This Tech Company Found a New Direction
Ask a random person what Garmin makes, and you'll receive one of two answers: a confused stare or "car GPS." But, the company's new third-quarter report showed a continued decline in the automotive segment. Has Garmin found a new direction?
Net sales for the quarter were down 4% year-over-year, largely due to a 16% decline in the automotive segment. Garmin predicts that sales of its personal navigation devices, or PND, will fall 20% next year, even though the devices will launch in a new line of Mercedes-Benz vehicles.
Garmin has no plans to abandon its automotive PND. Even with the drop, the segment still accounts for more than half of Garmin's net sales. But, three other segments show strength that can help offset the automotive slowdown.
Up in the air -- and the sea
Aviation segment profits were up 15% year-over-year to $83.5 million, which makes it the second-largest segment after automotive. Sales were driven by both OEM and aftermarket device purchases. Gross and operating margins were 71% and 28%, respectively. Garmin predicts a weaker fourth quarter for aviation due to the FAA's shutdown-related furlough. But, that headwind would only impact short-term results.
Moving from air to sea, Garmin's marine segment grew revenue 24% this quarter due to strong sales of the company's chartplotters. But, that industry has become more competitive and could constrict margins, particularly if Garmin fails to control operating costs in the future.
Getting fit
The fitness segment only accounted for about 13% of net sales, even after the quarter's 25% growth. New products launching in the fourth quarter could drive the segment to further gains in 2014.
Popular products included performance monitors for cyclists. The Edge cycling computer is a touchscreen GPS device that tracks basic performance metrics including distance and speed. Power measurements can be added on with the Vector power meter, a pedal-based power meter.
New products arriving soon include the Edge Touring, a cycling GPS system that offers programmed routes with additional downloadable content. Garmin will also release two new models of its Forefront running watches.
Garmin's Achilles' heel?
Garmin's business model has focused on getting to a market first for the pricing advantage. But, once cheaper competitors arrive, Garmin struggles to hold onto its margins. That's a major factor in the company's automotive GPS devices, especially as consumers grow more accustomed to using smartphone GPS systems in the car. Fitness products are selling well, for now, but it's a fertile field for future competition.
Apple is coming for Garmin's automotive segment with the iOS in the Car feature, announced with the latest operating system. The feature will bring maps, music, and messages to OEM in-car controls.But, the tech giant also offers a degree of fitness competition with a range of downloadable apps that can transform handheld devices into athletic monitors.
Nike also offers products that could threaten Garmin's fitness growth. The popularity of the Nike+ running tracker has inspired the upcoming Fuelband SE, a wearable performance tracker that gamifies the process with scoring metrics and social networking.
For Garmin, the least risky segments are marine and aviation, where federal regulations keep the field narrowed and customers expect higher prices.
Foolish final thoughts
Growths in the aviation, marine, and fitness segments show new life in Garmin. But, these gains don't offset the fact that automotive represents more than 50% of sales -- and that segment will continue to drop as Apple and other tech companies take a bigger step into the space.
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The article This Tech Company Found a New Direction originally appeared on Fool.com.
Brandy Betz has no position in any stocks mentioned. The Motley Fool recommends Apple and Nike. The Motley Fool owns shares of Apple and Nike. 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.
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