The consumer tech specialist is aiming for a fifth straight year of rising profitability.
Garmin (NASDAQ:GRMN) investors are feeling confident as the GPS device giant prepares to release its upcoming earnings report. Stellar results during 2018’s holiday season allowed sales growth to double the pace that CEO Cliff Pemble and his team had initially targeted for the past year. The consumer tech specialist also navigated serious challenges in a few key niches to deliver its fourth straight year of profit margin expansion.
Garmin said in late February that it should notch further gains in both sales and profitability in fiscal 2019, and Wednesday’s earnings report will be investors’ first chance to judge whether the business is on track to meet those goals.
Investors are bracing for the automotive business to shrink by nearly 20% this year, which would have been a huge problem in 2015. But Garmin has spent the past few years bulking up its portfolio in niches like smartwatches and fitness trackers, so it is positioned to take that hit in stride.
The automotive segment accounted for just one-fifth of sales last year and only 5% of profits, after all. Garmin’s continued market-share success relies on the double-digit gains management is targeting in its four other segments: fitness, aviation, outdoor, and marine.
The fitness unit should lead the way in 2019 with help from the recent acquisition of bike trainer Tacx, which management will discuss in more detail on Wednesday. Shareholders also have high expectations for Garmin’s outdoor niche, home to the premium Fenix hiking watches. If the company can maintain its design and marketing leads here, sales could rise by about 10% following last year’s 16% spike. Overall, revenue is expected to increase by about 5% in 2019 compared with a 3% projected uptick for struggling rival Fitbit (NYSE:FIT).
Protecting profit margins
It’s impressive enough that Garmin could improve its profitability last year while Fitbit saw its gross margin shrinking to 40% of sales from 43%. But investors have good reasons to expect further gains ahead, too. Garmin maintains a premium industry position in most of its product categories, and while none of its devices were breakout hits like Fitbit’s Versa, collectively they all supported a 59% gross profit margin in 2018, up from 56% a year earlier.
That metric might be lifted even further as the company delves deeper into the highly profitable aviation segment. Gross margin was a head-turning 75% in that unit last quarter, which is just one reason Pemble and his team are excited that the unit should grow at roughly double the pace of the broader business in 2019. Altogether, gross profit margin should rise to about 60% of sales in 2019 to mark a fifth consecutive year of steady improvement.
Garmin’s business is still heavily tilted toward consumer purchases that tend to occur around the holiday season. Thus, the company likely won’t have many clear details to give investors about its projected operating trends for 2019. Its holiday product lineup hasn’t been released yet.
As it stands today, Garmin is aiming for a 5% sales boost and higher gross profits, but a slight downtick in operating margin. Hitting those exact results would constitute a modest disappointment compared with last year and its 7% revenue spike and higher profits across the board. Still, bullish investors are hoping that Garmin might outperform its annual top- and bottom-line predictions starting in the back half of 2019, just as it has in each of the last two fiscal years.
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