What happened

Shareholders of Garmin (GRMN -0.59%) are losing ground to a rising market this week, with the stock dropping 12% through late trading on Thursday afternoon. The navigation device specialist reported strong third-quarter earnings on Wednesday, but Wall Street was hoping for a more bullish outlook for the holiday season.

A woman jogging while wearing a fitness tracker.

Image source: Getty Images.

So what

Sales rose 7% in the selling period that ended in late September, representing a slowdown from the prior quarter's soaring results. But Garmin is still setting sales records and seeing strong demand across its portfolio. Sales are up over 20% in four of its five major divisions so far in 2021, with the marine segment leading the way.

"Strong demand for active lifestyle products continued," CEO Cliff Pemble said in a press release, "and our marine and aviation segments recorded impressive double-digit growth."

Now what

Garmin's earnings were pressured by supply chain issues and rising costs. Gross profit margin slipped, and operating income fell to 24% of sales from 29% a year ago.

Those trends imply weaker earnings ahead in the core holiday season. And management is predicting another sales slowdown ahead in the fourth quarter, compared to booming results a year ago.

But the broader outlook is brighter than ever. Garmin lifted its total 2021 sales target to just below $5 billion, which equates to a third consecutive year of double-digit revenue gains. Operating margin will decline, but not by as much as management initially feared.

As a result, shareholders should be bullish about Garmin's ability to capitalize on the growing active lifestyle niches. That's true even if short-term growth is pressured by supply chain issues and rising costs.