Earnings Preview: Will Garmin Extend Winning Streak Into 2019?

Garmin (NASDAQ:GRMN) will report its earnings results for the key holiday shopping period on Wednesday, Feb. 20. Investors are heading into that announcement with cautious optimism, since the GPS device specialist enjoyed accelerating sales growth going into the fourth quarter. Yet its most recent earnings announcement included a few warning signs for shareholders.

With those crosscurrents in mind, let's look at the metrics that will determine whether Garmin's consumer devices found sufficient traction in the marketplace in the final months of 2018.

Image source: Getty Images.

Sales and market share

Garmin's sales growth rate was positive but inconsistent through the year, rising by 11% in the first quarter, 4% in the second quarter, and 8% in the third quarter. The automotive segment has been a headwind, having slumped 16% through the first nine months of 2018. However, Garmin's non-automotive divisions, which include fitness and hiking devices, along with GPS electronics for boating and aviation, have together more than offset those declines. Each of these segments grew sales at a double-digit pace in the third quarter, in fact.

For the holiday period, investors are expecting to see similar market share strength in non-automotive segments. Looking deeper into the portfolio, it will be interesting to see how the fitness division fared as Garmin's smartwatches went up against rival releases from Fitbit (NYSE:FIT). Overall, CEO Cliff Pemble and his team are predicting roughly flat sales of $891 million this quarter. Hitting that target would put Garmin at $3.3 billion for 2018 as growth accelerates to a 6% pace from 3% in the prior year.

Making money

Garmin's broad device offering, coupled with its innovation leadership position, helps it maintain unusually robust profit margins. Its gross profitability sits far higher than Fitbit's, at 59% of sales compared to 42%. Garmin's gross margin is on track to expand for the third consecutive year while Fitbit's has been contracting. Management is finding no difficulty in boosting bottom line profitability, either, even while investing in research and development and strategic acquisitions.

Price cuts in the competitive holiday season might pressure that financial progress in the fourth quarter. Yet Garmin has a habit of finding earnings gains in other areas. Its aviation segment boosted operating profit by nearly 50% last quarter, for example. Thus, look for gross and operating profitability to tick higher for the full year as the company reaches about $3.45 in earnings per share compared to $2.94 per share in 2017.

Looking ahead

Management has a few reasons to be cautious as they look out to the 2019 fiscal year. Costs on many manufacturing components are projected to climb, after all, and consumer attitudes always have the potential to shift rapidly around wearable electronics.

Still, assuming the company finishes 2018 at about where executives predicted back in November, the future should be bright for this business. Throughout the year it dealt with a massive shift in consumer preferences away from low-cost fitness trackers while also enduring contraction in the automotive division. These challenges didn't get in the way of accelerating sales growth and rising profitability, though, which bodes well for investor returns going forward.