It has been an honor and pleasure to produce strong analytical research and data oriented articles for Seeking Alpha over the last three years-plus for myself as a former research analyst for Capital Ladder Advisory Group (certain assets were acquired in 2015). With that said, it's not often that I find myself in opposition of other contributors, but when it is necessary to right certain wrongs I oblige myself accordingly and in keeping with the standards of the platform.
Recently I have adopted coverage on the wearables/fitness tracker category as I still maintain relationships with former clients that include some of the largest hedge funds in the United States. In being asked to dive into this category for the purposes of gathering data, consumer insights and delivering analytics, I've found a broad spectrum of thoughts, sentiment, comprehension and analytics concerning the companies within said category. My publications that began with initiating coverage on Fitbit (NYSE:FIT) and a long-term negative outlook, juxtaposed to the valuation at the time, can be reviewed here on Seeking Alpha. As investors and readers can clearly see from the linked initial coverage publication, when initiating coverage of a company and its products, it is most relevant to understand how the consumer adopts products based on usefulness and determining the total addressable market for the product. From that point, one can model more proficiently for the business going forward. It is how all consumer goods and businesses are initially assessed from sell-side analysts.
In covering the wearables/fitness tracker category one has to study many products, consumption habits and trends as well as competing products and companies. For this reason I've also articulated many facts and predictions regarding Fitbit's smartwatch chief competitor - Apple Watch from Apple Inc. (NASDAQ:AAPL).
This article aims to level set and correct some offerings from other publications with the assistance of pure logic and evidenced sales data. Readers and investors who have studied my publications in the past come to understand that I don't enjoy or appreciate opinions very much and as such I rely heavily on facts to model/predict future outcomes... the job of a research analyst. Some might suggest that models/predictions are rooted in opinion and to a degree that is subjectively correct if you will, but under that perspective it might behoove readers and investors to look at the track record of the analyst creating the models/predictions. It may require additional due diligence to perform such a task, but in doing so one also can find a value or devaluation of the offered model/prediction. In short, don't just believe everything you read - proof it yourself unless what you read is supported with undeniable evidence. I intend to display such evidence in this publication that is irrefutable and which adds a level of fact checking not generally offered freely to the public.
Yesterday an article titled "As Apple Watch Stumbles, Fitbit Steps Toward Taking More Market Share" was published.
Based on the publications put forth by the author, his sole articulations are related to Fitbit, the wearables category and competing products/companies. What I have offered regarding many Fitbit publications are that some continuously fail to make mention of Fitbit's most glaring problem - the attrition rate. Fitbit has a 12-month attrition rate of roughly 50% and a two-year attrition rate over 70 percent. This basically means that half of users abandon the product within 12 months and three-fourths of users within 24 months. This is a pretty big problem long term for Fitbit, but Fitbit isn't the only company that finds users abandoning the wearables category and in quick order. Under Armour (NYSE:UA) has the same issue with their fitness application and to a greater extent. But please let us take a closer look at a declaration made in the article.
"Blaze is literally selling out of stock at big-box retail stores and also out-selling the Apple Watch on Amazon by at least more than a ratio of 5:1."
For those familiar with my work, you already know that I have the ability to achieve sales results anytime I desire to achieve them from retailers across North America. I've posted point-of-sale (POS) data in previous publications for readers and investors to consider and see first hand. POS data is irrefutable, completely factual and void of bias. It's pure sales for a specified period of time and for any particular product/sku. In the declaration made in the article I plan to demonstrate why the declaration is inaccurate. Now without access to sales data, as I respect that not all investors have the ability to obtain the data, one can deduce the declaration as a farce through pure logic. Let's perform that exercise first before moving directly to evidenced sales data.
First, have there been any analyst notes since the Blaze was launched discussing sell-out of the product at any retail establishment? Analysts have subsets of sales data from retailers that they use to offer notes on companies intra quarter and to build into their forecasts for earnings and sales. But not a single analyst has offered any sales declarations for the Blaze. They would have, at the very least, a reason to advance such a declaration to investors and especially with most analysts having price targets well above the current trading price of FIT. Secondly and probably most obviously, with the Blaze only hitting retailers in the last few weeks, how would it be possible for retailers to "literally sell out of stock" of the product that quickly? They couldn't sell out of any existing product during the busiest selling season of the year, but during the first quarter of a year this happened? The impossibility of that happening is equally impossible to dismiss through logic. Thirdly, with all the links/resourced information offered in the article, where is the link/resource for this declaration on Blaze sales by the author? The exercise of logic and deductive reasoning render the statement put forth by the author as inaccurate.
