Garmin (GRMN 1.07%) is still capitalizing on strong demand trends for tech products. That's the main takeaway from the GPS device giant's latest earnings report, which paired steady sales growth with declining profitability.
That earnings pinch was the result of rising costs, and executives expect inflation to continue hurting the bottom line through most of 2022. And a few parts of its portfolio, especially fitness-tracking wearables, are seeing much weaker demand compared to earlier phases of the pandemic. Yet Garmin is still projecting another year of solid overall growth.
Image source: Getty Images.
Mixed sales results
Garmin's sales growth slowed a lot in recent months compared to 2021, when revenue jumped 19% on strength across each of its core selling categories. Yet demand was still strong in a few of those niches, including the outdoor segment that's home to smartwatch brands like fēnix and Instinct.
And Garmin's marine division expanded at a solid clip, too. Yet there was a big demand pullback for fitness trackers, in part because people aren't as interested in cycling watches as they were a year ago.
Averaging in those hits and misses, sales rose 9% across the portfolio, meeting management's targets despite supply chain issues and swinging demand trends. "We delivered another quarter of growth and record revenue in an increasingly complex and challenging business environment," CEO Cliff Pemble said in a press release.
Falling margins
The news wasn't as good around earnings. Garmin endured collapsing margins in its fitness division and declining operating margin in the aviation and marine categories, too. Overall, gross profitability dropped to 56.5% of sales from 60% a year ago, despite rising selling prices for its products.
GRMN gross profit margin. Data by YCharts.
Operating income fell to 19.5% of sales from 23.3%, in part because the company spent more on research & development (R&D), advertising, and selling expenses. These pressures translated into a 6% decline in adjusted earnings even as overall revenue rose 9%. "High freight cost and component supply challenges persist," Pemble said.
Steady growth ahead
The broader growth picture is still positive. Garmin affirmed its 2022 outlook that calls for revenue to climb by about 10% to reach $5.5 billion. That annual mark stood at $3.8 billion in 2019 before the pandemic struck.
Operating margin this year will be below the 25% that Garmin achieved back in 2019 and 2020. Profitability should land at about 23% of sales this year, in fact. Management could likely boost short-term earnings by spending less in areas like R&D or advertising. But these initiatives are laying the groundwork for more sales growth in 2023 and beyond.
That's why investors shouldn't read much into Garmin's weakening earnings picture. The company is tapping into strong demand across its diverse portfolio. And margins should recover as supply chain challenges recede over the next several quarters.
