While I'm no proponent of the "wearables" and the fitness tracker category, I've certainly been following it for the last couple of years, and as the category faces maturation over the next couple of years (maturation? Yes, while the category may be in its infancy stage some claim) I would propose that with the massive distribution build out already achieved and the proliferation of brands currently in the category/business segment, the wearables and fitness products are likely closer to market saturation than even adolescence.
A quick tour at the most recent Consumer Electronics Show in Las Vegas is the most glaring validation of the prior comment. As I browsed the event I encountered an entire "hall" of fitness tracker and wearables. It was baffling to think that this many vendors, over 50 in total, would believe they had the ability to stand out and differentiate their product from the like product in the next exhibit over. In a more recent publication I offered the following account from my experience at the CES show:
"It was unfortunate to witness a duplication of what I saw last year. At last year's CES show, there were at least 30 different GoPro (GPRO) like companies showcasing their action cameras. This year there were four. This year, there were 58 fitness tracker and smart watch companies showcasing their Fitbit-like (NYSE:FIT) products. So the question that does really remain is, "How many will there be next year?" And it happens every single year at the CES show; it's called follow the leader, and emphasizes a peak in the application of a product segment. In layman's terms, it's a good indicator of a saturated category."
While Fitbit is not GoPro it does very much fall prey to the same situation GoPro has found itself. Let me rephrase that, kindly. GoPro has expected itself to be in the current position it finds itself, but investors may not have seen much of the share price disintegration coming. While the two companies do produce very different products in application, the products exude the same characteristics in that they are non-essential goods - in other words, nobody needs their products like they need their cell phones, foods, beverages, clothing or shelter. Without a needs-based sellable good, margins for such non-essential goods tend to always devalue themselves upon maturation, which ultimately leads to margin contraction for the maker of the goods. GoPro executives knew this long ago, and it is with this in mind they appreciated the opportunity to IPO, raise cash for future projects and provide a "cash out" for early investors/seed funders. Just how closely do you think Fitbit shares follow the GoPro share performance you might ask as they both sell non-essential goods approaching market saturation points? All anybody has to do is take a look at the after-hours trading action on January 13, 2016.
On this day, GoPro issued a Q4 warning as the company's products failed to garner similar or growing sales from the prior holiday selling season in 2014. While GoPro was the biggest holiday "techy" buzz gift in 2014, it was anything but that in 2015. More importantly, Fitbit shares tumbled along with GoPro shares in lockstep during the after-hours trading session. The share price performance the next day, and for both companies, sought out new, all-time trading price lows.
- Fitbit has dropped to $18.90 after hours after GoPro (down 24.3%) issued a Q4 warning and announced it's cutting 7% of its workforce. The post-IPO low (hit on Monday) is $18.35.
- Fitbit and GoPro, of course, compete in very different markets. However, as leaders in consumer electronics markets that recently saw huge growth and whose long-term health have been questioned by bears, the companies have occasionally been mentioned in the same breath. And their shares have often moved in the same direction.
Fitbit finds itself in much the same situation as GoPro presently and with little more to offer than a singular product application. The company's most recent product announcement, the Blaze smart watch, highlights the company's inability to broaden its product lineup beyond its existing, non-essential fitness trackers. Upon disseminating the Blaze finer points to the marketplace on January 5th, investors who had been hoping to see something different and something more bailed on the stock in the early morning trading hours. The minute-by-minute chart aligns almost perfectly with the timing of the Blaze announcement.
With all this ugliness surrounding the largest sales volume and market share producer of the fitness tracker category, it's a wonder anybody would desire to compete in a seemingly doomed business segment. But that is what hype is all about and where thoughtful analysis must be employed on the part of investors. As I've received a great many emails since initiating public dissemination of the wearables and fitness tracker business segments, certain stocks including Fitbit have born out share price declines. And the same share price decline in Fitbit also has found its way to the likes of Under Armour (NYSE:UA).