The following sales sheet is a look at one of Fitbit's key retailers in terms of sales volume in the United States.
The sku is the Fitbit Surge BLK size small. The totals are at the bottom and a small sample set from individual store locations is offered as every single store can't fit onto the screen and so the screen shot must be truncated to produce the totals row and columns. What I'd like for readers and investors to look at is the column with the "I." The "ST" which categorizes the column stands for status of the sku and the letter "I" indicates the sku is "inactive" for every individual store. This means the sku is going to be discontinued and as such can't be ordered going forward. The last column, L52W, indicates how many units were actively engaged by the POS system over the last 52-week period. The retailer generally orders twice a year and as one can clearly see, even though the sku is being discontinued, there is still plenty of inventory left at the retailer and based on the Last 4WKS column, the retailer has enough inventory to still vanquish from the system for several months.
In general, retailers are very capable when it comes to forecasting demand, especially when there is a sales history for the particular product/sku. More often then not, the retailers purchase to carry inventory for at least eight weeks and at most six months. Again, it would simply be impossible for a product that only recently hit the retailers a couple of weeks ago and where retailers have not sold through former product to all of a sudden sell out of a new product and one that carries a significantly higher price point. The following sales shot also will identify the aforementioned information as valid.
This snapshot was taken two weeks ago from the retailer and one can clearly see the number of total units inventoried and distributed to individual stores. At $199.99 the Blaze was not able to sell out and again, with product only landing a couple weeks ago, it would be impossible for the retailer to sell out of this many units of the Blaze. Not surprisingly, not a single unit has sold to date chain wide and this is a major retailer. Additionally, the retailer has significant inventory for the Blaze Black small size unit.
I've articulated many times in my publications "Most of the growth in the fitness tracker category is due to distribution gains, not sell-through." This is evidenced in the sales sheet for the Surge above. Most stores, and you can name any retailer and it holds true, most stores are lucky to sell two fitness tracker units per week. Total up what Fitbit and Apple have offered in the number of retail stores they sell product into (this can be found in their quarterly transcripts) and then juxtapose it to what either Fitbit says they've sold or IDC says Apple has sold. Combined with the rate of sale you see here it's impossible to logically dismiss that the sell-through of fitness trackers is a very weak part of total sales and the greatest part of total fitness tracker sales comes from new distribution gains. What I've offered is undeniable and irrefutable. It's mainly distribution gains and when combined with the attrition rate for these products you have the makings of a real bad situation once distribution becomes saturated. The sell through just isn't enough to grow comps year-over-year. Furthermore, this is why Fitbit is forced to dedicate resources to growing its corporate sales. But even as such, Fitbit's CFO is on record as stating this segment of the business is not meaningful presently when compared to the consumer business.
Now the sales sheet above is not from Target Corp. (NYSE:TGT). The reasons I'm offering this disclosure is for the benefit of also outlining that Target is yet another big-box retailer that hasn't sold out of the Blaze. One can understand this to be true because the retailer has plenty of inventory and a planned promotion of the product in its current weekly flyer. Best Buy (NYSE:BBY) has plenty of Blaze inventory also as recognized in their weekly flyer. Running out of big-box retailers to claim sell outs for the Blaze.
I don't deal in opinions and I don't appreciate false declarations. I deal with data because the data doesn't leave open the opportunity to misunderstand or falsify. Fitness trackers don't sell well and the majority are selling in the holiday, gift-giving season. This is evidenced in Fitbit's Q4 2015 unit sales results that account for roughly 40% of annual unit sales, as well as the attrition rate. Through logic, we can understand that if the fitness tracker is gifted and the rate of attrition is so high for these products, they simply don't sell well absent gift giving and pure distribution gains. If anybody wants to make a declaration using the word literally, then "literally all the information is there for investors to consider." It becomes a matter of experience and being able to put the pieces together from that point and model going forward. Fitness trackers exhibit every single characteristic of a faddish product category from the sell-in data to the sell-through data and everything in between recognized through the rate of attrition.
I could go through every single major big-box retailer showing sales results, but that is not permissible. Additionally, understand that I'm very much sparing the Apple Watch in not disclosing sell through for the product. The point of this publication has already been proven and I will just say that as poor as the sell-through is for Fitbit skus, the sell-through for Apple Watch is considerably worse. But that should logically be the expectation. The Apple Watch is simply too expensive and offers highly redundant technologies in the Apple product ecosystem. The recently reduced pricing of the Watch also is an indication of poor sell-through and NOT the typical level setting of retail inventory that would foreshadow the second-generation product. Given that the next Apple event may not be for several months, the price reduction is occurring far in advance of the potential for a second-generation Watch. My track record of critiquing a product or business model has been an extremely accurate, foreshadowing of things to come for said product or business model as proven once again in the timing of my Watch publications and the recent updates for the product by Apple.
