Garmin may be signaling fitness wearable price war ahead

Garmin says its second quarter earnings and revenue will fall short of expectations. Aside from the usual culprits such as currency fluctuations, aggressive wearable pricing is to blame.
Written by Larry Dignan, Contributor

Garmin said its second quarter results would fall below expectations in part due to pricing pressure in the wearable market.

The company said its second quarter sales will be between $770 million and $775 million with gross margins of about 54 percent. Earnings will be about 70 cents a share to 72 cents a share in the second quarter.

Wall Street was looking for earnings of 91 cents a share on revenue of $773 million.

Like most technology companies, Garmin cited currency fluctuations for part of the miss. However, Garmin also indicated that there is a slugfest in the fitness wearable market.

Garmin said revenue growth in the fitness business will be about 5 percent in the second quarter. Garmin said the comparison to a year ago was tough and there was promotional pricing to battle.

Cliff Pemble, CEO of Garmin, said in a statement:

The current competitive environment in the fitness market necessitates more aggressive pricing with higher advertising expenses.

For 2015, Garmin said revenue will be about $2.9 billion . That projection is in line with the company's previous outlook. Garmin said new products should help the fitness business in the second half. Garmin still expects fitness growth to be about 25 percent for the year.

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As for expenses, Garmin said that its operating margins for 2015 will be 20 percent to 21 percent, down from the 23 percent projected. Non-GAAP earnings will be $2.65, down from the $3.10 previously projected.

Analysts were surprised by the shortfall. Wells Fargo analyst Andrew Spinola said:

We did not see this coming. It is positive that the company still expects Fitness to grow 25% for the year, but for the segment to grow just 5% with a difficult compare gives us pause. It is also clear that while Fitness can grow, it will not do so with traditional Garmin margins.

The takeaway here is to watch how Fitbit's first few quarters go as a public company. The fitness band pricing war may be just warming up.


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