Investors weren't optimistic heading into the fourth-quarter earnings report from Garmin (GRMN +2.21%). While the tech product specialist was set to announce another year of strong sales growth, Wall Street worried about rising costs and a potential slowdown ahead after two years of booming demand in niches like smartwatches and marine navigation platforms.
Garmin's actual results eased a few of those concerns. While revenue gains are indeed set to slow down in 2022, the company is targeting a seventh consecutive year of growth as profitability begins to recover from supply chain pinches.
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Sales are up
Garmin's sales trends landed right where management had predicted for the holiday period. Revenue rose 3% to $1.4 billion, translating into a 19% revenue spike for the full year 2021. Standout product segments included its marine and aviation units, and its car navigation division returned to growth after several years of declines. On the downside, Garmin didn't grow its smartwatch and fitness tracker business compared to the previous year.
Management was happy with the wider results, even though Q4 was pressured by supply chain shortages. CEO Cliff Pemble said in a press release, "Demand for our products led to strong double-digit annual growth in each of our five segments."
Margins are down
The news wasn't as good on the financial front. Garmin saw rising costs associated with manufacturing inputs, supply chain bottlenecks, and labor. Overall gross profit margin slumped to 55.5% of sales from 58.5% a year ago. Operating income landed at 24.5% for the year, down nearly a full percentage point from 2020. As a result, earnings rose just 9% to trail the 19% boost in revenue.
GRMN Operating Margin (TTM) data by YCharts
Among the profitability challenges management outlined was a shortage of key components for handheld and dog GPS trackers. Rising prices across the portfolio weren't quite enough to offset these cost increases, but the company is planning for margins to begin climbing again in 2022.
The new outlook
Speaking of the outlook, Garmin's first official 2022 forecast was encouraging. The company is targeting around $5.5 billion of revenue, equating to a 10% on top of this past year's 19% spike. Heading into the report, most investors were looking for more modest growth as revenue landed at $5.3 billion.
Garmin's earnings outlook implies that while supply chain issues will continue hurting profits in early 2022, its pressure will ease throughout the year. Gross profit margin should fall for a second straight year, but only by about 0.5 percentage points compared to last year's drop of 1.3 percentage points. Operating margin will shrink a bit faster, down to about 23% of sales compared to 24.5% in 2021 and 25.2% in 2020.
Investors are eager to see that bottom-line profitability number begin climbing back toward 25% of sales with help from innovative product releases and Garmin's new manufacturing plants. However, it appears that this rebound won't show up until later in 2022.
That's no reason to stay away from this successful growth stock, which is expanding market share across key tech niches and generating solid earnings along the way. It should only be a matter of time before those successes translate into market-beating returns for investors.
