Garmin Q2 results: 3 trends to watch

Garmin (NYSE: GRMN) Investors have big questions ahead of the GPS-focused device maker’s upcoming earnings report. Executives warned of an “increasingly complex and challenging business environment” during the company’s previous exit in late April. At the time, Garmin was reporting slowing growth and declining profitability. Wall Street is gearing up for the same next week.

With that big picture in mind, let’s take a look at three key trends to watch in Garmin’s second quarter announcement, scheduled for Wednesday, July 27.

1. Sales in 2 major divisions suggest challenges ahead

Garmin’s first-quarter fiscal report contained warning signs about demand that worried investors ahead of this week’s announcement. Yes, overall sales rose 9% to set another quarterly record. But two of Garmin’s five core divisions stumbled. Sales were flat in the aviation unit and fell 28% in the fitness unit that houses its wearables.

Investors are bracing for more challenges in this division ahead, and that’s a big reason why sales are only expected to rise about 1% in the second quarter. But look for any changes in the direction’s bullish reading on the broader industry. Executives said demand is strong overall and the fitness category will rebound in the second half of 2022. Any changes in those forecasts would impact the stock next week.

2. Garmin is seeing declining margins

The pressure on Garmin’s income has not been lacking. Supply chain challenges, higher wages and soaring input costs combined to boost operating profit down 8% in the last quarter. Operating margin is now around 23% of sales after touching 27% of sales in mid-2021.

GRMN Operating Margin (TTM) given by Y-Charts

The decline is the main reason for Garmin’s stock price plunge so far in 2022, as it fuels concerns that many of its profitability gains during earlier phases of the pandemic were only temporary. That’s not the reading that management has, and in fact, executives are aiming to increase margins again in the coming quarters, thanks in part to higher prices. But investors could see another disappointing drop in the Q2 announcement.

3. Will Garmin reveal weaker outlook?

Garmin’s official outlook for 2022 ahead of the report calls for sales to increase by around 10% to $5.5 billion. Reaching that figure would mark solid gains over last year’s impressive revenue result. It also reflects a stable outlook compared to the start of 2022, even if economic growth is slowing, inflation is soaring and supply chain challenges are worsening.

All of these issues have Wall Street worried about a possible change in tone from management on Wednesday. CEO Cliff Pemble could blame a number of short-term pressures, from exchange rate swings to inflation, as support for the release of a more conservative 2022 outlook.

Demand should still hold up well, in part because Garmin has a broad portfolio of GPS devices that spans both consumer segments and areas such as aeronautical platforms. This diversity has helped him growing up across a wide range of sales conditions over the past seven years.

Still, the stock could remain under pressure if Garmin can’t show a clear path to expansion, or at least stabilization in operating profit margin. Continued declines here will have investors worried about the earnings picture, even as Garmin continued to demonstrate market share strength in attractive industries like smartwatches.

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Demitri Kalogeropoulos has no position in the stocks mentioned. The Motley Fool has posts and recommends Garmin. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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