On a personal level, I'm a "fitness junkie." At 40 years of age I run 8 miles a week, go to the gym 3 days a week and enjoy an insanity workout twice a week. I do all of this not just because I hope to extend my life well into my 80s, but also because I'm a "junk foodie." Oh yeah, set me up on the couch in front of a Denver Bronco, New York Yankee or Boston Celtics game with a bag of Cheetos, popcorn, peanuts, chips and salsa with 2-liter bottles of SodaStream black cherry cola and I'm a happy man. With that said I've tried most every consumer good in the marketplace that aids in the health and wellness for the average person. Most of the time, I operate these new products as a consultant for many companies aiming to develop products for consumers. I had a Polar fitness monitor back in 2000 when joggers and runners first began using fitness trackers more widely. Most Polar products were worn around the chest with a band during activity. The product didn't work that well and was always malfunctioning in disseminating the data collected during a workout. Flash forward 15 years later and much is still the same for the majority of products on the market today. One might look at total sales for the fitness tracker category and say to themselves that the prior statement is outlandish. You might even have a fitness tracker and readily use the device and suggest that it works just fine. But what most consumers don't realize is that the technology employed within a fitness tracker is comprised of sensors and relays. Just like your automobile and cameras, sensors collect data and or images and relay that information to the display. In order for fitness trackers to be able to collect the data input from the body it has to have ample contact with the body alongside ample sensor sensitivity. And there the issue with most fitness tracker units - they don't maintain sufficient amount of body contact throughout the workout in order to accrue accurate data and disseminate accordingly. Some of the efficacy of the fitness tracker unit is user error, but some portion of the efficacy is related to design flaws and outright mislabeling of product. And don't get me started on the heart rate function. There is a very good reason that not a single fitness tracker on the market today touts the device as being able to disseminate "medical grade" heart rate tracking.
I don't desire to bore investors and readers to tears with additional details related to this subject matter, but Fitbit is not the first wearables and fitness tracker company to be slapped with litigation over the efficacy of its products. During the CES show I asked company officials about the class action lawsuits the company was facing and how they related to the overall use of the products. Unfortunately, the company didn't have a lot to offer beyond "steps" and how the consumer might misinterpret the data displayed. Most every application of a Fitbit product is actually tied to steps, the steps an individual takes and how they are taken. So if using your fitness tracker you might be thinking those miles and calories aren't adding up properly it's in part due to the steps you are taking and how Fitbit calculates those steps within its algorithmic sensors attached to the device which is attached to your wrist. And Fitbit devices have to employ this type of technology because more often than not the device will not maintain constant body contact, not to mention most every user has a differentiated step. What most every fitness tracker product does is give a reasonable measure of activity that engages users to understand a baseline of their activity in order to achieve a healthier standard of living that includes physical activity.
Look, of course these fitness trackers aren't accurate and of course they can't do and perform to the accuracy of their claims. All anybody has to do is purchase three different trackers from three different brands and wear them at the same time for a 24-hour period. Without fail, each device will have a different read on your daily activity. It's not even a close call in most examples as scientists have tested these trackers for years finding the same thing year after year. Additionally, it's kind of funny how we actually believe that a device tethered to our wrist and gathering data from our wrist movement can measure our sleep. Do your research consumers, investors and readers! Wrist movements can't measure sleep and there is nothing inside of most of these "fitness trackers" that can track what does track sleep... brain waves. In the accuracy of these devices lay just one of the long-term problem for the wearables and fitness tracker category. While some may tout that these devices are less relied upon for their measurements, but rather their motivational factor, I would greatly disagree. I think the class action lawsuits and the massive attrition rate of the users also would disagree with this notion. Fitbit has a greater than 40% attrition rate. Once the company saturates its distribution channel and early adopters that also become early dissenters, what is left? We'll discuss distribution later in this article.
What's left is easy to understand. GoPro knows what's left upon saturating a market and/or category. Skullcandy (NASDAQ:SKUL) knows what's left. SodaStream, yep, they have also been down this road. Even something one can argue is an essential part of our lifestyle, Keurig Green Mountain Coffee (NASDAQ:GMCR), also knows what's left. After several years of strong Nutribullet sales, do you wonder why the company is forced to finally engage consumers through commercial advertising and why the firm witnessed a 20% average selling price drop in from 2014-2015? It's called market saturation and an inability to diversify its product line as gross margins contract.
