Shares of Garmin (NASDAQ:GRMN) fell in early trading on Wednesday despite an earnings report that appeared to exceed analysts' expectations. In the third quarter, Garmin earned an adjusted $0.76 per share on revenue of $706.3 million; Wall Street had been looking for earnings of $0.72 per share on revenue of $679.7 million.

Although Garmin's core GPS business remains in decline, sales of its fitness products continue to grow at a rapid rate.

GPS falls another 5%
Revenue for Garmin's Automotive/Mobile division fell 5% on an annual basis as sales of its in-car and personal GPS units continue to dwindle. Garmin cited weak demand for its personal navigators in particular.

Garmin bears have long argued that its core GPS business is doomed, as the proliferation of GPS-equipped smartphones and tablets eats away at the demand for dedicated GPS devices. In the past, Garmin's management has admitted that it doesn't expect much from its GPS business long-term, and is instead managing it for profitability while investing in other parts of the business.

With the 5% sales decline, Garmin's Automotive/Mobile division remains its largest and most important, yet continues to shrink proportionately. Last year, it generated roughly half of Garmin's sales; this quarter, it was down to about 43%.

Fitness remains on fire
Not all parts of Garmin's business are in decline, however. Indeed, Garmin's total net sales rose 10% on an annual basis even as its largest division lost sales. All of Garmin's other units, including Outdoor, Aviation, and Marine saw rising sales, more than offsetting the decline.

But Garmin's Fitness unit saw the most growth -- sales rose an impressive 43% on an annual basis. Fitness is now Garmin's third largest business segment, and is on track to become the second largest within the next quarter or two.

Garmin saw increased demand for its many wearable fitness bands and watches; in particular, it cited interest in its vivosmart activity tracker and upcoming Forerunner 920XT fitness watch. Although competition in the emerging wearables market appears intense, Garmin has been able to succeed: its gross margins increased to 64%.

Other segments and guidance
Garmin's Outdoor unit, which is its second largest, saw sales growth of 19%. Garmin cited demand for its new outdoor products, including the Fenix 2 and the Approach S6. Aviation sales also grew 19% -- several new plane models are now available with Garmin's navigation units. Marine, Garmin's smallest segment, saw the least growth, with sales up just 12%.

Notably, Garmin's management is optimistic that the company's strong results can continue: It now expects to generate revenue of approximately $2.85 billion for the year, the high end of its previous forecast range. In terms of earnings, it expects to post a figure of $3.10 per share -- better than the Wall Street consensus estimates.

Overall, this quarter appeared to be solid for Garmin, though it may not have been good enough. Garmin is currently trading with a price-to-earnings ratio of more than 16 -- perhaps an aggressive valuation for a company whose core business appears to be in inevitable and inexorable decline. If Garmin's other units, particularly its Fitness business, can continue their recent growth, they could eventually offset a weak GPS unit. However, that day may not come soon enough -- even with the 5% decline, Garmin's Automotive/Mobile division remains larger than its Outdoor, Fitness, and Marine units combined.