Garmin Ltd. Earnings: What to Watch

By Markets Fool.com

Global positioning system, or GPS, technology company Garmin is scheduled to report second-quarter results before the market opens on Wednesday, July 29. With the stock down almost 25% in the past 12 months (and down more than 8% since the company reported disappointing preliminary second-quarter results on July 15), Garmin's second-quarter earnings report and conference call will be important. Will Garmin be able to soothe investor concerns about mounting pressure from competition and a difficult currency environment?

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Garmin fitness devices. Image source: Garmin.

Reviewing preliminary results
Earlier this month, Garmin said it expected to report second-quarter revenue of $770 million-$775 million -- in line with analysts' consensus estimate for revenue of about $771 million. However, management's range for diluted EPS of $0.70-$0.72 a share falls short of expectations of $0.90 per share.

While actual results may differ from these preliminary results, final adjustments will likely be small, since the preliminary results were announced well after the second quarter ended on June 27.

Comparing these preliminary results to Garmin's year-ago figures illustrates the negative storyline surrounding the stock.

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Metric

Q2 2014

Q2 2015*

Change (YOY)**

Revenue

$778 million

$770 million-$775 million

(0.7%)

EPS

$0.93

$0.70-$0.72

(23.7%)

Gross margin

57%

54%

300 basis points

Source: Garmin quarterly press releases for respective quarters shown. Single asterisk indicates a range provided by management in preliminary earnings release. Double asterisk indicates figures are calculated using a range midpoint when a range is used.

Year over year, Garmin's revenue, EPS, and gross margin are all lower. Management cited a difficult currency environment that negatively affected second-quarter sales "by $55 to $60 million year-over-year on a constant currency basis across all consumer segments," and "a more promotional pricing environment in the fitness segment" due to heightened competition. Further, a higher tax rate during the quarter weighed on profitability, management said.

Fitness products in the age of the Apple Watch
It's no secret the Apple Watch has exploded onto the wearables scene in a big way. Garmin CEO Cliff Pemble gave a nod to the tech giant's entrance into the nascent space and acknowledged his company's need to adjust to the new reality.

"The current competitive environment in the fitness market necessitates more aggressive pricing with higher advertising expenses," he said during the preliminary earnings report.

Notably, the decision to reduce its forecast for full-year EPS from $3.10 to $2.65 amid this more competitive environment suggests that management underestimated the effect of Apple's foray into the space.

With expected year-over-year revenue growth of just 5% during Q2, the company's fitness segment no longer looks like the catalyst it appeared to be a year ago, when Garmin reported 79% year-over-year growth in its fitness segment. It still remains the company's second-largest business segment, so investors should not ignore this rapid deceleration in year-over-year revenue growth.

Can management provide investors with reasons to believe it can reinvigorate its fitness segment?
While there will probably be no big surprises in Garmin's earnings release, since preliminary results have already been outlined, investors following the stock will likely benefit from tuning into the company's second-quarter conference call on the morning of the earnings release. Particularly, look for an update on how management feels about its fitness segment in light of fast-rising competition.

Garmin's second-quarter results will be made available on its website before market open on July 29. Investors can tune into its live earnings call at 10:30 a.m. EST at this URL.

The article Garmin Ltd. Earnings: What to Watch originally appeared on Fool.com.

Daniel Sparks owns shares of Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.