So let's circle back to a comment made earlier in this article that characterizes the reasoning for many getting into the wearables and fitness tracker categories today. Many vendors look at the raw data, the sales and the numbers are seemingly huge with the potential to continue to become even bigger over the next five-year period. Most analysts and data-tracking firms aren't willing to defend their projections for the overall category and its future beyond the relative newness of the category and sales generated to date. This is the most worrisome factor for me as an analyst covering the space - the lack of rationale beyond the historical sales. Very few analysts are giving credence to the attrition rate of the category while more are highlighting the brands and the cache they carry as they participate in the wearables category. And to make matters even worse, some vendors are spending major sums of capital to participate in the space where they might also be putting their shareholders at risk. I believe Under Armour fits that characterization. Having spent over $700,000,000 to participate in the fitness tracker and wearables segment to date, I believe the company has spent a good deal of money in error and under presumed notions of future growth.
In a recent article titled, "Fitbit: The Under Armour Problem," the author of the article makes a bold statement that is proven factually incorrect. The daily minute-by-minute chart of both FIT and UA can prove this incorrect. Let's take a look at what the author had to say about FIT stock performance as it relates to Under Armour's product announcement.
Whether insiders use this as motivation or not, the crushing blow to the stock came from Under Armour at the CES.
The author is articulating that he believes FIT's stock performance on January 5th was due to Under Armour announcing its launch of the HealthBox product. The first problem with this offering is that while UA's announcement came before the opening of trading that day, FIT actually traded higher upon the first half hour of trading. It wasn't until after Fitbit issued its Blaze press release that the stock plunged on January 5, 2016. On this day, the FIT share price started to stabilize around $26, but then came the next wave of selling late in the trading day. Again, the intraday, minute-by-minute chart identifies two significant trading volume spikes that led to significant selling in shares of FIT. None of these trading volume spikes align with the UA HealthBox announcement, which actually took place before the opening bell. Around 3:00pm EST, shares of FIT took a second leg down as rumors began to surface that another class action lawsuit was filed against the company. Note the time of the BusinessWire press release and the volume spike for shares of FIT, which produced another downdraft in the share price - they align perfectly.
"The complaint alleges that despite Fitbit's claims made in national advertising - which include alluring slogans such as "Know Your Heart" and "Every Beat Counts" in high-visibility advertisements such as those that ran during the 2015 World Series (available at ) - Fitbit's Heart Rate Monitors do not accurately track users' heart rates, much less "count every beat," particularly during the strenuous activities.
None of this had anything to do with UA's HealthBox and the chart supports this finding. Furthermore, if the author of "Fitbit: The Under Armour Problem" believed that UA's product announcement had anything to do with FIT's share price decline, then why didn't it help to support the UA stock price post the date of the product announcement? How can the UA product announcement reportedly have so much affect on FIT, but almost no affect on its own stock price if it is purported to be that meaningful? Again, even without a chart to negate the author's dissemination, under pure levels of deductive reasoning the notion that HealthBox had anything to do with either company's stock performance that day is proven erroneous. So let's move on to discuss Under Armour more closely.
It's no secret that Under Armour is late to the fitness tracker category. While the company has been acquiring other category participants, an actual wearable device won't launch until later this year and with limited distribution. That's right, limited distribution. Under Armour doesn't expect to land in every single store/door where consumers can buy Fitbit and other fitness tracker devices to date. It doesn't appear to be able to offer the number of skus/products that its competition has already deployed into these retailers and with that limitation the display of its product will be found wanting by many retail buyers. Without meaningful distribution, it's not likely that Under Armour's fitness tracker products will gain traction or acquire meaningful market share longer term. I offer this even as the company boasts a 150mm user base for its fitness applications. Unfortunately, even though 150mm users have signed up for its fitness apps, only 60mm remain monthly active users. If one is doing the math they come to find a very disturbing trend in the attrition rate of fitness trackers and apps. It's unlikely that with faulty equipment and data that doesn't really tell the user anything life changing, the trend will change anytime soon, if ever.
While some might suggest that the Under Armour brand alone will be able to garner great sales, I would suggest that Nike (NYSE:NKE) nor Addidas (OTCQX:ADDYY) are a leader in the category and they are multiples larger than Under Armour and therefore that argument fails to resonate with many investors. Some of those investors have expressed their sentiment in the recent sell-off in shares of UA in 2016.
