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Is Under Armour Finally Killing its Connected Fitness Unit?

Under Armour (NYSE: UA) (NYSE: UAA) is quietly killing off UA HealthBox, its bundle of three wearable devices (a fitness tracker, a chest strap heart rate monitor, and a Wi-Fi scale) less than two years after their initial launch. Under Armour will sell the devices through the end of the year at steep discounts, then stop supporting the products next year.

This marks a disappointing end to the HealthBox, which was once Under Armour's "second best-selling item on e-commerce behind the Curry Two" during the first quarter of 2016. At the time, that bold claim caused some investors to think that UA could challenge Fitbit (NYSE: FIT) in the wearables market.

Image source: Under Armour.

However, CEO Kevin Plank rarely mentioned the HealthBox again, and the products never gained enough momentum to challenge Fitbit, Xiaomi, or other market leaders. So does the HealthBox's demise indicate that UA finally plans to ax its Connected Fitness efforts?

Gazing into Under Armour's money pit

UA's Connected Fitness business, which generated less than 2% of its revenues during the first nine months of 2017, consists of several apps it acquired or created over the past few years -- including MapMyFitness, MyFitnessPal, Endomondo, and UA Record. The unit also launched connected devices like the HealthBox and "smart shoes" which synchronized with the UA Record app.

Under Armour believed that the more data it collected from these apps and devices, the more accurately it could predict shopping trends and boost its brand awareness. Registered users across all those apps rose 16% annually to 220 million last quarter.

Image source: Under Armour.

That ecosystem sounds big, but it's also a highly fragmented one that operates at a loss since many users only use the free versions of the apps instead of the paid ones with premium features.

Combining that business with a growing inventory of hardware products like HealthBox creates a massive money pit. Here's how much revenue the Connected Fitness unit generated over the past four quarters compared to the unit's operating losses:

 

Q4 2016

Q1 2017

Q2 2017

Q3 2017

Revenue

$18.3 million

$18.9 million

$23 million

$23.4 million

Operating income

($4.3 million)

($9.6 million)

($1.9 million)

($44.6 million)

Source: UA quarterly reports.

That huge increase in operating losses last quarter was partly due to a $29 million goodwill impairment charge related to a decision "to deemphasize certain ancillary revenue streams, including connected hardware and related web and mobile app development."

In other words, Under Armour's dream of becoming a connected health and fitness company is fading fast. But investors shouldn't really be surprised by that failure, as Fitbit has also been struggling with plummeting sales and profits in the face of tough competition across a saturated market. Fitbit hopes its new Ionic smartwatch might turn things around, but UA probably doesn't have the time or resources to develop a full-featured smartwatch.

Why it's time to kill the Connected Fitness business

The decline of UA's Connected Fitness business can be traced back to the departure of its chief digital officer, Robin Thurston, last year. Thurston was previously the co-founder and CEO of MapMyFitness. UA acquired that company in 2013, and oversaw its subsequent acquisitions of other fitness apps and its development of connected devices.

UA's fragmented digital ecosystem certainly didn't lift its sales with fancy analytics last quarter, when its revenue and adjusted earnings respectively dropped 5% and 24% annually. Instead, the company got clobbered in North America by a resurgent Adidas (NASDAQOTH: ADDYY) and a defensive Nike (NYSE: NKE).

The future of UA's flagship Curry shoes also seems murky in the face of tough competition (and mockery) from Nike, while a recent Piper Jaffray survey found that most teen shoppers saw UA as an "old brand", while Nike and Adidas remained their top choices. These are serious problems that mobile apps and fitness trackers can't fix.

Therefore it makes sense for UA to simply kill off the Connected Fitness business and invest that money in stronger R&D or marketing efforts to counter Nike and Adidas. Nike wisely killed its fitness tracker business over three years ago, so UA's exit from this oversaturated market is long overdue.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Fitbit, Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.