Garmin (NASDAQ:GRMN) reported its third-quarter results on the same day this past week as its wearables peer Fitbit (NYSE:FIT). And while investors were ecstatic that Fitbit had edged back into profitability, they had a more measured response to Garmin's steady success at boosting sales and improving its earnings power.
CEO Cliff Pemble and his team discussed those important wins in a conference call with analysts following the earnings announcement. Below are a few key highlights from that chat.
We achieved 8% consolidated growth led by double-digit growth in four of our five segments. This growth was partially offset by decline in our auto segment as a result of continued decline in the [broader industry].
Garmin has a much wider portfolio of devices than Fitbit, even though much of its growth is coming from wearables aimed at hikers and fitness fans. The company found success in both of those categories, with its outdoor segment rising 13% and its fitness tracker division expanding by 14% -- compared to Fitbit's flat result for the quarter. Garmin tacked on growth in its aviation and marine-based GPS devices to push overall sales up 8%, or roughly double the prior quarter's pace.
Profitability strengthened in most of its selling categories, including the fitness division that's driven by smartwatch devices like the latest vivosmart series. That product was outsold by Fitbit's hit Versa device, but Garmin maintained its impressive profitability lead. Gross margins were 54% in the fitness segment and improved to 59% of sales overall. Fitbit's comparable figure slipped to 40% of sales from 45% a year ago.
[Aviation] revenue increased 17%, driven by broad-based growth within this segment. Gross and operating margins increased to 76% and 35%, respectively, resulting in operating income growth of 49% over the prior year.
Garmin's airplane device segment grew to 16% of the wider business last year, up from 14% two years earlier. Yet because of its outsize profit margins, the division accounts for almost one-quarter of total earnings.
Those positive sales and profit trends held up this quarter, and management is hoping to extend the momentum with recent acquisitions and a brand-new manufacturing plant that doubles its production capacity.
Looking forward to the holidays
In light of the strong third-quarter results, we are making some adjustments to our guidance.
Garmin affirmed its full-year sales outlook that calls for growth to speed up to a 6% pace from 3% last year. At the same time, the company raised its profitability target for the second straight quarter while also lowering its forecast for tax liabilities. As a result, management now sees profits improving to $3.45 per share compared to the $3.30 per share they had predicted three months ago.
The forecast implies a flat holiday season quarter when it comes to sales growth. However, the bigger picture describes a business that's profiting from real competitive advantages in engineering and marketing across a wide range of consumer electronics.
Assuming it achieves its latest operating prediction, Garmin will notch its third straight year of rising sales and expanding gross and operating profit margins. That's an impressive feat, considering the disruption it has seen in the auto segment and the rapid demand shifts away from fitness trackers in that time.