Where is Garmin Leading Us?

Having my GPS device stolen caused me to look a little deeper into the Garmin (GRMN) business model. Looking at the Garmin inventory days of supply metric, it is directing me to slower sales growth going forward.

In the past 5 years, GRMN's stock price (Exhibit 1) has provided a nice return for long-term investors from the late 2003 period. More recently, GRMN's stock price has been on a decline being driven by significant competitive issues, difficulty maintain prices, and erosion of gross margins (reference Exhibit 2).

Exhibit 1

Exhibit 2

What I find interesting in my analysis is the relationship between sales growth vs. prior year and the inventory on hand to support future anticipated sales growth. As you look at these metrics on the chart (Exhibit 3), you will see the following:

• Solid growth story with strong quarterly sales growth vs. prior year amounts, with the last reported quarter as the highest growth of 99.1% vs. py (blue line)
• Reduction in Inventory on Hand (aka Days of Supply) to the lowest levels in GRMN's history to 66.3 days (red line)

Exhibit 3

These metrics with what the company has publicly stated in the annual report of...

We operate with a customer-oriented approach and seek to maintain sufficient inventory to meet customer demand. Because we desire to respond quickly to our customers and minimize order fulfillment time, our inventory levels are generally substantial enough to meet most demand

...supports my conclusion that this navigation device company will lead us to slower sales growth in the future quarters.

Disclosure: Author does not own any shares of Garmin (GRMN)

Comments

[Pilot_151:]

All of you analyst always miss the big picture on this company. You focus on one element and that is personal GPS for autos. This company is the market leader in General Avonics and Marine GPS which are large cash generaters for this company. Stop focusing on 1 small part and start looking at the big picture

2008 Apr 15 07:22 AM

[M M:]

That's a pretty weak conclusion from this data you provided.
Wouldn't a lower Inventory / DOS signify greater demand, since the product is sitting on the shelves less time- obviously people are grabbing them all up? Isn't that why they're expanding their headquarters, to increase production and warehousing to keep up with the great demand? Don't you think buying the distributors in Europe may be helping, also?

Does that mean you would draw the conclusion that Tom Tom demand is rising, since their extra inventory is sitting there?

Again with the lame cliche, pun filled headlines...not clever. It seems the worse the headline, the more awful the article is.

2008 Apr 15 07:32 AM

[iai:]

Declining inventory is positive in my opinion. It show management knows what they are doing. Based on the graphs alone it looks like there will be higher sales growth and lower inventory. Until GPS becomes like the radio, I feel there's a long way to go.

2008 Apr 15 08:26 AM

[M M:]

They can also be allowing the current inventory to gradually decrease in order to better manage new products coming in. They don't want a lot of old product that they'd have to get rid of at a discount filling up their warehouse.

You should have learned a lesson from your Alpha buddy, Roger Nusbaum, after he wrote his misinformed article bashing Garmin.

2008 Apr 15 08:45 AM

[aitraders:]

Something appears to not correlate. Judging from the supply chart, they were reducing inventory levels from March to June '07, and sales increased in the following quarters to record levels. In addition, they corrected inventories astutely in '05 and '06, trending down for lower growth quarters and stocking up for growth, which is a positive sign of efficient inventory management. However, looking at '07, it appears that not even they know how strong growth is giong to be, evidenced by earnings surprises over last several quarters. Therefore, although the supply line may indicate they expect slower growth in conservate inventory management, the charts also indicate demand exceeding expectations. Conservative and efficient inventory management with increasing demand is one of the structural reasons this company will succeed.

2008 Apr 15 10:46 AM

[electron boy:]

Garmin will shine as a gas saving device for autos as we enter the new energy conservation revolution. Screeming buy with a P/E less than 12! Tom Tom had execution problems.

2008 Apr 15 11:29 AM

[swanlars:]

What I see in the chart is increasing sales reducing inventory. The blow out Q4 results are reflective of the idea that the company has a limited ability to increase production capacity and continues to produce improved product lines. Where is the analysis of new model turnover. The really interesting "proof" is the quote from the annual report. My take on that quote means that shareholders should not worry about the company missing out on sales opportunities due to production capacity. Of course he could be right but there seem to be many warrants missing in his line of argument.

2008 Apr 15 02:13 PM

[bullswin5:]

The missing info in this article is whether the reduction in inventory is being achieved by improving the efficiency of Garmin's operations, such that the time to build and ship a unit is less, resulting in less need for inventory. All else being equal, reducing inventory is a positive.

Declining gross margin percentage is not good, but what matters most is how Garmin's gross margin percentage compares to their competitors. There is no doubt that prices have been coming down on portable, automotive market PNDs, serving to drive margins down. But as long as Garmin's costs relative to competitors are low, their competitors will have little ability to wage price war. So before I get too concerned about Garmin's margins, I want to know what the competitors' margins are. And in general terms, Garmin's margins don't look too bad for a consumer product. I would also expect some degree of positive impact on margins (over time) from the ongoing sale of map updates, which is high-margin.

