Garmin (GRMN)

Garmin is trying to gain market share for GPS on cell phones by launching its Nuvifone phone. However, Garmin has no history in cell phone GPS and goes up against huge competitors like Nokia. If the Nuvifone, expected to be released in 2009, is unable to gain market share and cell phone GPS becomes more adopted, Garmin's personal navigation devices could start to be cannibalized.

As the market for handheld GPS devices expands, expect significant gross and operating margin compression for Garmin’s Auto/PND segment. Asian OEMs such as Mitac and others have much lower gross and operating margin hurdles, given their historical focus on mass market consumer products. In order to remain competitive in the Consumer market, expect Garmin’s Auto/PND margins to compress significantly over the next several years. (Credit Suisse 12/18/06)

In the past 5 years, GRMN's stock price 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. What is 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)

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

With Circuit City going bankrupt and already closing 155 stores in 2008, Garmin is losing important distribution of its products.