The six obstacles I believe Under Armour will not overcome with regard to succeeding in the current wearables market are as follows:
- Entering category late and with limited product skus
- Lack of price point diversity
- Brand lacks distribution, even with its traditional products
- Attrition rate in category is huge headwind
- The end game is not wrist worn devices for Under Armour
In bulleting the obstacles above, readers also will notice that I highlighted the word current. The current wearables market is somewhat of a stepping-stone to the end-goal for Under Armour as well as other athletic wear providers. Since 2013, Under Armour has spent over $700mm in a bid to correct a fundamental flaw in every activity tracker and application on the market today. None of them, not a single device, communicate with each other. Additionally, apps aren't usually capable of syncing with other apps or with most hardware for that matter. But most importantly and as I stated earlier, none of these apps tell the consumer what to do. In fact to some degree they became quite burdensome. It's mindless data without a purposeful use that has largely caused users to disconnect from the application and the activity tracker altogether. Once a user familiarizes themself with the mundane tracking information, the appeal quickly fades and the fitness tracker becomes less useful than what many athletes use to drive them through a workout, music. There in lay the ultimate opportunity for next generation wearables and fitness tracker growth if you were to ask me, and they have. Having said all of that, even with these best of intentions Under Armour utilizes in righting the wrongs in the wearables category they are missing the mark or will miss the mark in my opinion.
Under Armour is a tech company? Hardly, while they might aim to offer greater technologies within their athletic wear this is not a prototypical tech company and the fact that they have spent some $700mm on the wearables business segment through acquisitions and such suggests the opinion to be more factual than opinionated. If all of the technology was home grown or organic then one could label the apparel company as a technology company, maybe.
Moreover, Under Armour hopes to achieve more than a wristband fitness tracker in the coming years. CEO Kevin Plank went on record several times and most recently at the Tech Crunch during the CES show in stating the following:
The days of dongles and wristbands and straps are winding down. It won't be long before our fitness trackers are built into our shoes, our shirts, our headphones. Everything will be a fitness tracker. The data is the most important part of the equation and there is a lot of data to be gathered and mined.
Plank first launched his wearable technology embedded in clothing almost five years ago with the assistance from Julio Jones of the Atlanta Falcons and Cam Newton of the Carolina Panthers as testers in his E39 product testing cycle. The E39, a workout shirt with a removable biometric sensor measured just about everything these athletes did on the field that day. From heart rate, acceleration, G-forces and vertical jumping power, it was supposedly all measured by the E39. Under Armour believed players could use the data to train better, and scouts could use it to make smarter decisions. Yet hear we are five years later and after Plank admittedly failed with the technology during trials. Still nothing to show for it except a learning experience that forced the company to acquire more capable technology driven, consumer-facing companies. It takes a long time for technology to develop in a manner that can be priced for mass-market adoption and for those who go to market without this understanding of pricing they quickly retrace.
Since failing to address the wearables marketplace with the E39, the company has continued with its endeavors to collect all sorts of data and participate in a seemingly large market opportunity. And this has brought the company to the HealthBox product launch with hopes to generate a return on all of that capital the company has spent over the years. In addition to the HealthBox, this February the company also will be launching a version of the Speedform Gemini 2, its most popular running shoe, with a chip in the heel that contains an accelerometer, a Bluetooth antenna and a battery. Well ooh la la right?
The sales for this shoe will likely be strong out of the gate and until people realize what they are getting. Just like most wearable devices the attrition rate will likely be high. Why do I say this? Take a look at what the company has suggested about the Speedform Gemini 2 for yourself:
Since Under Armour knows your shoe size and height, the shoes can measure your pace and analyze your stride to help you run better. The shoes can track their own wear and tear, and let you know when it's time to replace them.
