Garmin 2022 – Full year sales crash for Fitness. Company maintains margins, Cash Flow Crashes by 22%

Garmin’s full results for 2022 are out.

They show a gradual decline overall for the company BUT with increased margins. That should be good news for many Garmin employees worried about job security.

However, a significant concern is the sales crash of the fitness segment of the business, which includes cycling and Forerunner but excludes Fenix. The fitness segment fell by 28% both for the full year and for Q4. This level of decline may be heavily skewed by cycling products, which have also been experiencing similar levels of decline across the competition.

-27% – That’s the growth in the UK bike market right now

The sales in the OUTDOOR segment seem to be holding up, with annual growth remaining healthy, but Q4 growth of 3% demonstrates an obvious slowdown. However, the notes to the financial statement indicate that the growth in the OUTDOOR segment is coming from HANDHELDS, and not from Fenix/Epix sales.

Putting this all together, it appears that 2023 is not going to be an easy year for Garmin sports products ie watches and bike products.

Here’s what Garmin said

Fitness:

Revenue from the fitness segment decreased 28% in the fourth quarter, with declines across all categories. Gross and operating margins were !!49% and 12%!!, respectively, resulting in $40 million of operating income. During the quarter, we launched Bounce, our first LTE-connected kids smartwatch. Bounce offers two-way text and voice messaging, as well as real-time location tracking. Bounce also offers kids fitness tracking, games, and allows parents to assign chores and give rewards.

Outdoor:

Revenue from the outdoor segment grew 3% in the fourth quarter primarily due to growth in handhelds and services. (ie NOT FENIX and NOTE EPIX) Gross and operating margins were 64% and 34%, respectively, resulting in $132 million of operating income. During the quarter, we launched the second-generation MARQ luxury smartwatch collection built with Grade-5 titanium, sapphire glass, and a vibrant AMOLED touchscreen display. [Garmin]

the Best Sleep Tracker and App [2023]

Note: the 49% margin for the FITNESS segment is BAD news. Garmin aims to keep margins above 50% so any parts of the business dragging the average down are a cause for concern.

The markets have NOT reacted badly to this news. Clearly, they expected something similar. Over the last 5 days, Garmin has only very slightly underperformed falls on the tech-heavy NASDAQ (GRMN is listed on NYSE as of 2021)

Corporate Cash Position

This chart from Garmin clearly shows that the cash it generates from normal activities has fallen by 22% from $1000m to $788m

Presumably, the Q4 cash situation compared to 2021 was improved by reducing expenditure on property/equipment

Will new products turn this around?

New products and new customers are the only way Garmin is going to turn this around in the short term and as I posted earlier today, don’t expect too much from new products by Garmin in 2023 – last year was the bumper year for new products. Sure we might get an Epix 2X and Epix 2S but neither of those will impact the FITNESS segment. FITNESS will only benefit from the new Forerunner 965, 265/265s and Edge 840/840 Solar/540 over the next few months and maybe a couple of new Venu models later in the year. Sales for all of these will be ‘alright’ but don’t expect sparks to fly in the current climate.

Garmin – What next (later in 2023, after the 965 and Edge 540)

The view that product innovation must turn this around is supported by the sales figures that paint a bleak economic picture in some regions. Europe is ‘stuffed’, it’s effectively in recession and declining with a poor outlook. Markets do not seem to fully appreciate that the Ukraine War has forever changed the cheap energy supplies that underpin German/Italian/European heavy industry ie the EU’s cheque book is ripped up.

Asian economies, in total, are probably also now declining for Garmin and in any case, the growth that is reported elsewhere in the region by other media outlets, for example in India, is at the bottom end of the price spectrum which is definitely not Garmin’s forte.

However, as we see here, the Americas are still growing (yay!). That growth might taper off slightly in the course of 2023 but I would still have a positive outlook for opportunities there for the company and for the region once on-shoring gathers pace. The USA obviously also has energy independence which is fundamentally important for underpinning its economic growth going forward.

Also Note

These points are noteworth but to a lesser degree so I just add them here as one line notes.

Looking ahead, Garmin is internally combining two segments, AUTO and OUTDOOR. It’s possible that there were some layoffs resulting from this decision, or perhaps some employees were relocated to other parts of the organization.

In January 2023, the Company combined the consumer auto operating segment with the outdoor operating segment. [Garmin]

R&D spend grows but this only means that the engineers got a pay rise.

Research and development increased 5% primarily due to engineering personnel costs [Garmin]

2023 will be static in terms of overall revenue

Revenue $5.00Bn [Garmin]

2022 had positive cashflow

Fourth quarter of 2022, we generated approximately $309 million of free cash flow [Garmin]

In 2023 Garmin intend to maintain the dividend payment and to further increase shareholder value by completing the remaining half of its share buyback program

approximately $93 million remaining as of December 31, 2022 in the share repurchase program which is authorized through December 29, 2023. [Garmin]

Take out

Here is what I said last quarter and I don’t expect the outlook to materially change.

Strategic Opportunity: I think Garmin may soon realise that they have entered several procuct-related cul de sacs, albeit large and profitable ones. The only major new strategic opportunities I see for Garmin are geographical and those linked to AMOLED. I’m not so sure that Solar and Satellite-based personal safety capabilities will become that important for Garmin in the longer term.

I’ll double down on that and go one step further.

AMOLED is a major opportunity for Garmin however it’s only nice to have. There will simply be many people out there who cannot afford this or who might delay an upgrade for a year or two more than they otherwise might. Furthermore, in contracting markets, the supply of new, unsullied customers looking for their first watch or bike computer is also getting tighter.

Thus AMOLED sales WILL come for Garmin… just not as many as it would like.

On the one hand, you need to consider Garmin’s competition and keep in mind that Garmin is in a stronger financial position than many of its competitors, with $1.3 billion in cash equivalents on hand. This is a significant advantage for Garmin. However, it’s worth noting that its cash flow position is also deteriorating, and the positive cash flow generated by the business for the full year decreased by around 20% compared to the previous year. While this may not sound ideal, it’s important to recognize that when compared to some of its competitors, Garmin is still generating cash rather than burning it.

It’s also worth revisiting the geopolitical outlook. Many US tech companies have already begun to bring their operations back to North America. Garmin has historical ties to Taiwan, where there will soon be elections and where the pro-independence party currently polls well. There is a significant risk of disruptive Chinese action against that country in the next 5 years, the risk includes war.

I do NOT have a position in Garmin or related companies and I’d rather not have one right now!

Source: Garmin,