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Fitbit Q1: Expect A Beat

Summary

Fitbit expected to report strong quarterly results.

Blaze and Alta launch with strong reviews by consumers.

Attrition and usage rates remain a concern.

CLAG expects Fitbit to beat expectations.

Fitbit (NYSE:FIT) is set to report Q1 2016 results after the closing bell on Wednesday. The company has been maligned by a steep sell-off in its share price since January. The company is expected to earn $.02 a share on just over $440mm in revenues according to Capital IQ. While earnings comparisons from the previous year ago period are not readily available; revenues are expected to soar from $336.75 million in the year ago period.

Based on the company's admittedly conservative guidance and global launch of its two newest fitness trackers, Blaze and Alta, I would be of the opinion that Fitbit will surpass its revenue guidance by roughly 10 percent. As other analysts don't see much upside for earnings due to the aforementioned global launch of newer units, Capital Ladder Advisory Group (for whom I am affiliated) expects Fitbit to express earnings between $.04-$.06 a share in large part due to increased distribution efforts in Europe and Asia-Pac that have gone unrecognized. Retailers such as Carrefours, Asda, Curry's, Tesco, Intermarche, MediaMarkt, Saturn, Loblaw, Office Works, DoMayne and dozens more have grown the Fitbit presence in stores. These expansionary efforts are difficult for sell-side analysts to track intra-quarter and even harder to quantify for a variety of reasons. As such, we believe analysts' estimates remain largely in-line with Fitbit's upper end of earnings guidance.

Fitbit is entering a difficult period in its business cycle and with a dedication to both expanding distribution globally and introducing new fitness trackers. The Blaze and Alta found growing pains as the company launched the two products during the Q1 2016 period. Some retailers failed to get the product from distribution centers onto store shelves in an expeditious manner. Other retailers simply didn't order enough product to either fill shelf space or meet demand. As new products entered the market, older product/fitness trackers are being discontinued. With sell-through waning YOY from existing retail partners, inventory has become more difficult to manage and demand more difficult to forecast. Ultimately, Capital Ladder Advisory Group is seeing retail inventory levels are sufficient in North America, while international inventories are more difficult to track in large part to distributor's maintaining limited open bill of lading.

While some analysts reduced their 12-month price targets on shares of FIT after the company's Q4 2015 Earnings report and FY16 guidance, others have been more bullish about unit trends during the quarter. Please review the below noted analysts' considerations:

Bullish notes from Citi's Stan Kovler (Buy rating, $30 target), Morgan Stanley's Katy Huberty (Overweight rating, $32 target), and Raymond James' Tavis McCourt (Outperform rating) are likely helping Fitbit out. Kovler sees Fitbit topping Q1 estimates, and states app download data from App Annie points to strong EMEA/Asia-Pac sales. "We model rev outside N. America to rise to 29% of rev in C16, up from 26% in CY15. Although still early in Q2, our app analysis index points to traction in EMEA and APAC."

Huberty, who earlier this week reported seeing strong sales for Fitbit's Blaze smartwatch and Alta fitness band: "We expect 1Q results and 2Q guidance ahead of consensus estimates ... We expect Fitbit to report 10-15% upside to revenue or $475-495M. While we also expect EPS to surprise positively, we see less upside in light of higher production costs during the new product ramp."

McCourt provides positive survey data. "Thirty-six percent of respondents in [Raymond James'] survey indicated they owned a wearable device, with 50% expecting to own one in the future. Both these percentages continue to move up in every quarterly survey and the gap between current ownership and future intended ownership indicates that this category still has substantial room to grow. The Fitbit brand continued to dominate both current ownership and future purchase intent.

Fitbit has increased its advertising and promotional spend to support the global launch of Blaze and Alta. Consumer reviews have been positive for...


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