Again we come to find the absolute uselessness of the data being collected by techy shoe number one. Most runners are not in the business of running - they are in the business of keeping in shape. While the pace and stride analytics may prove valuable for professional or aspiring-to-be professional athletes, the average person will likely not desire to focus on their workout, run, jog or walk in this manner. If getting people to run in the first place is as difficult as the obesity epidemic suggests it to be, go ahead and layer on another unattractive aspect to running by asking these individuals to track their results and improve their performance using expensive equipment. They just won't! And for all that data gathering there still might be a value in it for Under Armour to utilize in other applications down the road. Regardless of where the wearables and fitness trackers are placed, Under Armour is seemingly just embellishing the functionality, the cost of goods and the data when for the most part, our five senses do a pretty good job of knowing what we are or are not doing. If you are looking for a strong anecdote to highlight how illogical the products are in the wearables market look no further than your cell phone. When someone calls you, the right to answer and engage is solely on you. You can make a decision to pick up the phone or not. How many calls do you let go to voice mail during the course of a day before returning the call? With wearables it is pretty much the same thing - for every aspect of the technology you are the active participant. You have to put on the device, charge the device, upload the data, read the data, understand the data and ultimately have a desire to utilize the data for better or worse. Based on the attrition rates of these companies issuing products in the category, it very much looks like for every advanced stage of technology deployment the consumer continues to realize it simply doesn't go far enough to force continued engagement. Wearables are calling, but not enough people continue to pick up the device.
When I view the capital spending by Under Armour for wearables and juxtapose it with their distribution model, what becomes apparent is that the company has over spent. Even if they deploy their wearables into every existing distribution channel, they simply can't sell enough wearables product over the next 7-8 years to break even. If you layer on some 10,000 new points of sales distribution they might be able to break even on the investment over that time, but it is very unlikely given the astounding attrition rate that this category garners and how late the company has "come to the party." It has taken Fitbit, the leading brand in the category, roughly five years and with many more stores selling its products than sell Under Armour to reach $1bn in sales. And it has taken roughly 20 years for Under Armour to garner $4bn in total sales. To assume the company will generate a quarter of its total net sales through wearable devices just doesn't pass the sniff test. It's a very common occurrence in the non-essential consumer goods industry that finds displaced capital for every single trendy new product offering and everything points to Under Armour having displaced their capital erroneously. The headlines are often compelling, aren't they? But as I stated earlier, this is why investors have to juxtapose the headlines with real analytics. Put the numbers to the test.
What finally draws this articulation to a close are the sales results. Capital Ladder Advisory Group (Seth Golden is a former owner of CLAG equity) is an independent analytics firm catering to some of the largest institutional investors participating in the capital markets. What readers and investors should more closely understand are the sales results and CLAG is the only real-time provider of such data available to many and the only firm capable of gathering more than 75% of all point-of-sale data. Through the firm's extensive relationships we have disseminated the sales results intra-quarter for many other publicly traded companies in the past. Most every public company reports, during their reporting process, sell-in sales results. Sell-in is depicted by what the vendor sells to its distributors and/or retail partners. The sell-through numbers are generally not reported at all or are sometimes referenced during conference calls. Sell-through is the act of a consumer purchasing the vendor's product from a distributor or retailer. NPD Group is often cited for sell-through results. Unfortunately, what is not known about the NPD Group sell-through results is that they generally make up less than 50% of total sell-through results as the point-of-sale, data gathering firm doesn't gather data from distributors or every existing retail door the vendor sells goods to. Lastly, the sell- through for wearables continues to show slowing growth that is filtering into the sell-in results or net sales results. In the future, I will offer an example of real time sales data for Fitbit products as they are still leading the wearables and fitness tracker category in terms of total sales and market share. It is important for investors to understand distribution and how to pinpoint where a product will be found in decline. Wearables will be around for a long time to come and in no way am I insinuating the category is a fad. What I am articulating, however, is that the category will go through realignment as sales slow and eventually decline post distribution build out. For those who think the Apple Watch (NASDAQ:AAPL) is void of this potential they should also take a gander at the most recent uptake from Macrumors.
Apple posted a slight increase from the previous quarter, mostly the result of additional markets and channels coming on line. End-user attention has been going toward its entry-level and least expensive Sport line, to which Apple responded by introducing gold and rose gold models. In addition, Apple released watchOS 2, bringing native third-party applications to the device.
Trust me folks, there is a good reason Apple hasn't broken down Apple Watch sales beyond the sell-in results. The sell-through is pretty poor, even by lesser brand standards, and it's mainly for the most obvious reasons. But the company can continue to show growing sell-in results as it builds out its distribution channel for the products. And that is why investors and readers should be careful with the projections for the wearables category. It's pretty easy to get distribution, but it's much more difficult to maintain growing sell-through - very difficult. My last bullet point for Under Armour obstacles in the wearables category highlighted time. How much time do you really think Under Armour has to recoup its invested capital under the premise that wearables are becoming a mature and saturated marketplace?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.