Garmin (NASDAQ:GRMN) investors had some good reasons to expect to see improving third-quarter operating results from the GPS device giant. Its last report showed surprisingly strong demand through some of the worst weeks of the COVID-19 crisis, after all. Garmin's deep portfolio, which spans several categories of consumer and professional products, helps protect it from slumps in any one category. And the business has proven to be highly profitable even through demand disruptions.
Those assets all shined through in the most recent quarter as sales roared back into positive territory despite struggles in categories like aviation and automotive navigation.
Let's take a closer look.
Garmin put plenty of distance between itself and the 9% sales decline it posted in the fiscal second quarter. Each of its five core product divisions saw sharp rebounds, leading to a 19% overall increase.
The fitness unit was a big standout, with sales jumping 35%. Management cited strong demand for premium wearables and cycling products as that segment grew to $328 million from $243 million a year ago.
The outdoor and marine divisions also enjoyed significant volume spikes, thanks to a steady pace of well-received launches. "Demand for active lifestyle products fueled strong revenue growth," CEO Cliff Pemble said in a press release, "resulting in record revenue and profits."
Navigating to higher profits
Garmin's aviation segment shrank again and remained under intense pressure from COVID-19-related demand challenges. It is one of Garmin's most profitable divisions, and so declines in the unit threaten the tech specialist's broader profitability.
However, the company more than offset that slump with improving margins elsewhere. The fitness segment, for example, notched 75% higher operating income. The outdoor division, home to premium hiking watches, saw profits expand 40%.
Overall, gross profit margin barely dropped, falling to 60.2% of sales from 60.7% a year ago. Operating margin rose by 0.6 percentage points to 28.6% of sales. That translated into a 24% increase in adjusted earnings.
Garmin is doubling down on the competitive assets that have helped it build enduring market share gains over the last few years. Research and development costs rose 18% this quarter compared to just a 4% increase in advertising.
That innovation-fueled growth is looking brighter, too. Management sees sales landing at $4 billion, equating to significant gains over 2019's banner result. Notably, that forecast lines up exactly with Garmin's initial outlook, which came before COVID-19 disrupted global commerce.
Pemble and his team still see operating margin declining slightly in 2020 to mark the first decrease in several years. But the drop will be more modest than executives had forecast in late February, with profitability landing at about 24% compared to 25% last year.
Two of its segments (aviation and auto) are on pace to post double-digit sales declines this year. But Garmin's strong overall product portfolio is allowing the wider business to grow as it soaks up market share in areas as diverse as fitness trackers and boating GPS platforms.
Those wins just extend an impressive track record for this business that spans more normal operating environments like 2019 along with this year's volatile, but likely positive sales outing.