Garmin's (NASDAQ:GRMN) recent impressive stock price performance has been driven by its success at diversifying away from car dashboard GPS devices, which were almost completely displaced by smartphones. However, another of its core product niches, wearable fitness, has turned negative this past year as consumers again shift their spending toward more powerful devices -- this time, smartwatches.

On Wednesday, Feb. 21, Garmin posts fourth-quarter results that will show whether its latest product lineup helped it to navigate that risky sales environment without sacrificing revenue growth or profitability.

Let's take a look at what investors can expect from this important announcement.

Steady growth

Healthy growth in its fitness device category helped Garmin achieve decent sales gains in 2016 despite a 17% slump in its automotive device segment. The company can't count on that same help for 2017, though, as fitness sales are down 11% through the first three quarters of the year. In early November, in fact, CEO Cliff Pemble and his team lowered their outlook for the division to a 7% slump while citing the "rapidly declining market for basic activity trackers."

A jogger interacts with her smartwatch.

Image source: Getty Images.

The good news is Garmin's other products are still enjoying solid demand. Its outdoor category, made up of popular, full-featured smartwatches, soared 31% in the third quarter and is expected to grow by 27% for the full year -- up from the prior expansion target of 25%. That gain, plus continued double-digit growth in the aviation and marine segments, should completely offset declines in fitness and automotive devices to allow sales to reach about $3.07 billion in 2017. That would mark a 2% improvement over the prior year.

Rising profitability

Investors won't celebrate that sales growth if it came at the expense of profitability, though. That's why it's worth keeping a close eye on gross profit margin this week. The metric ticked up to 58% of sales last quarter from 56%, and that success was evidence of a pricing power that is hard to come by in this industry. Rival Fitbit (NYSE:FIT), for example, saw its margin dive by 3 percentage points to 45% of sales in the same period.

It's possible that holiday shoppers rejected Garmin's new product releases, which would result in price cuts by retailers and a reduction in its profit margin. Management isn't forecasting that result, though. Instead, gross margin is projected to rise to 57.5% of sales for the full year to nearly set a record high for the GPS device specialist.

GRMN Gross Profit Margin (TTM) Chart

GRMN Gross Profit Margin (TTM) data by YCharts.

Looking ahead

If it hits its latest full-year guidance, Garmin's $3.07 billion of revenue will surpass the $3.02 billion that management initially targeted a year ago. Its profit metrics should come in ahead of that early forecast, too, with gross margin of 57.5% beating the 56% target and earnings per share of $2.90 trouncing the $2.65 executives had predicted.

That impressive result would likely give Pemble and his team room to issue an aggressive profit growth outlook for 2018. After all, its product sales are shifting toward high-margin devices like smartwatches even as the shrinking automotive segment becomes a smaller and smaller drag on overall results. That's a formula for sustainable earnings gains, as long as Garmin can keep innovating across its diverse lineup of GPS devices.

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