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Fitbit Inc. (NYSE:FIT) is a manufacturer of wearable fitness tracking devices. The company recently reported Q2 earnings adjusted loss of 18 cents per share, which was narrower than Zacks Consensus Estimate. Year to date, the stock has underperformed the industry it belongs to. Fitbit’s growth has been slowing down with smartwatches outshining the fitness wearable category, influx of new wearables, lack of upgrades among existing users and lackluster growth in the Asia Pacific region. Management has taken some recovery initiatives that include executive shakeup and cost structuring.

Overview

Founded in 2007 and headquartered in San Francisco, CA, Fitbit specializes in wearable activity tracking devices that record personal data, including the number of steps taken, distance traveled, calories burned, and other wellness related metrics. Fitbit sells its products primarily through retailers and distributors.

There are currently 11 different product models, with some devices worn around the wrist and others clipped on to a piece of clothing. Fitbit devices are priced competitively and offer consumers a variety of options.

Fitbit also offers compatible mobile applications, allowing users to track their information and further interact with their personal data. Additionally, a partnership with American fashion designer Tory Burch has given the company a new line of styled products. It also offers accessories which include bands and clips, charging cables and Fitbit apparel.

Fitbit (NYSE:FIT) faces stiff competition from several fitness-device makers such as Garmin Ltd, Jawbone, Misfit, but its biggest challenger could be Apple Inc’s recently launched Apple Watch, which has a host of health-related features and apps.

Fitbit Brand

Fitbit is a global brand with a first-mover advantage and remains one of the leading providers of wearable fitness trackers. Being one of the first to market these devices, the company has been able to build a knowledge base about users’ fitness habits and demand for health monitoring devices. This, along with a concerted brand building effort, innovative new products and improved distribution has led to an increasingly loyal customer base. The loyalty is important because it leads to repeat purchases and upgrades to newer, higher-ASP and higher-margin products.

Fitbit is also riding a couple of secular growth trends. This includes a trend toward better health and fitness behavior noticed among consumers. Another is an economic trend where consumers are increasingly eager to assume responsibility for their healthcare and are willing to pay directly for products that help them monitor their health. Fitbit is extremely well positioned to commercialize on these trends owing to its brand, pricing, reach and new product pipeline. The company is well poised to diversify as it has a solid user base (50 million), and a strong presence in corporate wellness and assets that make it a force to reckon with in the digital health space.

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International Growth

Fitbit (NYSE:FIT) is seeing strong international growth. From the outset, it has taken a local approach to global expansion with the goal of becoming a household name in all the countries it serves. The company has entered India through Amazon and Reliance distribution systems, and is now trying to partner with local distributors to target mom-and-pop outfits. To tap the growth potential in China, the company has entered into a very close relationship with Alibaba’s Tmall. Earlier, it integrated Baidu Maps to display GPS runs and bike rides in China. It also enabled friend discovery through phone numbers as e-mail and Facebook are not allowed. In 2016, Fitbit obtained 29% of revenues, based on ship-to destinations, from outside of the U.S. Currently the company sells its products in 65 countries.

The market for wearable fitness devices is growing. International Data Corp. expects the market for wearable devices to increase to 240.1 million units by 2021, at a compound annual growth rate (CAGR) of 18.2%. Of these, the largest segment, the watch category is expected to contribute 67% to total wearables shipment by 2021, increasing from its current level of 56.9%. Basic watches will continue to out-ship smart watches as more and more traditional watch makers shift resources to manufacturing hybrid watches.

Slower Growth

After years of maintaining its leading position in the wearables market, Fitbit finally lost its ground to Apple (AAPL) and Xiaomi. According to the latest International Data Corporation (IDC) report Apple and Xiaomi are tied at the top in terms of firstquarter 2017 shipment volumes, with each having shipped 3.6 million units. Fitbit has been pushed back to the third position with 3 million units shipped. Samsung having shipped 1.4 million units and Garmin (GRMN) 1.1 million units hold the fourth and fifth positions, respectively. Fitbit’s (NYSE:FIT) shipment decreased a massive 37.7% on a year-over-year basis while that of Apple surged 64.1%.

In terms of market share, Xiaomi is leading with 14.7% market share followed by Apple with 14.6% share. Fitbit holds 12.3% share of the market while Samsung and Garmin hold 5.5% and 4.6% share, respectively.

Fitbit’s growth has been slowing down with smartwatches outshining the fitness wearable category, influx of new wearables, lack of upgrades among existing users and lackluster growth in the Asia Pacific region. Despite the broad range of devices Fitbit provides at different price points, it has been facing tough competition at both the high- and low-end products. At the high end, there is Apple’s multi-functional Apple Watch, which renders Fitbit devices useless. There are other big manufacturers who are developing connected devices on Alphabet (GOOGL) owned Google’s Android operating system. At the lower end, the company’s biggest competitors are Xiaomi and Garmin.

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Last Earnings Report

Fitbit Q2 Loss Narrower than Estimated, Revenues Top

Fitbit, Inc. reported second-quarter 2017 adjusted loss (excluding all one-time items but including stock-based compensation) of 18 cents per share, which was narrower than the Zacks Consensus Estimate of a loss of 22 cents per share. The top line was also better than our expectation.

Revenues

Fitbit reported revenues of $353.3 million, which were up 18.2% year over year but down 39.8% on a sequential basis. The top line exceeded the guidance of $330 million to $350 million and the consensus mark of $339 million. The year-over-year top line growth was driven by strong demand for connected health and fitness trackers and special edition devices. Fitbit Charge 2 remains the top selling connected health and fitness tracker in the U.S. Continued strength of the company’s Blaze offering also drove the results. Enterprise customers voted Fitbit Blaze as the number one tracker.

Geographically, revenues from the United States accounted for 56% of the second quarter revenues; EMEA brought in 31%, Americas excluding the U.S contributed 7% and the remaining 6% came from Asia Pacific. Second-quarter revenues from the EMEA jumped 12.2%. Asia-Pacific revenues recorded an increase of 11.9%. In the U.S. and the Americas excluding the U.S., revenues decreased 55.3% and 12.7% year over year, respectively.

Margins and Net Income

Gross profit for the second quarter was $150.6 million. Gross margin was 42.6%, up 259 basis points (bps) sequentially and 77 bps year over year. Gross margin was negatively impacted by a change in mix and excess component materials and manufacturing capacity.

Pro-forma net loss was $41.3 million or loss per share of 18 cents compared with loss of $56.2 million or loss per share of 25 cents in the previous quarter. In the year-ago period, the company had recorded income of almost $15 million or earnings of 7 cents a share.

Balance Sheet and Cash Flow

As of Jul 1, 2017, cash and cash equivalents was $318.7 million compared with $374.3 as of Apr 1. Accounts receivables were $216.3 million compared with $194.8 million in the previous quarter. Inventories were $141.5 million compared with $200.3 million in the previous quarter.

Guidance

For the third quarter of 2017, Fitbit expects revenues to remain in the range of $380 million to $400 million. The company expects nonGAAP loss per share to be in the range of 2 cents to 5 cents. It expects non-GAAP tax rate to be approximately 46%.

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