2008 Apr 15 03:06 PM

[get shorty:]

I don't see how you get to that conclusion. I see inventory reduction as a sign they are selling more product and the statement that they keep a sufficient inventory to meet demand a sign that their products are selling and they do not have excess inventory-like the old Dell model. My conclusion is that sales are increasing in a competive environment where margins are decreasing. With market share gains due to a superior product. The stock is currently being manipulated by shorts who would like to compare Garmin to Crocs, which is like comparing apples to oranges.

2008 Apr 15 03:46 PM

[andallen:]

I'm a stock owner, so I'm biased. But, I just can't see how this stock has fallen so quickly while still being reviewed by most major firms so well. Moreover, people like using Garmin products. The car makers continue to demand $1800+ for nav systems, and there are less people buying cars these days. But, people are still going to drive (particularly with flights so expensive), and nav is a very helpful product that people will want. I don't think the average nav purchaser is going to pull back from a $200 system, I think they are going to pull back on big ticket items. And for those of you who think the cell phones are going to steal huge market share, stick your phone on your dash, start driving and tell me what your cell phone screen says. Like TV's, a bigger screen is better.

2008 Apr 15 04:45 PM

[successfult...:]

I will be doing a fairly comprehensive post on Garmin at Successfultradingtips.... later today for a few clients. It will address questions on competitors margins and more

John Bougearel
successfultradingtips....

2008 Apr 16 11:58 AM

[Damyata:]

Incredibly bad analysis. The terribleness of this analysis cannot be overemphasized. All you've shown is that sales growth causes a decline in DOS. Duh. Also, has units in inventory declined? As prices for units decrease, inventory carrying value declines even if inventory supplies are sufficient to support rapid growth. By the same token, a decrease in the number of different models would also lead to declines in inventory and yet sales growth would be unaffected.

2008 Apr 16 04:38 PM

[User 179695:]

What a moron...Garmin is the one to beat. They are leaders in the industry and the technology changes every five minutes. Low inventories means new models being introduced weekly. They are being conservative. It means they won't have to sell boatloads of outdated product at big discounts. Smart...
Buy!

2008 Apr 17 01:11 PM

[Mr. K.:]

What stupid analysis! In most consumer goods and manufacturing companies, these sort of metrics where Growth is increasing QOQ and turns are up, this is absolutely great news.
Look at the declining industries where turns are 1 or 2 per year. This number is telling us 6 turns per year which is closer to a well run company. When it used to be 2, that indicated slow moving inventory. They appear to be on the right track IMO.

Go short someone else's stock and leave the hard working people at GRMN to do their job.

2008 Apr 18 03:56 AM

[cautious:]

Haters and Shorties getting sqweezed, boo yeah! Irrational negativity on it's way out - GRMN shares coming back from the dead. Bet against this great growth company at your own peril.

2008 Apr 18 11:50 AM

[ROOSEVELT:]

I FIND THIS ARTICLE VERY INFORMATIVE AND THOSE CHARTS SUPERB.
JOB WELL DONE, THANKS.

2008 Apr 21 12:07 PM

[mmeister:]

There's an obvious correlation between product and inventory and an art to manageing both. Based on Garmin's long term record, I'd say they know what they're doing............. far better than any of us.

2008 Apr 21 12:38 PM

[krug:]

So declining inventory is bad for Garmin and rising inventory levels are bad for Crocs. Does any of this make any sense? Oh to have an analyst's mind! I must also comment that the quote from the annual report was pretty selective. On the Q4 call management commented that inventory levels would probably build in Q1 so as to have sufficient product to meet the high demand in subsequent quarters.

2008 Apr 29 06:28 PM

[mcadoo3312:]

I had to read this guy's conclusion three times to see if I was missing anything. I didn't miss anything, but he did; he missed support to merit his point thus giving his readers no reason to believe a word he said. Maybe he should spend more time doing research and less time writing a terrible article that, unfortunately, will cause some people to short, put, or sell shares.

2008 May 19 05:17 PM

[GhostByte:]

All those "analysts" work about the same way . They divide all their stuff in several bunches . Each bunch of shares is attributed a rate without any logic . At the end of everydays game they always will please some of their customers for the shares where by chance they were right . Sorry for my english, but I am a foreigner who is really laughing with your american "gourous" . They would not make it further than five minutes in a school fancy fair .

2008 May 22 04:23 AM

[na:]

Elias, so far you've been 'wrong' and have 'missed the bigger picture', for about a 20% profit in two months.

Well done my friend.

This thing was and still is just plain wrong.

What is the reason for owning this thing? Tell me there's nothing easier to go long with in this environment that you need to keep bucking the tape, folks.

2008 Jun 18 11:50 PM