flow. That's less than half its reported net income under GAAP. It's also a steep 35% decline from the amount of cash Garmin had cranked out at this time last year.

My final point on Garmin's quarter concerns the key concern I expressed in my pre-earnings Foolish Forecast: inventories. As you'll recall, when last we heard from Garmin on this subject, it was 'fessing up to a startling 139% spike in inventories, including a 160% superspike of "finished goods" -- already built GPS devices with no takers.

The picture here has improved, but so slightly that you need a GPS device to distinguish our position now from where we were three months ago. Inventories are still up 126% year over year. As for finished goods ... well, Garmin didn't go out of its way to tell us that in its earnings report, and it hasn't yet filed its 10-Q. Which means -- you guessed it -- there's still a chance of more bad news to come.

At that point, we will be able to officially declare this comedy of errors an out-and-out tragedy.

Do you enjoy long, leisurely root canals at the dentist? Slow-motion car crashes? Then you'll just love reading about the disaster-in-the-making that culminated in this week's earnings report:

What do the Foolish investors at Motley Fool Global Gains and Motley Fool Stock Advisor think about mutual pick Garmin's mounting inventories and plummeting cash flow? Take a free trial to whichever newsletter service strikes your fancy and find out.

Fool contributor Rich Smith does not own shares of any company named above. Apple is a Stock Advisor selection. The Motley Fool has a disclosure policy.