Exec: Shares of Garmin Slide On Guidance Cut

Shares of Garmin fell $8.94, or 8.7 percent, to $93.56 on Tuesday after the wearables maker lowered its guidance for the year due to weakness in its fitness segment and supply constraints in its marine segment.

Garmin said it now expects revenue for 2022 to be approximately $5.0 billion with a pro-forma EPS of $4.90. Previously, Garmin expected sales of approximately $5.5 billion and pro-forma EPS of $5.90.

The updated guidance is based on a gross margin of 56.7 percent, an operating margin of 20.0 percent, and a full-year effective tax rate of 8.5 percent.

The guidance assumes currency exchange rates stabilize at current levels and growth expectations have been downwardly adjusted for fitness and marine, which reflect current trends.

Garmin updated its guidance while reporting sales in the second quarter were well below Wall Street’s target, although EPS was slightly ahead.

Consolidated revenue in the quarter declined 6 percent to $1.24 billion, short of Wall Street’s consensus estimate of $1.36 billion.

Garmin noted that the decline partly reflected the strong pandemic-driven prior-year quarter.

Net income in the quarter declined 18.7 percent to $257.9 million, or $1.33, from $317.0 million, or $1.64, a year ago. On a pro-forma basis, excluding foreign currency losses, earnings slumped 13.8 percent to $278.6 million or $1.44 a share, from $323.2 million, or $1.68, a year ago. Earnings were slightly ahead of Wall Street’s consensus estimate of $1.42.

“Our performance in the quarter was influenced by several factors,” said Cliff Pemble, president and CEO, on a call with analysts.

First, he said the US dollar strengthened significantly over the previous year relative to other major currencies and unfavorably impacted second-quarter revenue by approximately $57 million. Pemble said, “Our strategy for managing currency fluctuations of this nature is to increase prices where we are able and reset pricing as we introduce innovative new products. We believe this approach is very effective in managing currency changes over the long-term, but the rapid and relentless strengthening of the US dollar will be a significant headwind for the remainder of the year.”

From a business segment perspective, the underperformance of the fitness segment had a “significant impact” on results. Finally, Pemble said Garmin continued to experience supply chain constraints, which limited the orders it could fill in the quarter, specifically in marine and aviation.

Gross margins in the quarter were about flat, at 58.7 percent against 58.8 percent a year ago.

The earnings decline reflects the lower sales and higher operating expenses, which increased to 35.1 percent of sales from 30.9 percent a year ago. Total operating expenses in the quarter were $436 million, a 6 percent increase over the previous year. Research and development increased 8 percent, primarily due to engineering personnel costs. SG&A expenses increased 6 percent, driven primarily by personnel-related expenses and information technology costs. Advertising was relatively flat to the prior-year quarter.

By segment, revenue from the fitness segment fell 34 percent in the second quarter to $272.1 million, with declines across all categories led by its advanced wearables and cycling products. Pemble noted, “These are categories which benefited significantly from pandemic-fueled demand in the first half of 2021.”

Gross and operating margins were 49 percent and 9 percent in the quarter in the fitness segment, respectively, resulting in a $23 million operating income against an income of $113.7 million a year ago.

“Although our Q2 performance was disappointing, we are encouraged by the response to our new product introductions,” said Pemble about the fitness segment. “During the quarter, we celebrated global running day by launching two new running watches, the Forerunner 255 and the Forerunner 955. The Forerunner 955 solar version is our first running watch with solar charging capability, which provides up to 20 days of battery life in smartwatch fashion. We also launched the Edge 1040 cycling computer featuring solar charging capability for superior battery life and multiband GPS technology for accurate high-performance positioning in the most challenging ride environments such as those found in urban areas or dense street cover. Given the year-to-date performance and current trends, we now expect fitness revenue to decline 25 percent for the year.”

Garmin had expected fitness to show flat growth for 2022 at the start of the year.

Revenue from the outdoor segment grew 18 percent in the second quarter to $381.9 million, primarily due to demand for its adventure watches. Gross and operating margins were 66 percent and 40 percent, respectively, resulting in an operating income of $154 million, up 27 percent from $121 million a year ago. During the quarter, Garmin announced the tactix 7, a smartwatch with tactical, performance and wrist-based navigation features.

Pemble said, “The outdoor segment has been a strong performer so far, and we are maintaining our revenue growth estimate of 20 percent for the year.”

Revenue from the marine segment decreased 7 percent in the second quarter to $242.8 million, primarily due to supply chain constraints. Pemble said, “Demand for our products was even higher than it was during the historic second quarter of 2021, but we were unable to satisfy all of the demand due to supply chain constraints.”

Gross and operating margins were 57 percent and 28 percent, respectively, resulting in an operating income of $69 million, down 24 percent from $91 million in the 2021 quarter. During the quarter, Garmin introduced the Echomap UHD2 Chartplotter series bringing best-in-class sonar and built-in wireless networking to its 5- and 7-inch combo units. Garmin also launched the quatix 7 smartwatch featuring an always-on touchscreen display, chartplotter control and anchor drag alarm.

Pemble said, “We’re excited to bring live scope technology to the deep fishing market and believe it represents another growth opportunity for the marine segment. Given our performance so far this year and the anticipated return of normal seasonality patterns in the marine market, we will now expect revenue growth of 5 percent for the year.”

Garmin had expected 15 percent growth from the marine segment at the beginning of the year.

In its Aviation segment, revenue grew 13 percent in the second quarter to $204.7 million, driven by growth in both OEM and aftermarket categories. Gross and operating margins were 72 percent and 30 percent, respectively, resulting in an operating income of $62 million, up from $51 million the previous year.

Revenue from the auto segment decreased 6 percent during the second quarter to $139.3 million, driven by both OEM and consumer products. Gross margin was 40 percent, and the auto segment recorded an operating loss of $15 million in the quarter against a loss of $5.6 million in the year-ago quarter, driven by ongoing investments in auto OEM programs.

Pemble concluded, “While we are facing a variety of headwinds, it’s important to remember, our diversified business model provides many opportunities for growth within each segment. We have a very strong product lineup, and more new products are on the way. We remain focused on what we can control, and we’ll be agile and opportunistic as we navigate the evolving macroeconomic environment.”

Photo courtesy of Garmin

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