Fitbit Inc (NYSE:FIT) reported lower-than-expected earnings for the quarter, and warned that manufacturing issues would leave it short of devices during the crucial holiday sales quarter. The bad news drove Fitbit stock down 30% on Thursday.
The wearables market hasn’t quite panned out as some had expected, with smartwatch sales tanking. Apple Inc. (NASDAQ:AAPL) — the smartwatch leader — saw its sales fall nearly 57% in the latest quarter.
Fitness trackers have continued to be the bright spot, however, and Fitbit is on top of that segment.
Fitbit Earnings
So Wednesday’s earnings report by the company caught many people off guard. Fitbit reported quarterly revenue of $504 million, missing analyst expectations of $507 million. In a statement on the filing, CEO James Park said: “We continue to grow and are profitable, however not at the pace previously expected.”
Despite launching two new wearables in the third quarter (the Charge 2 and Flex 2), as well as launching new luxury brand and retail partnerships, Fitbit sales were up just 11% in the quarter.
Holidays Blues
Unfortunately for Fitbit, the holiday quarter looks to be even more challenging.
There is a long list of issues that are combining to wallop its expected revenues during what is traditionally a strong quarter. The new Flex 2 is proving difficult to manufacture and sourcing batteries needed to power it has been difficult. As a result, the company says it wracked up several million dollars in scrapped metal, it’s not going to have the expected margins and it won’t be able to ramp up the volume needed to meet demand during the holidays.
The company has also continued to face legal battles with rival Jawbone, and all those lawyers don’t come cheaply. In its earning report, Fitbit notes that the Jawbone litigation costs “may continue to be material for the remainder of 2016.”
As a result, Fitbit is projecting revenue growth for Q4 in the 2% to 5% range. When you consider that it saw growth of 92% in Q4 2015, you can understand why Fitbit stock has taken such a beating.
Making the situation worse, going into the holiday quarter, Fitbit will face off with Apple again. Although its smartwatch sales have taken a dive, the company recently released the new Apple Watch Series 2, dropped the price on the original Apple Watch and released new software that puts even more emphasis on its smartwatch as a fitness tracker.
Apple has also just released the Apple Watch Nike+ a version of its smartwatch developed in partnership with Nike Inc (NYSE:NKE) that’s aimed squarely at the fitness market.
“CEO Park kicked off the earnings report on a positive note, writing: ““I am pleased to see positive reception for our new products launched in the third quarter. We are attracting new customers while our existing ones are upgrading their devices, underscoring the strength of the Fitbit brand and growing relevancy of wearables as part of consumers’ everyday lives.”
All that may be true, but if Fitbit can’t get those products into its customers’ hands, there’s a chance that they’ll move on to a competitor like Apple, Garmin Ltd. (NASDAQ:GRMN) or Xiaomi.
The holiday quarter offers huge sales potential, but if you have a product shortage in a popular product category, gift buyers are just as likely to buy the competitor’s gear rather than wait.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