Tethering the Watch to the phone has been a huge issue for sell-through and there really bears no need to further discuss the shortcomings of the overall functionality of the Watch. Watch 2 will eventually come to light. In suggesting Apple should simply move onto something else, I do so because of the deficiencies in the category as a whole regarding solving a useful consumer issue. So now let's take a look at another publication and keep true to our exercise in logic.
I respect the author of "Apple Watch Is Not A Failure Because Of Fitbit" greatly and consider his works in high regard most of the time. Bill Mauer's knowledge of the consumer and consumer goods is a step above many. However, our understandings differ with respect to the aforementioned article. Here is what Bill had to say up front:
One thing I never like is when I see an apples to oranges comparison. If you want to compare two products, they need to be extremely similar. Unfortunately, I keep seeing a lot of comparisons between the Apple Watch and Fitbit, many of which are extremely misguided.
Most of the articulations offered as to why comparing Fitbit Blaze to the Apple Watch is misguided have to do with price and total generated sales, not unit volume. I'm sorry, but that doesn't hold water from a logic or analytical perspective with me and I will appreciate that others feel differently. Both products aim to provide the same service and that's why both have been promoted in the same manner. It's fair to say that the Apple Watch has many more functions than the Blaze, but even Apple realized that to drive purchase activity they needed to market the unit as a health and fitness device more so than anything else. This also is evidenced by the new apps being established via HealthKit. The Blaze is marketed the same way and therefore both devices are trying to capture the same consumer, regardless of price. Apple's reduced pricing for the Apple Watch is an actionable and measurable recognition of Blaze's potential total addressable market (TAM) and the desire to participate with the same TAM. So again, logic dictates that pricing is not validating the notion that these products don't or won't compete against one another.
The practicality of recognizing pricing as a determinant for competition also is rendered illogical when we accept where the devices are used. Both go in exactly the same place, on your wrist. If you are buying one, more than likely, you are not buying the other and as such you are definitively competing product-for-product. This is especially true when there is so little product to choose from. We are talking about a very small category in wearables with few competing smartwatch products to choose from. It's not like we are discussing the automobile sector, littered with different classes of brands and product. You can't very well say that Porsche is competing with Hyundai, that's just illogical. But when you only have a few smartwatch companies to choose from and a few products at that, then yes you are directly competing and doing so regardless of price.
Off topic for a moment, but I've lived in Florida for over 36 years. I have two homes in Florida and one is in Naples, Florida where I live several months out of the year. This is regarded as the healthiest and happiest city to live in the nation. We know health and wellness in Naples, know it all too well and if fitness trackers were to do well, they would do best per capita in Naples, Florida. I often visit the Target store on Pine Ridge road in Naples, hoping to see any employee wearing a Fitbit. Hasn't happened to date. I have seen one employee wearing a Watch, but in that is as anecdotal an offering as I'm willing to venture forth with.
I like the products in the wearables category, but I recognize the usefulness of these products beyond what is hyped by the companies, the media and the fan base. The sell-through and attrition rates offer undeniable forecasts beyond distribution saturation. I would love for these products to "change the world" - I really would. I don't enjoy seeing the obesity epidemic continue to rise unabated. But fitness trackers don't have the ability to curb or change the mass population habits as proven since their introduction in 2007 and mass market distribution through 2016. The data doesn't lie and we are no better off regarding obesity and wellness than prior to wearables' introduction. Wearables track and display data, but they haven't proven to make us do anything more than acknowledge the data exists, and at most for two years before abandoning the product. There is no opinion in that statement as it is clearly evidenced in the sales and metrics.
For investor consideration, the information above is just that, information. I'm not recommending an investment here in any stock. I do believe that valuation and timing is necessary to benefit from participating from both shares of AAPL and FIT. This is often the case when it comes to consumer good companies. Some variables to consider: Are the YOY comps low enough to hurdle over and what does the cash position look like? Will the dividend be raised or implemented and what is the R&D pipeline looking like going forward? I tend to favor the Apple business model over that of Fitbit presently because Apple meets many of the favorable investor requirements and Fitbit offers one type of product. But in terms of trading, it is hard to ignore the present valuation of Fitbit when juxtaposed to the likely 2016 results. Just saying!
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FIT over 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.