Fitbit Inc (NYSE:FIT) started the month of May by repairing its brand reputation. On Apr. 26, a woman claimed the Flex 2 exploded on her arm. Fitbit responded by saying that its investigation concluded that the tracker did not malfunction. External forces caused the damage and malfunction.
With the negative news out of the way, investors may value the company based on its latest strong, first-quarter results.
FIT Stock First-Quarter Results
Fitbit stock reported revenue of $299 million but lost 15 cents a share non-GAAP and negative 27 cents per share GAAP. On a GAAP basis, gross margin fell from 46.3% to 39.6%.
CEO James Park described 2017 as a transition year for two reasons. First, it is executing on a restructuring plan. Second, it is positioning the company to pivot from wearables and towards connected health.
The company sold three million devices and launched Fitbit Alta HR. This device is the first phase for focusing on monitoring heath vitals. It continuously tracks the heart rate and has a seven-day battery life.
FIT also launched Sleep Stages, which analyses sleep, gives insight to the subject and advises on ways to improve sleep. The company also strengthened its community section, by making it easier for users to connect with similarly minded individuals, friends and family.
Investors should not brush off the potential of tracking sleep for driving sales. Excessive internet use on the computers and other devices deprives people of sleep. Poor eating habits exasperate the problem. By collecting and reporting sleep patterns, Fitbit gives its users the data needed to help tackle insomnia.
Second Quarter Guidance for Fitbit Stock
Fitbit forecast revenue improving sequentially in the range of $330 million to $350 million. For the full year, it expects revenue as high as $1.7 billion. But FIT still expects losing between 22 cents and 44 cents per share (non-GAAP). The loss for the year is worrisome for investors seeking growth. Management is still confident prospects will improve.
The company enters the back half of this year with minimal inventory, though it is still working that down in North America currently. Assuming channels clear, FIT stock will be better positioned to grow globally.
Fitbit has a broad global distribution of over 55,000 retailers. Despite the competition it faces, it is still the leader in wearables. The more recent store openings were in international locations. In addition to expanding its market reach, Fitbit still has resources to invest on innovation, despite cutting headcount by 120 staff and having 1,631 employees. The $726 million in cash and short-term investments should give FIT the option of increasing R&D or marketing spend.
Risks
Fitbit’s turnaround strategy depends on management’s ability to rein in costs. Sales from the product are slowing so the company must adjust for the new equilibrium. If the margin profile does not improve, the company must reduce its exposure to the markets that are not growing fast enough. Once Fitbit works down channel inventories in North American markets, it may redirect its attention to the EMEA markets.
Fitbit’s turnaround is not assured, but if management executes on clearing its inventory, it may more aggressively push out its newer, higher-priced, more profitable products. This will take more than several quarters, though, so any rebound in the stock will not happen until 2018 at the earliest.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.
